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TURNAROUND All Dressed up, But Nowhere To Go At long last, Vijay Mallya has succeeded in turning around group company Mangalore Chemicals & Fertilisers, but what does he do with it now? By Dilip Maitra
Sure enough, a month later, an ecstatic Daraius P. Mehta, the 48-year-old Managing Director of MCF, flew back to his Bangalore headquarters from Delhi armed with a letter from the Board for Industrial & Financial Reconstruction (BIFR), approving the revival package for MCF. It's now official: the fertiliser company that entered the UB stable in 1990, and was declared sick four years later is out of the purview of the Board for Industrial and Financial Reconstruction (BIFR) after wiping out the losses that had piled up over the years. What Next? So now that the red ink has been erased, the net worth turned positive, Rs 175 crore set aside for capital expenditure, and debt on the books reduced to just Rs 40 crore, what does Mallya do with MCF? He's clear that his core businesses are liquor and beer. Fertiliser just doesn't fit in. The chairman is willing to sell, but are there takers willing to pay the liquor baron a handsome price for his efforts? Chances are there won't be too many, given the state of the industry: prices are low, cheaper imports are on the cards, and naphtha-based plants (as opposed to gas-based ones) are on shaky ground because of the high price of this basic feedstock. The MCF plant runs on naphtha, which is more than double the price of gas, the popular feedstock for new plants. Because of their higher costs of production, naphtha-based plants need more subsidies. For instance, MCF's average cost of urea production is Rs 12,000 per tonne. To sell at Rs 4,600-the price set by the government-MCF needs a subsidy of Rs 7,400 per tonne. Against this, the subsidy for a gas-based unit works out to just Rs 2,000, thanks to its lower cost of production. ''I think the life for most naptha-based plants in the decontrol regime will be tough and they will be gradually phased out,'' says R.S. Nanda, President and Managing Director of the Murugappa Group-owned Coromandel Fertiliser. Still you can't take away the fact that it's been a remarkable turnaround for MCF. Over the past five years, the UB Group, with a 30.44 per cent stake in MCF, proposed four rehabilitation packages. Finally, the last one was accepted. ''Now there is no more ambiguity. We have reached a settlement that is final and accepted by all concerned,'' says Mehta, a chartered accountant who joined MCF in 1990 and became managing director six years later. According to this 'one-time settlement scheme' agreed upon by the banks and financial institutions (FIs) under the supervision of the Industrial Development Bank of India (IDBI), MCF's final liability has been pegged at Rs 207 crore. The banks and FIs have waived a total interest of Rs 135 crore, and this amount has been written back to the profit and loss account, allowing MCF's net worth to turn positive. Of the Rs 207 crore in liabilities, the banks have been paid back all their dues totalling Rs 114 crore, the FIs Rs 47 crore of a total of Rs 68 crore, and the leasing companies Rs 3 crore of Rs 11 crore. Once MCF pays up the balance Rs 29 crore-it plans to over the next two months-it would have completed the implementation of the BIFR package in toto.
Turnaround Tactics So how did MCF pull it off? Tight financial and operational management did the trick. For the past five years, the company ensured that its plant operated at near total capacity. This is vital in the fertiliser industry, as the retention price (decided by the government) is worked out on the basis of an 80 per cent utilisation rate. So the higher the capacity utilisation, the better the price that can be fetched. Simultaneously, MCF also improved working capital turnover to cope with lower limits (remember that the banks had frozen the company's working capital limits). First of all, MCF managed to get its regular flow of subsidy (for the fertiliser sold) from the government within three-to-four weeks of sale against the two-to-three months it would otherwise take. Next, it shortened the normal credit period dealers were used to by introducing discounts for up-front payments. The result of this twin strategy has been remarkable: with the same amount of working capital, MCF now handles double the sales it did five years ago. And its inventory of finished goods as a percentage to sales dropped from an average 60 days in 1996-97 to only four days in the last financial year. Says Pratap Narayan, Director-General of the Fertiliser Association of India (the apex body for the industry): ''MCF has been operating efficiently in the last few years, despite several financial constraints. I guess they got their strategy right.'' For Mallya, it may be the time to raise a toast, but investors aren't exactly celebrating as the stock still languishes in the Rs 10 range. Perhaps an acquisition-or at least rumours of one, to start with-could shore up the stock. |
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Last
November, UB Group supremo Vijay Mallya called in Mumbai's sports
journalists to announce that he, along with the likes of fellow
industrialists Anand Mahindra and Shivanand Salgaocar, was forming the
Indian Premier Football Association (IPFA), whose objective ostensibly was
to give soccer the due it deserved. Even as Mallya talked about his plans
for flagging off an under-19 and a women's league, he couldn't resist
flaunting one of his group's recent achievements that had little to do
with soccer. ''We will soon restore Mangalore Chemicals & Fertilisers
(MCF) to a positive net worth, wipe out our accumulated losses, and show a
net profit,'' he crowed.