Shapoorji Pallonji Group: To Hell & Back

THE MISTRY FAMILY has learnt from adversities that their pains contract as much as they stay together. In 2022, the family faced a double loss: 54-year-old Cyrus Mistry died in a road accident in September 2022, three months after his father Pallonji Mistry passed away at 93. The offices formerly occupied by Pallonji and Cyrus Mistry in group headquarters at Minoo Desai Marg in Colaba, South Mumbai, have been left vacant as a mark of respect. Cyrus, along with elder brother Shapoor, was in the midst of unbundling the 158-year-old Shapoorji Pallonji (SP) Group to improve operational performance and re-engineer financials to lower debt, which touched `45,000 crore in March 2020, mainly due to high-cost construction projects and working capital shortage during Covid 19 pandemic. The family raised funds by pledging the family jewel — its 18.37% stake in Tata Sons — to raise ₹26,000 crore. The stake is equally divided between Sterling Investment Corp. Pvt. Ltd. and Cyrus Investment Pvt. Ltd. (both holding companies are equally owned by families of Shapoor and Cyrus). Mistrys want to get the shares released within next three years by using cash flow from group companies. The intrinsic value of the stake would be over 10 times the loan as Tata Sons’ promoter holding in top 15 Tata companies such as TCS, Tata Motors, Tata Steel and Titan was worth ₹16.3 lakh crore in first week of March.

If raising funds has been tough, restructuring the group is proving to be even more challenging. In the new structure, the group will have three main lines of business — construction and infrastructure (Shapoorji Pallonji & Company Pvt. Ltd. and Afcons), real estate (SP Real Estate) and energy (SP Energy, which is involved in development and operation & maintenance of Floating Production Storage and Offloading (FPSOs), vessels). FPSOs are floating vessels used by oil & gas industry for production and processing of hydrocarbons in offshore blocks. After the restructuring, the present holding company, Shapoorji Pallonji & Company Pvt. Ltd. (SPCPL), will focus on engineering, construction, EPC and water & environmental solutions. Infrastructure construction giant Afcons will be its associate firm. SP Real Estate and SP Energy will move out of SPCPL and operate as separate entities. Will this be enough to get the group going?

Debt Detail

Debt reduction had already started under Cyrus Mistry after he rejoined SP Group on removal from chairmanship of Tata Group in 2016. Cyrus did not take up any official role but supported Shapoor in formulating a strategy for debt reduction and making group companies, which are privately held, accountable for paying debt from their cash flows. Since allocation of funds to businesses was made from the common pool of holding company SPCPL, the businesses were not directly accountable for their debt; this is the main reason for restructuring.

The Mistry brothers, who were close to each other and lived in the palatial family home, Sterling Bay, on the shores of Arabian Sea at South Mumbai’s Walkeshwar, had a shared view of the direction they wanted to steer the group towards. One plan involved becoming aggressive in areas where they had core capabilities. Before Covid, the group had witnessed significant growth in project revenues, underlining the need for expansion through debt. “The group witnessed strong and consistent growth between 2016 and 2021 — over 20% CAGR in revenue. It grew across sectors. The growth was funded with internal cash flows, promoter funds and debt,” says a source close to the group.

The group has been grappling with paying off debt ever since. “The Mistry family has been giving special attention to reducing debt post IL&FS (crisis) in 2018. Deleveraging was their strategic priority. However, the debt increased to record levels in FY20 due to high cost of construction projects. Everything went haywire during Covid. Group revenues hit rock-bottom but working capital did not fall, triggering losses and debt escalation,” says an executive in the know.

Group debt was ₹37,170 crore at the end of August 2020. It had to opt for the One-Time Resolution (OTR) plan offered by Reserve Bank of India in September 2020. However, the parent firm exited the OTR plan by paying ₹12,450 crore to lenders by March-end 2022. “SPCPL has been India’s largest and possibly the first OTR to get fully repaid within one year of implementation. The accelerated repayment to lenders was enabled by the Mistry family infusing over ₹5,100 crore into the company,” the group said while announcing the exit. “SP Group did not demand any haircut from banks,” says another source close to the Mistry family.

However, its debt challenges are not over yet. The debt was ₹20,700 crore in August 2023. In December last year, CARE Ratings downgraded SPCPL long-term loans from “BBB+” to “BBB” due to delay in securing working capital limits. As a result, turnaround in operations for FY24 is expected to be slower vis-à-vis what was envisaged earlier, it said. While SPCPL got the sanction for working capital limits, documentation remained pending due to talks between working capital and term lenders about sharing of securities. This is now expected this quarter, says the agency.

