HPL complex: A restructuring package might be just what the doctor ordered

The latest chapter in the never-ending Haldia story began on September 16 at Kolkata's Writer's Building, the 190-year-old structure that serves as the seat of government in West Bengal. Present at the meeting were Chief Minister Buddhadeb Bhattacharya, Industry Minister Nirupam Sen, Tata Group Chairman Ratan Tata, and Confederation of Indian Industry Director General Tarun Das. Tata was in town for the Tata Tea annual general meeting (AGM), and it was only to be expected that he meet with the state's cm, industry minister, and Das, whose good offices Bhattacharya has used to market West Bengal as a destination for business, but the meeting was far from routine. The West Bengal government owns a 43 per cent stake in Haldia Petrochemicals-billed as a sign of the state's industrial revival, it had never quite taken off-the Tata Group, 14 per cent, and Das is the company's Chairman. The timing was just right. Financial institutions, led by IDBI, had set September 30 as the deadline to declare HPL a NPA (Non Performing Asset) in their books. The exact details of what transpired at the meeting aren't known, but Bhattacharya did enough to keep HPL afloat.

The state government convinced the Tata Group, which had wanted out, to stay invested in the company. The endorsement from one of the country's most respected business houses was reassurance enough for the financial institutions, which released, on September 26, a restructuring package that could save HPL the blushes of being labelled a NPA.

The FI-package includes the conversion of Rs 700 crore of debt to equity, a two-year moratorium on repayment of short-term loans, and the reduction in the interest rate on loans from 14.5 per cent to 11.5 per cent. The catch? HPL will have to find an additional Rs 500 crore in equity by November 30. For a company that pays Rs 135 crore in interest charges every quarter that's nothing short of a miracle.

Already, ONGC and GAIL have both expressed interest in investing in HPL; GAIL has engaged audit firm Ernst & Young to carry out a due diligence study as a precursor to its proposed Rs 500-crore investment-Rs 200 crore in the equity of HPL and Rs 300 crore in a marketing joint venture with the company. And to think that just two months ago, HPL looked like a lost cause. Its debt burden was killing and it had been unable to find a replacement for its CEO, Richard Saldanha, a former Unilever exec who quit in May 2002, to join Bennett, Coleman, & Company.

TWISTS AND TURNS HPL has seen enough of both

Former West Bengal CM Jyoti Basu TGC's Purnendu Chatterjee Tata Group's Ratan Tata HPL's Chairman Tarun Das 1990: West Bengal's tag as an industrial wasteland irks (then) Chief Minister Jyoti Basu, who announces plans to create a giant petrochemicals complex at Haldia. The names of the Tatas and the Goenkas does the rounds as possible partners to the state government. 1994: Non-Resident Bengali Purnendu Chatterjee emerges as the great white hope. MIT alum, McKinsey hot-shot, and associate of global investor George Soros, Chatterjee says he wants to do something for West Bengal. Haldia seems possible 1995: Work on HPL begins in earnest. The partners in the Rs 5,170 crore project? Purnendu Chatterjee's TCG (The Chatterjee Group), which holds 43 per cent of the equity, the West Bengal government, through West Bengal Industrial Development Corporation (WBIDC), which owns 43 per cent, and the Tata Group, which holds 14 per cent 1996: HPL achieves financial closure at the steep interest rate of 14.5 per cent. 2000: HPL goes on stream 38 months after it was commissioned. There are rumours concerning TCG's inability about bringing in its share of the equity. The Tatas want out, and the state government and TCG are locked in a battle for control. The institutional lenders start demanding their pound of flesh. The state government starts considering the possibility of inducting a strategic partner. 2001: Buddhadeb Bhattacharya makes Haldia a priority and initiates talks with Indian Oil as a possible strategic investor. TCG and WBIDC discuss the prickly issue of control; Chatterjee wants to call the shots. The issue remains unresolved and Haldia continues to function as a board-managed company. Debts mount. In December, the two promoters reach a compromise of sorts. They agree (tentatively) to divest in favour of Indian Oil, and give the PSU management control. 2002: Tarun Das replaces Tapan Mitra as the Chairman of Haldia Petrochemicals. The Indian Oil deal falls through as the oil major refuses to take a 51 per cent stake; wants a 26 per cent stake and management control. The crisis deepens as debt balloons. Hectic negotiations see both WBIDC and Chatterjee agree to a financial recast. The Tata Group is persuaded to stay on and GAIL and ONGC are seen to be willing to step in as strategic investors. Hopes of survival seem real.

What About Purnendu?

So, what happens to high profile NRI investor Purnendu Chatterjee whose tcg (The Chatterjee Group) holds a 43 per cent stake in hpl? The state government was willing to accede management control of HPL to TCG last year, but that plan is now dead, says its advisor Dipankar Chatterjee, Senior Partner, L.B. Jha & Co. ''Instead, TCG is likely to hold the controlling stake in a new SPV (Special Purpose Vehicle) that will enter into a swap-marketing alliance with GAIL.'' The Chatterjee Group appears amenable to this arrangement. Chairman Tarun Das is reported to have worked on transforming TCG's outlook: as late as May this year, the group was averse to diluting its stake in HPL.

