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Growth with debt-Keep your fingers crossed

I was surprised to note that Tatas have also borrowed heavily by pledging its shares. Growth with too much borrowed money is very risky. Public invests in Tata companies thinking they are financially sound without realizing that they have borrowed heavily. When I saw Tatas going in for huge acquisitions like Jaguar/Rover and Corus, I was concerned that even if one of them landed in trouble, Tatas could get into serious trouble. With the recession and financial crisis, trouble has landed in multiples. The interest of the common shareholders in the Tata companies could suffer.

Look at Subhiksha’s state of affairs. The company has come to a standstill. Stores are closed. They owe money to everybody including the employees. They have not even contributed to Provident Fund. The CEO has admitted that they were growing on borrowed funds.

I don’t know whether I would like to blame the CEO of Subhiksha completely for the mess. One of the culprits are the PE funds. They give you funds with the condition that you have to scale up fast so that within 2/3 years they can exit by selling their stake and make a killing. I am surprised that most of these guys don’t realize that scaling up fast is an expensive business strategy. Sibhiksha had blitzed Delhi with their advertising campaign. One could not drive down any road without seeing their advertisement and hoardings. I used to always wonder not only where he was getting the money but also how is this guy going to make money and finally return money from whom he has borrowed. I am really surprised that of all the people Azim Premji invested money in Subhiksha.

I wish somebody could explain why do we have to go global? Why do we have to grow beyond our means? Why do we have to become a Indian multinational? Why do we have to scale up fast? Why do we have to buy a bigger company than us? Its not the law. There is no requirement to do so. So, why can’t we just grow naturally by taking the right actions. If the right actions take us global or allow us to scale up fast, so be it.

As I have said before, growth for growth sake is the root cause of all our troubles. So avoid forced growth, pursue natural growth.

Avinash Narula

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