SP Group is at present focusing on improving operational performance and increasing cash flow, says a Mumbai-based banker.

How It Reached Here

The Mistrys, a Parsi family which landed from Iran in first few ships that anchored at Sanjan on Gujarat coast in 17th century, were “industrious people and ingenious in trade,” as Gerald Aungier, Governor of Bombay, noted in historical records. The Mistrys started a construction business in Mumbai but got fame when Pallonji Mistry Sr. (grandfather of Pallonji Mistry) constructed a water reservoir at Malabar Hill, which brought piped water to the city in 1879.

There’s been no looking back since, with the Mistrys building some of India’s iconic structures, including RBI headquarters, Oberoi Towers in Mumbai and the Sultan of Oman’s ceremonial palace, Qasr Al Alam, in Muscat. This is apart from Lilavati Hospital, NCPA, Mandovi bridge in Goa and Vallarpadam rail bridge in Kochi. They also expanded in the Gulf and Africa with projects like the Seat of Government and Presidency in Ghana, DAMAC Park Towers in Dubai, Sabah Al Salem University in Kuwait, National Assembly Building Complex in Gambia and Lusaka City Decongestion Project in Zambia. Recent projects in India include Atal Tunnel in Himachal Pradesh, Chenab railway bridge, convention centre Bharat Mandapam where the G20 summit was held last year and redevelopment of Rajpath (renamed Kartavya Path) in New Delhi. The group also recently completed construction of BAPS Temple in Abu Dhabi, the first traditional Hindu stone temple in the UAE.

The group was present in six business segments (before restructuring) — real estate, engineering & construction, infrastructure, energy, water and financial services — with order book of $11.5 billion. It has 36,000 employees. However, finances are not in the best of shape. When it had ₹45,000 crore debt in FY20, the net loss was ₹1,756 crore on a revenue of ₹40,672 crore. The parent company, SPCPL, posted a consolidated loss of ₹1,915 crore in FY23, compared with its highest ever profit of ₹3,319 crore in FY22, thanks to sale of assets. The revenue was ₹33,375 crore vis-à-vis ₹34,565 crore in previous year.

On a standalone basis, SPCPL’s turnover was ₹7,203 crore in FY23 as against ₹6,464 crore in previous year. The standalone loss last financial year was ₹679 crore compared to a profit of ₹1,715 crore in FY22. The holding company has been single-mindedly focused on reducing its debt-equity ratio, which has fallen from 5.74 in FY21 to 0.57 in FY23 because of debt reduction to ₹3,580 crore in July 2023 from ₹15,500 crore in March 2022.

Afcons, the group’s flagship firm, posted ₹11,270 crore revenue in FY22, as against ₹9,521 crore in previous year. The company, which derives 32% revenue from overseas, has an order book of ₹33,000 crore. Taming debt is the key priority when financials improve. Meanwhile, it will continue selling assets.

Shrunk to Survive

The Mistrys have sold several assets to stay afloat. In 2021, Advent International bought a majority stake in Eureka Forbes Ltd., the consumer durables flagship, for ₹4,400 crore. The proceeds were utilised to pay off SPCPL’s OTR dues and Eureka Forbes’ ₹300 crore debt. The proceeds from sale of Sterling Wilson Renewable Energy Ltd. to Reliance Industries were also primarily used to reduce the OTR debt.

In 2022, the group divested its entire stake in SP Jammu Udhampur Highway Ltd.’s 64.5-km four-lane road to Indian sovereign wealth fund National Investment and Infrastructure Fund at an enterprise value of ₹2,100 crore. Then, Actis bought 49% stake in the group’s 220-MW combined cycle gas turbine power plant in Bhola region of Bangladesh for an enterprise value of ₹2,000 crore. Before these deals, in 2020, SP Infra sold five solar-energy assets to KKR for ₹1,554 crore.

The group has announced the sale of its brownfield Gopalpur port to Adani Ports and SEZ Ltd. at an enterprise value of ₹3,350 crore. In another deal, JSW Infrastructure has signed an agreement to buy more than 50% stake in PNP Maritime Services (PNP Port) for ₹270 crore. It has a capacity of five million tonnes per annum (MTPA) with potential for expansion to 19 MTPA. PNP Port operates multi-purpose jetties at Shahbaj, Raigad.