Today, Haldia Petrochemicals is a board-run company. Das has sought to address the issues of ownership, control, and restructuring, and the state government's nominee on the board of the company, WBIDC (West Bengal Industrial Development Corporation) Managing Director Gopal Krishna looks after the diurnal functioning. ''HPL has already shown its ability to perform,'' says Das. ''With most management issues resolved, and the entry of a strategic partner, almost finalised, the company can start performing without being weighed down.''

Das has already strengthened the board by inducting India's former ambassador to the US, Naresh Chandra, as an independent director. Godrej & Boyce CEO Jamshyd Godrej is expected to join the board sometime this month and the Tata Group has reclaimed its board-presence by appointing two directors-Tata Engineering's Company Secretary H.K. Sethna and Tata Power's Vice President

S. Mohan Gurunath. The Tata-nominees, however, may change once the two companies transfer their holding in HPL to Tata Sons. And the search is on for a managing director who can run the company.

The Money Crunch

The quality of its board won't make it any easier for HPL to address its financial difficulties. The company had to capitalise its previous losses the minute it started commercial production, in August 2001. That meant the project's cost went up from Rs 5,170 crore to over Rs 6,000 crore. And the debt-equity ratio was skewed heavily towards debt (3.69:1) to begin with. ''HPL's balance sheet has to be cleaned up for its survival,'' says West Bengal Industries Minister Sen.

The restructuring package presented by the financial institutions envisages the reduction of debt from Rs 4,628 crore to Rs 3,100 crore and the enhancement of equity from Rs 1,010 crore to Rs 2,250 crore (Rs 500 crore of additional equity plus the conversion of Rs 700 crore of fi debt to equity). That will improve the debt-equity ratio some (to around 2:1, not all that bad for a large petrochemicals company). And the 300 basis point reduction in the interest rate will net HPL, which was paying Rs 135 crore as interest every quarter, substantial savings.

Under the new dispensation, TCG and the state government will each hold 35 per cent of HPL's equity. The rest will be shared between the Tata Group (it owns 14 per cent now, but this could come down) and new strategic partners, such as GAIL. ''IOC and ONGC could pick up small stakes too,'' adds Sen.

BUDDHA'S PART How West Bengal's chief minister may have saved the day.

West Bengal CM Buddhadeb Bhattacharya No one expected Buddhadeb Bhattacharya, the 56-year-old who took over as chief minister of West Bengal in November 2000, to solve the Haldia imbroglio. He was known for his liking for the arts, not his ability to negotiate board-room intrigues. Still, Bhattacharya's first meetings with TCG's Purnendu Chatterjee went well. Then everything that could go wrong, did. The state government was keen on IOC as a strategic partner; Purnendu was insistent that TCG wouldn't dilute its controlling stake. Bhattacharya didn't give up. He met with possible investors-Reliance included-who could bail out the project if TCG withdrew. Then, he inducted CII head honcho Tarun Das as Chairman and started parleys with two Bengali technocrats, GAIL Chairman Prashanto Banerjee and ONGC Chairman Subir Raha to explore possibilities of the two psus investing in HPL. Today, GAIL seems committed to become a partner in HPL by November. And Das has managed to convince the Tata Group to stay invested in the project. The financial institutions, encouraged by all this affirmative action, have now offered a restructuring package as a lifeline to HPL. All's well that ends well. And what about Reliance? Bhattacharya's emissary, state it minister Manabendra Mukherjee met with the Ambanis in Mumbai in the last week of September. The buzz is, he has convinced them to build a world-class it school in West Bengal and name it after the late Dhirubhai Ambani.

Time could play spoil-sport. ''The promoters have to bring in the equity by the stipulated time frame for the restructuring to proceed,'' explains Jitendra Balachander, Director, IDBI. If all goes well, HPL will be able to convince gail to invest Rs 500 crore. ''We are hopeful that GAIL will be a meaningful strategic partner,'' says Das. CM Bhattacharya and GAIL CEO Prashanto Banerjee have discussed the investment and ''the signs are very positive,'' says West Bengal Industries and Commerce Secretary Jawhar Sircar.

The Market Context

If one can overlook the debt burden it is carrying, HPL boasts the soul of an efficient petrochemical company. It hopes to be making gross profits by 2004. ''In March 2002, we notched up a monthly sales of Rs 304 crore,'' says Swapan Bhattacharya, the TCG nominee on the board of the company. ''This, when the market is just looking up.'' And the company isn't averse to changing its product mix to tap lucrative opportunities. For instance, its 420,000 tonnes-per-annum (TPA) naphtha cracker produces 75,000 tonnes of LPG a year. This yields the company Rs 17,000 per tonne. HPL is in the process of constructing a dedicated pipeline that will help it pipe butadiene to Haldia port for export. Once that is done, it will switch from LPG to butadiene, which will yield it close to Rs 30,000 a tonne.

With the domestic plastic market growing at 16 per cent and with its brand Halene making a mark, HPL could well return sales-extrapolating its March 2002 performance-in excess of Rs 3,700 crore in 2002-03. With Reliance's plans of acquiring either HPCL or BPCL on hold, a move that would have the given it an unbeatable edge in the petrochemicals business, everything seems to be going right for HPL. And the GAIL partnership, should it materialise, will give it access to a pipeline grid that can reach markets across the country. Now, if only this new agreement is for keeps.