Petrochem: Playing On A Spic-Y Wicket

PETROCHEM
Playing On A Spic-Y Wicket

Baulked by scams and defaults, the petrochem giant is struggling to keep its head above water.

By Dilip Maitra

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Readers may be forgiven for wondering what a cricket administrator like the gentleman in the picture is doing here. It's as the President of the Board of Control for Cricket in India (BCCI) that the 58-year-old A.C. Muthiah has figured in the news. But now, it's as Chairman of the Chennai-based Southern Petrochemical Industries Corporation (SPIC), that he will have to play the toughest innings of his career.

First, in July this year, a Chennai court indicted Muthiah in the case investigating the decision of the state-owned Tamil Nadu Industrial Development Corporation (TIDCO) to divest the stake it held in spic to Muthiah and his fellow promoters, at terms highly advantageous to them. And in September, spic defaulted on the interest payment on the $120 million it raised in 1996, by issuing floating rate notes (FRN). Surely, something is seriously wrong if a company with an income of Rs 2,712 crore and a net worth of Rs 653 crore (1999-2000) can't make a payment of

Rs 23 crore. Muthiah did not respond to BT's queries, but a spokesperson for spic clarified that the Indian Oil Corporation's decision to withdraw the three-month credit facility it used to offer on naphtha purchases, had caused a quarterly outflow of Rs 240 crore and wrecked spic's cash flows.

Domestic financial institutions are threatening to call back loans of Rs 600 crore released to spic Petrochemicals, a still-born JV between spic and Chennai Refineries Ltd. And things could worsen if the FRN-investors exercise their option to call the payment in (all Rs 550 crore of it) on January 19, 2001.

It isn't hard to find the core of spic's problems. Bitten by the diversification bug in the early nineties, Muthiah used spic as the main borrowing and investing vehicle in projects that haven't quite worked out. Expectedly, spic's debt is killing: at Rs 2,118 crore in 1999-2000, it was 3.2 times (real) net worth. That it is still showing profits has a lot to say about its quality of accounting. Investors, though, seem to be aware of this as they have beaten down the price of the scrip to Rs 7 (October 10, 2000).

Under-utilised assets are one of spic's problems: after discounting the 27 per cent of its income arising from trading, spic's asset utilisation ratio was 0.77; and its return on capital employed, 1 per cent.

SPIC's investments in group companies stand at Rs 321 crore. And its loans to them, at Rs 1,000 crore. Of the eight large investments made by spic, only two-in Tamil Nadu Petroproducts (TPL) and Indo-Jordan Chemical Co.-are profitable, and the its overall return on investment (dividend) is just 5.6 per cent.

SPIC's investments in mega-projects like the $60 million it has sunk in SPIC Fertilisers and Chemicals FZE in Dubai (a joint venture with US-based MCN Energy launched in 1996), and the Rs 395 crore (excluding the Rs 175 crore in interest due) in spic Petro (conceived in 1995) are stuck. MCN wants out of the former, and after Chennai Refineries walked out of the latter, Muthiah has been trying in vain to find a buyer.

Disinvesting its non-fertiliser businesses may be the only way out for spic, and the company is selling its loss-making heavy chemicals division to TPL. Next on the block will be its pharma and biotech businesses. But these divestments will not raise the kind of money Muthiah needs. And so, it's a treacherous pitch on which spic finds itself batting first. Wrong call.

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