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CASE GAME The Case Of The Polyester Manufacturer Unviable capacities and obsolete product lines are killing Hind Synthetics. Does it have a tomorrow? GSL's R.C. Bagrodia, HFS' S. Haribhakti, and Accenture's Ajit Kumar debate. By R. Chandrasekhar
Over the past 30 years, Hind had built a synthetic fibre plant with an annual capacity of 26,000 tonnes. Of the Rs 150 crore invested in it, Rs 55 crore had come by way of loans. But the downturn of the past six years had pushed Hind into a crisis. With profits drying up, it had defaulted on interest payments, and today owed Rs 120 crore in principal and interest to the lenders. As far as Sethi could see, there was no immediate hope of things changing for the better. The faxed message further added that Sethi would continue to be the chairman of the company, but the new CEO would report to a three-member committee of the board, including Sethi. ''Let me assure you, Jaswant, this is only an interim measure,'' the lead lender wrote in a bid to soften the blow.
''Shyam, call Nadim. Tell him to get the car ready. We are leaving for Delhi,'' Sethi barked at his housekeeper, on his way to the bath. Within half-hour of receiving the fax, Sethi was on the road, seated in the ample rear of his Mitsubishi Pajero. Pulling out the fax message from his bag, he tried to mentally playback Hind's past and present. He had ample time to do that-five hours at least-and it wouldn't be until eight in the evening before he could get to meet the head of the lead financial institution for dinner. Memories came flooding back. Sethi remembered that August morning in 1968 when he had accompanied his father to Chennai for the inauguration of Hind's plant. Sethi Sr had been proud that this was one of the biggest polyester plants in India at that time. The facility had been built to manufacture 4,500 tonnes per annum (TPA) of rayon yarn; 2,500 TPA of nylon yarn and 4,000 TPA of nylon tyre cord, and 15,000 TPA of polyester filament yarn. As a teenager, the first thing that had struck Sethi about the new plant was its size; ''it's huge,'' he remembered telling his dad. Three decades on, it was the size that was bleeding Hind. But until the late eighties, Hind had not felt the pinch. A majority of its competitors had similar capacities, and none of them really worried about efficiencies because import tariffs were high and, therefore, the industry could afford to sell on a cost-plus basis. But liberalisation of the economy, which began in the early Nineties, had changed all that. Import duties came down progressively to 32 per cent from 150 per cent. Suddenly, it was cheaper for customers to import man-made fibre than to buy locally. Manufacturers were forced to match prices, but without comparable efficiencies in place, the bottomline began to hurt. It hadn't taken long for Sethi to realise that Hind's small manufacturing capacity had become a source of competitive disadvantage. ''What else can explain the losses despite Hind manufacturing to its full capacity,'' Sethi said almost aloud. At half-past three Sethi's Pajero pulled up in front of the office of Rajeev Verma-a consultant Sethi had been referred to. Verma was surprised to see the CEO of Hind Synthetics land up in his office without a warning. Sethi thrust the fax message into Verma's hand by way of explanation. Quickly, Sethi brought Verma up to speed on the events of the past few weeks. ''Companies that came in much after you did have set up 50,000 plus TPA plants,'' pointed out Verma. ''In fact, Vimoline Industries has not only set up a 2-lakh TPA plus plant, but also gone in for backward integration right up to the primary feedstock stage. Why didn't Hind expand its capacity?'' ''Therein hangs a tale,'' Sethi winced. ''You know, Hind was doing well till the early 90's with operating margins of up to 40 per cent. We thought the good times would last. It was only when profits were beginning to decline by mid-1994 that we thought of expanding our capacity. Paradoxically, it triggered off a spiral from which Hind has not recovered.'' ''How?'' Verma asked. ''Since the primary capital market was not too favourable,'' Sethi explained, ''we decided on an initial rights issue in mid-1994 to fund both capacity expansion and backward integration. But the issue failed. All major shareholders renounced their rights entitlements. In anticipation of funds from the rights issue, we had taken a bridge loan from financial institutions. That was clearly a mistake. As the original promoter, I was forced to contribute to over 80 per cent of the rights issue which helped merely to increase my stake from 12 to 34 per cent.'' ''But what happened to the issue proceeds?'' Verma asked. ''They were frozen under a petition from the institutions,'' said Sethi. ''Sooner than we realised, we got into working capital problems. In the process of servicing the debt, our business priorities went haywire. One example: Although we imported the plant and machinery, it could not be commissioned for two years for lack of funds.'' "'But are there any synergies among your product lines?'' Verma asked. ''Forget about synergy, what scares me is the thought that in another few years some of my product lines may become obsolete,'' Sethi said with a quiver in his voice. |
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Jaswant Sethi
was sitting on the verandah of his summer cottage in Kausali when the news
arrived. The consortium of financial institutions that had provided huge
loans to his company, Hind Synthetics, had directed him to hand over the
running of the company to a professional manager. Sethi wasn't totally
surprised at this turn of events. He had been through tens of meetings in
the recent months trying to make his case against such a move. But being
the hard-headed businessman that he was, Sethi knew that chances of his
winning were slim.