Disinvestment: Will The Dough Rise?

DISINVESTMENT
Will The Dough Rise?

Hindustan Lever says the turnaround at Modern Foods has begun. Some employees are sceptical. Others fear they may be axed before that happens.

By Vinod Mahanta

GUNENDER KAPUR
Executive Director (Foods), HLL

If you thought disinvestment of public sector undertakings is laborious and contentious in this neck of the woods, things surely don't get better once the exercise is finally concluded. Ask anybody at Hindustan Lever Ltd (HLL), they'll agree. Immediately after the deal for the acquisition of Modern Foods-which has been touted as a test-case for divestment in the country-went through last February, opposition members, union honchos, and sundry opinion-makers brought out the daggers. They questioned the government's decision to sell this bread maker-which boasts a national presence, 14 production units, and almost 5 lakh square metres of land-for just Rs 105 crore.

That was then. These days, HLL finds itself in the midst of another tumult. Sections of workers at Modern's various units have accused the FMCG major of deliberately making the company a stretcher-case, of hatching plans to axe more than half of the 2,000-odd workforce, of shutting down some manufacturing facilities, and of relying on third parties to meet production needs. Some even allege that Lever's prime consideration when acquiring Modern was the huge land at its disposal, and don't rule out the possibility of HLL eventually using that land for its own expansions.

So is Lever another example of a transnational cowboy capitalist on the rampage; or is Cain being raised by a bunch of steeped-in-PSU-culture workers, unwilling to adapt to change (read work)? There's no easy answer to that question. If you heard Gunender Kapur, Executive Director (Foods), HLL, declaring that ''we are committed to making Modern a thriving and exciting business,'' it would be difficult not to believe him.

The Axe Effect

The Great Debate: What went wrong?
MODERN-SPEAK	HLL-TALK
HLL has made Modern sick	Modern was potentially sick
Lever is outsourcing, not making bread	Lever is outsourcing where it doesn't have plants
Lever is shutting down Modern's plants	These plants were set up to handle Modern's diversifications
Lever will exploit Modern's real estate	Lever will do so only for Modern's own expansions
Workers feel insecure	Staff reacting well towards HLL efforts

Now look at the other side. R.D. Sharma, a clerk at Modern Foods' head office in R.K. Puram, New Delhi, is twiddling his thumbs. ''I want to work,'' he moans. Across him sits P.N. Tripathi, who in unbelievable contrast, starts work at 9 am, and regularly burns the midnight oil, sometimes even keeping the flame going up to 2 in the morning. He's putting in that extra bit to ensure that he's retained in the eventuality of a job cut. Frustration and fear, if there are workers who best personify those two sentiments at Modern Food, they're Sharma and Tripathi, respectively.

An HLL official dismisses the situation rather bluntly: ''People who are in the habit of doing nothing are still doing nothing.'' Kapur insists that by and large the workforce has reacted positively to HLL. ''They have a strong desire to see Modern do well... but a minority will always feel threatened during a time of change,'' he adds.

But have things changed, asks the anti-HLL brigade. In fact, the only change appears to be for the worse. By December 2000, 10 months after HLL took over the reins, Modern's accumulated losses had bloated to Rs 47.04 crore, as against its net worth of Rs 33.01 crore. Result? The Sick Industries Act (SICA) made it mandatory for Lever to refer Modern to the Board for Industrial & Financial Reconstruction (BIFR), as more than 50 per cent of Modern's net worth had been eroded by its piled up losses.

One view prevailing at Modern's New Delhi headquarters is that Lever wanted Modern to be taken to the BIFR, ostensibly in the hope of getting some relief (from the banks and financial institutions). After all, if Lever had put the Rs 16.5 crore it infused into Modern as preference share capital instead of loans, the company would not have become sick.

HLL officials retort that neither have they made Modern sick, nor have they made any application or proposal for rehabilitation, nor have they asked for relief. Kapur adds that Modern had little choice but to go to the BIFR, because its accumulated losses have exceeded 50 per cent of its peak net worth, over a four-year period-as per section 23 of SICA-if a company's accumulated losses over four years exceed 50 per cent of net worth, then it has to be declared sick. The implication is that Modern was already potentially sick, and invariably would have made it to the BIFR. ''It is only a matter of time before companies that come to the BIFR potentially-sick, land up as sick industrial units with erosion of net worth,'' points out Kishore Soni, CEO, Sircon, an industrial reconstruction firm.

