debt exposure Zee Essel GroupEssel Group founder Subhash Chandra gave a scare to markets on Friday after he came out with a letter post the 26% crash in Zee Entertainment shares, apologising to bankers, NBFCs and mutual funds for not living up to expectations. The letter, supposed to assuage investors and lenders, has actually thrown the cat among the pigeons. Monday morning did see some recovery in Zee Entertainment shares (up 13% at 9:50 AM) due to speculation that RIL may be interested in buying a stake, but future volatility cannot be ruled out.

Chandra, a billionaire and Rajya Sabha MP, has talked about the raft of wrong decisions (Essel Infra projects, D2H acquisition from Videocon) and events (possible corporate rivalry and IL&FS meltdown hurting debt rollovers) that may have pushed Essel Group to the edge. From a mutual fund investor perspective, Zee/Essel group holdings are both in equity and debt schemes.

While Chandra plans to sell a stake in Zee Entertainment to reduce debt etc., a subdued stock price may not allow him to strike a great deal. Difficulty in getting rollovers has implications for refinancing fresh debt. With debt mutual fund exposure worth Rs 8,000 crore through different Essel Group entities, it is important to understand how which schemes could be impacted and how. Before that, let’s understand what is the brouhaha all about.

The Zee fiasco

On Friday, Zee Entertainment shares prices tanked amid huge selling. The reason for such a stock price drop is two-fold. One, media reports linking Essel group entities to thousands of crores of post-demonetisation deposits. This sparked off fears that no stake sale in Zee Ent. can be completed until a government probe gives clean-chit. Two, the panic selling led to many traders getting margin calls and that set off another round of heavy selling as positions got sold off i.e. liquidated when the stock kept on falling further during the day.

While Chandra has alluded to negative forces trying to defame his business interests, media reports have been focussing on a company called Nityank. The Economic Times on December 18, 2018 had reported on “Nityank”, a company that deposited and withdrew “over Rs 3,000 crore of cash during or after #demonetisation”. Then, last week more detailed reports in The Wire brought the issue again to the limelight.

There is no consolidated debt number for Essel Group. A BloombergQuint article put it at approximately Rs 17,000-crore (total debt) raised by 15 investment arms and 88 operating companies of Chandra’s promoter group—the Essel Group.

ICICI Securities in a report said that through a conference call and stock exchange announcement, Zee Entertainment has categorically denied any connection with the said entity (Nityank). “It admitted some information was sought by SFIO and has been provided by group entities with no further information being subsequently sought,” the report said,

Subsequently, over the weekend, Essel Group and lenders are said to have reached an understanding with ~96-97% of lenders (by value) to prevent further invocation beyond targeted stake sale timeline of April, 2019.

Equity scenario

Now let’s get to the impact of these events on equity mutual funds. The equity market being reasonably more liquid definitely offers investors a way to exit. Friday saw a 26% drop in Zee Entertainment stock, which Chandra calls family jewels. If the stock corrects more as investors panic, expect the following equity schemes to take a hit. In total, there are more than 145 schemes with Rs 2,700 crore exposure to Zee Ent. shares. Do remember that these holdings are as on December 31, 2018. Investors should look at schemes with more percentage exposure than value. This is because any equity scheme with a high share % of net assets in a particular stock is far more vulnerable. A large Rs 10,000 crore scheme with Rs 400 crore exposure would not be hit as much as a scheme with 8-10% exposure.

Thirteen schemes individually have more than 2% exposure to Zee Entertainment stock. The funds with the biggest exposure include Tata India Consumer Fund, Invesco India Largecap Fund, Tata Multicap Fund, Reliance ETF Consumption, ICICI Prudential Equity Savings Fund, HDFC Charity Fund For Cancer Cure – Arbitrage Plan and Aditya Birla Sun Life Resurgent India Fund – Series 3.

Take a look at the 13 schemes below with Zee Ent. exposure

Fund % Net Asset Amount Invested (Cr) No. of Shares
Tata India Consumer Fund – Regular Plan 4.18 60.99 1280000
Invesco India Largecap Fund 3.57 6.12 128555
Tata Multicap Fund – Regular Plan 3.02 43.83 920000
Reliance ETF Consumption 2.94 0.36 7518
ICICI Prudential Equity Savings Fund 2.72 55.56 1166100
HDFC Charity Fund For Cancer Cure – Arbitrage Plan – Regular Plan 2.64 3.53 74100
Aditya Birla Sun Life Resurgent India Fund – Series 3 – Regular Plan 2.33 3.81 80000
Invesco India Dynamic Equity Fund 2.13 22.33 468684
Principal Focused Multicap Fund 2.09 6.48 135900
Tata Value Fund Series 2 – Regular Plan 2.09 5.34 112000
Tata Value Fund Series 1 – Regular Plan 2.08 15.25 320000
DSP Equal Nifty 50 Fund – Regular Plan 2.07 2.54 53354
Aditya Birla Sun Life Tax Relief 96 2.03 146.52 3075269

Dish TV, which acquired D2H from Videocon, is also present in a dozen of schemes. Apart from UTI Long Term Advantage Fund – Series VI – Regular Plan, none of the other schemes have more than 1% net asset in Dish TV India stock. So, there is little to worry.

Similarly, Essel Propack stock is present in just three fund portfolios, with UTI Children’s Career Fund-Savings Plan – Regular Plan having the highest exposure at 0.94%. Clearly, MF investors will be unaffected if anything at all goes wrong.

Shares of Siti Cable, an Essel Group entity, is present in just two MF schemes. HDFC Capital Builder Value Fund has the maximum exposure at 0.79%, which is materially insignificant.

