|
|
|
|
|
            
|
Contn. Surviving The Slowdown Come Together, Right Now! Expect to see a spurt in M&A activity now; there's a rationale for it. By Dilip Maitra & Roshni Jayakar ''Going cheap. large consumer durable company available at a tenth its book value! Hurry, offer open till stock stays at this price".
Investment bankers haven't been reduced to vending their wares thus, but truth is, it is a great time to consider the M&A option. It's alright to depend on organic growth when the going is good; it's almost criminal to ignore inorganic growth opportunities when things turn bad. Eroding margins, sluggish sales, and almost no hope of a recovery have caused the share prices of most companies to plummet. Tractor and utility vehicle manufacturer M&M's shares quote at Rs 85 today against a book value of Rs 186. The Rs 3,251 crore Videocon International finds its share price quoting at Rs 25, a tenth of its book value. Says a consultant from consulting firm KPMG's M&A practice: "It's a good time for business consolidation. Smaller entities should merge into bigger and more efficient players, or else they will be marginalised". A slowdown also presents another kind of M&A opportunity: large profitable companies realising that they want out because the future doesn't look too good. Nicholas Piramal, which has traditionally grown through acquisitions, found one such in Rhone Poulenc, whose foreign parent Aventis Pharma simply wanted out. In December 2000, Nicholas Piramal acquired a 40 per cent stake in Rhone Poulenc through its subsidiary NPIL Finvest. And in April 2001, the company's shareholder approved the merger of the two. The merged entity, which will still be called Nicholas Piramal, will boast a turnover of close to Rs 800 crore, net profit of Rs 100 crore, a product portfolio of 240, 16 products in ORG-MARG's top 300 OTC (Over The Counter) brands, and a field force of 450.
Exults Ajay Piramal, Chairman, Nicholas Piramal: "Our strengths in adding significant value through mergers and acquisitions are now well documented. We will continue to look at any attractive opportunity to grow inorganically." The recent merger of BPL Communications with the Birla-Tata-at&t combine to create the country's largest cellular service provider was motivated, in part, by the state of the economy. The government's decision to allow basic telephony companies provide mobile services on the Wireless in Local Loop (wiLL) platform had already hit existing cellular telephony companies like the two parties involved in the merger, hard. Worse, the flagship businesses of the promoters (like BPL's consumer durable operations) had enough problems of their own brought about, primarily by the slowdown. A merger wouldn't just help the companies combat competition, went the reasoning. It would help them make consolidated bids for the 4th cellular licence (the bidding-process for which will end on July 19), and tap operational synergies in network-and subscriber-management. Most significantly, by being the largest company in the Indian cellular firmament, the merged entity would have no problems raising money either from the equity- or the debt-market. Says V. Krishnamurthy, the vice chairman of JM Morgan Stanley that served as the financial advisor to BPL in the merger: "The consolidation is for reasons of scale, (creating) a larger resource base, and cost effectiveness". Those reasons hold true for several potential M&As. Expanding during a slowdown comes with its own risks, but if the cost and time factors are managed well, the added capacities can pay off when demand picks up. By Brian Carvalho
A dot com example may not be the best way to kick off this story, but what if it's Monster.com? The global e-recruiter flagged off its Indian operations-Monsterindia.com-in March this year. Right now, it's expanding-by setting up offices in Delhi and Chennai, in addition to the ones at Mumbai, Bangalore, and Hyderabad (the headquarters). By the end of this year, monsterindia.com will also double its staff strength. ''There may be a slowdown now, but by focusing on revenues, profitability, and looking at costs-and of course expanding-we will be well placed to ride the boom when it happens,'' says Krishna Krovi, head of Monster.com's India operations, who is targeting breakeven for the second half of next year. Monsterindia.com might just turn out to be a freak in Indian Internet space. Krovi can, after all, rely on his profitable parent for funds for growing his operations. What's more, the e-recruiter, like any typical start-up, is in the investment phase, and an expansion wouldn't exactly come as a bolt from the blue (or the red). But let's leave the dotcom domain now, and enter the real world of manufacturing-steel, cement, aluminum etc-where companies are struggling to come to grips with tapering growth (and even degrowth in some cases). With sheer survival top of mind, most manufacturers are ruthlessly cutting costs. That may not be the most profound of observations, but hang on, what's this? Many of these manufacturers of commodities are actually expanding capacities. Harakiri? Not really. ''Investing during a slowdown makes ample sense. Because by the time your expansions are complete, demand should have picked up as the industry enters an upcycle,'' says Darshan Mehta, Managing Director, Anagram Stock Broking.