But the fact remains that lever could have prevented Modern from entering the BIFR's ambit. As Soni points out: ''If the amount that HLL brought in was brought as equity or preference capital before December 31, 2000, Modern Food could have escaped the clutches of the BIFR.'' So why then did HLL not opt for this route? ''Rationalisation of manpower and closure of unviable units may be the likely agenda of HLL in taking Modern Food to BIFR.''

Kapur for his part insists that taking Modern to the BIFR was just a 'technicality'. He is upbeat that in two years Modern should be able to post a cash profit via the turnaround strategy HLL has blueprinted. Broadly, this involves improving the quality of the product, and the raw material (refined flour), improving the manufacturing process (which is baking), upgrading process controls, plant and machinery. Existing distributors are being trained and new ones identified, and the market is being mapped to identify new outlets that can sell bread.

To do all this HLL has, of course, invested in Modern-Rs 8-9 crore has gone into upgrading plant, machinery, and buildings, whilst another Rs 3-4 crore has gone into the wage revision that was committed to the workers. Another couple of crores has been sunk into beefing up distribution infrastructure, buying vans, and hiring sales people. Finally, an attempt has also been made to clean up Modern's books.

The Revival?

The HLL viewpoint is that The First Signs of the turnaround are already showing. Between February (since acquisition) and December, Modern's sales have doubled, says Kapur, in comparison to the previous year's corresponding period (he doesn't oblige with figures, citing 'competitive' pressures). This year's first quarter has also witnessed a doubling of sales. ''And margins are 40 per cent higher than they were pre-acquisition,'' adds Kapur. Not just that, HLL officials now claim that Modern is growing much more rapidly than the 7-8 per cent growth rate being notched up by the industry as a whole, and that Modern is now a leader in the Rs 900-odd crore organised sector, with a 15-16 per cent market share (Britannia apparently has 10 per cent).

Mention the word turnaround to a section of the Modern workers, and they'll most likely scoff. How can HLL revive the company when it's going about shutting down plants? For instance, they point out, the units at Bhagalpur and Kirti Nagar, Delhi, have been closed, and just about half of the Lawrence Road factory in Delhi is operational. The workers are at pains to figure out how HLL intends to up capacity utilisation to 75 per cent (as professed) from the dismal 15 per cent at the time of takeover. As for the doubling of sales, they feel that Lever has achieved this largely by adding the figures of the franchisees-turned into ancillaries from November. Modern sources bread from 22 franchisees all over the country. Clearly, they feel that the HLL game plan is to shut down units, lay off workers, and rely more on third-party production.

HLL's stance on outsourcing is simple: the decision is based on whether Modern owns a unit in a certain region or not. For instance, in Mumbai, Modern has its own plant so it doesn't outsource. On the other hand, in Pune it doesn't own one so it relies on an ancillary. Kapur explains capacity utilisation is location-specific-in the South, where demand is huge, utilisation is 100 per cent, ''but other units are far from it. In Delhi, for instance, there's huge overcapacity,'' adds Kapur, which explains why Modern isn't producing much there. In any case, analysts point out that Lever relies pretty heavily on outsourcing to boost returns. ''Outsourcing is a classic Lever strategy,'' says Neerav Seth, Equity Analyst, SSKI. ''Lever always operates on lower margins and higher return on investments.''

Lever is clear that it's not exactly in a hurry to open the four units that have been lying shut, as almost all of them were set up to handle Modern's diversifications (into fruit processing, for instance). ''We will have to take a view on the workers at the shut units,'' says Kapur. He also makes it clear that Lever has no plans to use Modern's vast stretches of land for Lever's expansions. ''We will use Modern's land for Modern's expansions, nothing else,'' he avers.

As far as Lever is concerned, it acquired Modern because of its bread business-and little else. The synergies are well defined. HLL is one of the largest players in wheat flour. It makes all kinds of wheat-based products, ranging from atta, rava (being test-marketed in the south), and ready-to-eat chappatis, to bread and cakes. The next couple of years will tell whether Modern can be transformed from an ailing concern into a breadwinner by HLL

-Additional reporting by Brian Carvalho
(Names of Modern Foods personnel changed to protect identity)

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