The Crown Jewel

However, the biggest arsenal used by the Mistrys has been their 18.37% stake in Tata Sons. In early 2023, the promoters pledged their 9.185% stake in Cyrus Investment Pvt. Ltd. to lenders, including foreign banks and overseas hedge and credit funds. This was the second bulk pledge. Earlier, they had pledged the same stake that they were holding in Sterling Investment Corp. Pvt. Ltd.

The history of how the Mistrys got to own such a big stake in Tata Group is decades old. Nearly 100 years ago, the Mistrys had bought a Parsi investor’s firm, FE Dinshaw Ltd, which had lent over ₹2 crore to the Tata group for rescuing Tisco (now Tata Steel) and Tata Hydro (now Tata Power). The owner of the firm was a lawyer-turned-businessman Framroze Edulji Dinshaw. As Tatas failed to repay, the outstanding amount got converted into long-term payments of one-eighth share in Tata Sons’ commissions. Dinshaw had transferred the rights to the commissions to FE Dinshaw Ltd. In 1928, Shapoorji Pallonji Mistry (Cyrus Mistry’s grandfather) bought a portion of shares in FE Dinshaw. It took another two-three decades for the Mistrys to get a majority stake in FE Dinshaw and equity ownership in Tata Sons. By 1978, Mistrys had taken the entire stake in FE Dinshaw, and changed the company’s name to Cyrus Investments. The Mistrys got a board seat in '90s and Pallonji became the first director of Tata Sons. The bond between the two Parsi families further strengthened when Ratan Tata’s half-brother Noel married Aloo, daughter of Pallonji, soon after. Pallonji Mistry divided the private wealth between his two sons. Cyrus Mistry legally disassociated himself from SP Group in 2011 when he joined Tata group as vice chairman. Later, he became chairman when Ratan Tata retired in 2012.

The stake became one of the contentious issues in the legal battle between Tata Group and Mistrys as Tatas opposed its pledging saying failure to get them released would lead to transfer of ownership. Mistrys announced their intent to sell the stake. Finally, both reached a settlement — the shares are movable property and carry with them an intrinsic right of the shareholder to mortgage or pledge them for securing a loan.

Unbundling & The Way Forward

The road to get the shares released passes through massive restructuring that the group is undertaking. When other corporate houses in the country were diversifying into new businesses — like Reliance Industries in telecom, Tata in aviation and Adani in solar energy — the Mistry brothers chose to remain focused on core capabilities and expand into adjacent businesses. Their core business, construction and infrastructure, bid aggressively for government projects and reported 20% revenue growth year after year. “The DNA and core competence of the SP Group are its engineering capability and project delivery. Going forward, it will focus on sustainable growth in all its businesses. It will particularly focus on three pillars of growth — construction & infrastructure, real estate and energy,” says a source close to the group.

In construction & infrastructure, it will leverage India’s economic potential. “The group will continue its participation in delivering complex engineering projects, be it institutional buildings for government or factories for the private sector. Additionally, it will grow overseas, especially in emerging, geographies. In real estate, it will leverage the brand and wave of urbanisation in India to grow across the spectrum from luxury residences to affordable houses,” he adds. SP Real Estate, an integrated developer, is present in over 10 cities and has developed around 16 mn. sq. ft. residential and commercial real estate projects. It has delivered 18,200 homes so far. It is currently executing over 25 mn. sq. ft. projects. The realty arm has around 144 mn. sq. ft. of pan-India development potential with 430 acres land bank, say sources. It estimates $24 billion revenue potential over next decade. The company is engaged in one of the largest integrated redevelopments in Mumbai’s Kandivali over 55 acres. It is executing one of Asia’s largest affordable housing projects — around 20,000 units — in Kolkata.

In energy, the group is among the top five FPSO players globally. It built its largest FPSO at a cost of ₹2,500 crore, which was delivered to ONGC recently. It has a processing capacity of about 60,000 bpd of liquid and three MMSCMD of gas. It is a 70-30 joint venture between SP Energy and Malaysia’s Bumi Armada Group. “SP Energy will grow integrated operation and maintenance business, both onshore and offshore,” says another source.

Since debt plays an important role in capital structure, the group has decided to focus on the “quality” of debt so that it is backed by adequate operating cash flow and collateral. Overall, the group restructuring exercise, which is in final stages, will help it attract marquee investors in some of its businesses. They also want to explore opportunities in the capital market for some businesses, say insiders.

The Mistry family has ample challenges that it will have to take on together. It’s now up to Shapoor Mistry and the next generation to steady the ship.