Corporate: Diversification - Nagarjuna's Flagging Ambitions

DIVERSIFICATION
Nagarjuna's Flagging Ambitions

With profits in the group's flagship fertiliser business getting squeezed, its big-ticket diversification move faces an uphill run.

By E. Kumar Sharma

When it comes to the New Economy, K.S. Raju is totally at ease. Last April, the 50-year-old Vice-Chairman and Managing Director of Nagarjuna Fertilisers and Chemicals (NFCL) stole a march over his rivals by launching ikisan. com-a unique agri-portal targeted at farmers. And, if all goes well, he will also have a company in the sunrise bio-tech industry to boast of three years from now. Ironically, it's the old economy where Raju seems to be losing his grip.

Five years ago, Raju's vision was that of building a diversified empire with interests in fertilisers, steel, power, and refinery. By his reckoning, Nagarjuna was to be a Rs 5,000-crore turnover group with an asset base of Rs 10,000 crore by 2000. It is nowhere near that target. Says P.K. Madhav, 46, Director (Finance), Nagarjuna Group: ''We will achieve this target, but with a five-year lag.'' But, with the profits in the group's flagship fertiliser business getting squeezed, the big-ticket diversification could prove to be difficult act for Nagarjuna to manage. Says a local analyst: ''The financials are already under strain with the group having to pay back investors in Nagarjuna Finance. And NFCL's cash-flows will never be the same again with the governmentout to cut subsidy.''

Raju knows as much, which is why the Rs 5,000-crore hot-rolled (hr) steel coil project with a 2.5 million tonne capacity, slated to come up at Mangalore in Karnataka, was put on hold last year. The project had been conceived when the steel industry's future looked hunky-dory. But the rapid decline in the industry's fortunes forced change in Nagarjuna's plans, although not before 1,000 acres of land had been acquired for the project. Says Raju: ''We already have our plate full with the refinery and power projects. Steel would have added to the burden.''

Spreading it thin

Despite Raju's optimism, there could be more casualties at the group. Analysts say that the next to be put on the back-burner could be the proposed power project in Mangalore. The 1,000-mw project is into its fourth year of waiting. According to the plan which was penned in 1996, the utility should have been up and running by now. But with the Karnataka government continuing to drag its feet on the escrow account-which insures power generators against state electricity board (SEB) defaults-and still to move on the Deepak Parekh Committee's recommendations on SEB restructuring, Nagarjuna has had to halt work at the site.

More worryingly, Nagarjuna Power Corporation, is yet to tie up its finances, although the project cost is escalating. The cost per megawatt is up 25 per cent from Rs 4 crore to Rs 5 crore. Another sharp depreciation in the rupee may make the project unviable. According to Geeta Gouri, 49, Hyderabad-based power sector analyst, the CEA benchmark today is Rs 4 crore per megawatt, but the cost could get as low as Rs 2.58 crore to Rs 3 crore, depending on the EPC contractor.

Nagarjuna's power gambit also hinges on Raju's ability to rope in other equity partners. For, of the total project cost of Rs 6,000 crore, the equity component is a high Rs 1,150 crore. Of this, Nagarjuna will hold 36 per cent (Rs 648 crore) and the balance is to be distributed among a strategic partner, a financial investor, the EPC contractor, and the fuel supplier.

Finding investors, however, will not be easy. Especially when foreign companies like Cogentrix and PowerGen are turning their back on India. To evoke any interest, the project must get all its statutory clearances and sort out the escrow account issue. Admits Raju: ''That's the billion-dollar question.'' Experts say that even if all the issues get sorted out, it will take another whole year before the financial closure is finally made.

Then, there is the six-million-tonne refinery project at Cuddalore in Tamil Nadu. Already, the project-involving the relocation of Mobil's old plant at Woerth, Germany-has become dearer by Rs 380 crore at Rs 3,480 crore. Reasons: the fall in rupee's value, and change in the refinery's status from an export-oriented unit (EOU) to a non-EOU.

Strained financials

But together, the power and refinery projects will involve an outflow of Rs 1,234 crore from Nagarjuna. As on March 31, 1999, the company's free reserves were Rs 652 crore. What should worry Raju more is that NFCL's profits have been falling although its topline has grown. For instance, in 1995-96, the company had logged net profits of Rs 221.18 crore on sales of Rs 885.58 crore. In the last fiscal, while the topline soared to Rs 1,435.96 crore, the bottomline had sagged to Rs 113.50 crore. Points out Rajendra Naniwadekar, 37, President, Hyderabad Stock Exchange: ''There is not much interest in the stockmarket about the group. Its financials are under pressure, with the net profit declining. The NFCL board has also decided to lower the dividend to 10 per cent for 1999-2000 against 20 per cent last year.''

Raju's plans of tightening the flagship's finances have also run into trouble. In April, a limited stock swap between NFCL and Nagarjuna Oil Corporation (NOC) was proposed with the idea of lowering NFCL's equity capital from Rs 418 crore to Rs 209 crore. Under the plan, all shareholders of NFCL were to be given two shares of NOC for every share of NFCL, but only for half of their total NFCL holding. Says L.V.V. Iyer, 45, Vice-President (Legal) and Secretary of NFCL: ''Post-swap, NFCL will have one of the lowest share capital per tonne of urea capacity.''

Sure, but it will jack up the debt-equity ratio. At the moment, for every shareholder rupee, there are long-term borrowings of Re 1. Following the recast, the ratio will jump to Re 1.60, making leveraging even harder. But, advisors S.B. Billimoria and Company, don't agree. ''This is still an acceptable ratio,'' opines P.R. Ramesh, 45, Partner, S.B. Billimoria.

Apparently, not too many of his investors are in agreement with him. If the indications are right, they probably want Raju to make do with a more modest vision of Group Nagarjuna.

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