Admittedly, it's a strategy that comes with its fair share of risk. What, you might well ask, happens if the upcycle doesn't materialise by the time your plant comes on stream? The best example of expansion gone sour is that of Larsen & Toubro which, in the early nineties, frenetically put up new cement capacities, in the hope that their commissioning would coincide with improved prospects for that industry. That upturn didn't quite happen, and L&T suffered heavily because of its cement operations. What's more, if a company decides to expand, you can bet that its competitors are thinking along similar lines. A possible result? Overcapacity, as happened when the steel companies (Jindal, Essar, Lloyds, Ispat) put up mega capacities of flat steel products in the early nineties. Yet, expanding during a slowdown can work wonders-as long as the creation of new capacities is accompanied by all the other things you should be doing during periods of low growth: Like reducing production costs, adding value and modernising. And of course the expansions have to be done by efficiently allocating capital and leveraging the balancesheet. Consider Tisco, a perfect instance of a company that endured years of pain, and is now reaping the gains. Over the past five years Tisco has invested Rs 8,000 crore in modernising and putting up new capacities. In the process, it has become one of the cheapest producers of hot rolled coils in the world, with an operating cost of $75 per tonne. Forward integrations into cold rolled STEL and galvanised products have also been commisioned. And the results are showing, although the steel industry is yet stuck in a slowdown: even as steel prices fell to $190 per tonne from $270 per tonne last year, Tisco managed to increase its operating margins to 22.5 per cent from 17.5 per cent. Imagine what could happen once steel prices begin to climb! Only a soothsayer can figure out how long that will take, but Indian commodities majors aren't wasting their time gazing into the crystal ball. They're adding capacity. In cement, for instance, virtually every player worth its clinker is expanding. By next year, some 14 million tonnes of new cement capacity will come on stream (including grinding units). Most cement manufacturers look at the year gone by as an aberration. In the three years preceding 2000-2001, the cement industry grew by 7.5 per cent, 8 per cent, and 15 per cent. What's more, the reconstruction of Gujarat is expected to add further fuel to this year's growth.
That's why ACC is upping capacity. By May 2002, the company will have commissioned 2.6 million tonnes of additional capacity in Wadi, Karnataka. That, estimate analysts, will once again place ACC as the country's largest cement producer, with a capacity of 15.3 million tonnes, and a market share of roughly 11 per cent. ACC also appears well placed to ride the boom when it happens, thanks to the steps it's taken to modernise plants and scrap the inefficient ones. And in aluminum, all the majors-Nalco, Indal, Hindalco-are in expansion mode. Post-expansion, Nalco's capacity would have increased by 50 per cent, to 3.45 lakh tonnes per annum. Alongside, the PSU is also expanding its alumina capacity from 8 lakh tonnes to 15.75 lakh tonnes. And it's turning out to be a cost-effective expansion too. For instance, if Nalco had to put up a greenfield project, its cost per tonne would work out to Rs 24,100. But by expanding at the existing site (termed a brownfield project), Nalco is able to bring down that cost to Rs 16,000 per tonne. Says S.K. Banerjee, Director (Projects & Technical), Nalco: ''Projections suggest there will be a shortfall in the supply of aluminum by the year 2002. By that time, Nalco hopes to be ready.' -Additional Reporting By Rakhi Mazumdar 1 2 |
|
Issue Contents Write to us Subscription Syndication INDIA TODAY | INDIA TODAY PLUS | COMPUTERS TODAY |
TEENS TODAY |
 |
 |