Shares of no other Essel Group entities are present in fund portfolios.

The debt trap

The real worry for MF investors and the industry lies in the debt exposure to Essel Group entities. Given how the IL&FS saga has played out, it is debt that remains a black box. Funds cannot really offload debt, unless at a huge discount. The actual value of debt securities also drops if interest payments do not happen on time. Chandra in his letter has mentioned how till December 2018 the Essel group has paid due interest and principal.

Most of the MF debt exposure to Essel Group entities is through debentures and zero coupon bonds. There are about 150 MF debt schemes with some sort of Essel Group debt exposure. It is pertinent to note that after family business separation was implemented, as the eldest member of the family, Subhash Chandra had taken the entire burden of the debts. Most of his bets on the new businesses have not worked, which led to the increased debt, due to the added interest levels. Fund-houses like Aditya Birla Sun Life, HDFC, Kotak, Reliance, ICICI Prudential, SBI, DHFL, Baroda, and Franklin Templeton have taken exposure to debt securities.

Coming to schemes, HDFC FMP – June 2016 (36) – 1 – 1128D has the maximum exposure to Essel Group entity Sprit Infrapower & Multiventures Pvt Ltd. with 11.95% money in debentures. In fact, a raft of HDFC fixed maturity plans are the most exposed from a scheme perspective to Essel Group debt. They have more than 10-11% exposure to each debt security. Other Essel Group entities whose debt is exposed to HDFC FMPs include Edisons Infrapower & Multiventures Private Ltd. and ARM Infra & Utilities Pvt Ltd.

Kotak MF’s FMPs are next in line. The FMPs with biggest single-debt security exposure have all taken refuge in Konti Infrapower & Multiventures Private Ltd.

Take a look at the 15 schemes with maximum net asset % debt exposure to Essel Group entities

Essel Group Debt Exposure

Company Name AMC Name Scheme Name Instrument Market Value % of Corpus
Dec 2018
Sprit Infrapower & Multiventures HDFC HDFC FMP – June 2016 (36) – 1 – 1128D Debentures 9.48 11.95
Edisons Infrapower & Multiventures HDFC HDFC FMP – June 2017 (38) – 1 – 1136D ZCB 10.75 11.68
ARM Infra & Utilities Pvt Ltd. HDFC HDFC FMP – June 2018 (41) – 1 – 1124D ZCB 50.84 11.41
Sprit Infrapower & Multiventures HDFC HDFC FMP – May 2016 (36) – 1 – 1127D Debentures 13.55 11.33
Sprit Infrapower & Multiventures HDFC HDFC FMP – July 2016 (36) – 1 – 1161D Debentures 6.77 11.26
Edisons Infrapower & Multiventures HDFC HDFC FMP – February 2016 (35) – 2 – 1148D Debentures 44.26 11.04
Konti Infrapower & Multiventures Kotak Kotak FMP – Series 194 (1099 Days) ZCB 23.62 10.95
Konti Infrapower & Multiventures Kotak Kotak FMP – Series 183 (1204 Days) ZCB 61.40 10.73
Konti Infrapower & Multiventures Kotak Kotak FMP – Series 193 (1098 Days) ZCB 26.25 10.53
Konti Infrapower & Multiventures Kotak Kotak FMP – Series 187 (1146 Days) ZCB 51.06 10.48
Edisons Utility Works Pvt. Ltd. Kotak Kotak FMP – Series 187 (1146 Days) ZCB 50.92 10.45
Konti Infrapower & Multiventures Kotak Kotak FMP – Series 127 (730 Days) ZCB 45.93 10.36
Edisons Infrapower & Multiventures HDFC HDFC FMP – February 2016 (35) – 1 – 1161D Debentures 86.09 10.34
Primat Infrapower & Multiventures ICICI ICICI Prudential FMP – S 80 – 1138 Days – Plan R ZCB 16.81 10.24
Sprit Infrapower & Multiventures Birla Aditya Birla Sun Life FTP – Series OW ZCB 9.39 10.23

Do remember there are many schemes which have two or more debt securities in one scheme. These debt schemes face a higher group risk in case things in Essel Group take a bad turn.

Some examples of such schemes are Aditya Birla Sun Life FTP – Series OW which has a combined 15% money invested in Sprit Infrapower & Multiventures Pvt Ltd. and Essel Lucknow Raebareli Toll Roads Pvt Ltd. Likewise, Aditya Birla Sun Life FTP – Series PN has a combined more than 19% exposure to Sprit Infrapower & Multiventures Pvt Ltd. and Essel Lucknow Raebareli Toll Roads Pvt Ltd.

Aditya Birla Sun Life debt schemes are not alone. Baroda Credit Risk Fund has 18% money spread across ARM Infra & Utilities Pvt Ltd. and Cyquator Media Services Pvt. Ltd.

HDFC FMP – February 2016 (35) – 1 – 1168D scheme has nearly 20% exposure to Edisons Infrapower & Multiventures Private Ltd. and Sprit Infrapower & Multiventures Pvt Ltd.

ICICI Prudential FMP – S 81 – 1100 Days – Plan O has more than 15% combined exposure to Bioscope Cinemas Pvt. Ltd. and Jay Properties Ltd. Both Kotak FMP – Series 127 (730 Days) and Kotak FMP – Series 183 (1204 Days) each have close to 18% combined exposure to Konti Infrapower & Multiventures Private Ltd. and Edisons Utility Works Pvt. Ltd.

While Zee Learn shares are not present in fund portfolios, the company’s debt securities are present in two UTI MF schemes – UTI Credit Risk Fund and UTI Medium Term Fund. Fortunately, the exposure is less than 3%.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on contact@rupeeiq.com