Videocon's Dhoot: Pursuing integration via global acquisitions

There's no stopping the global ambitions of the Dhoots of Videocon on the consumer electronics stage. After buying out the colour picture tube (CPT) business of Thomson SA for Rs 1,260 crore a little over a year ago, Chairman Venugopal Dhoot quickly followed up with the purchase of Electrolux's Indian subsidiary, Electrolux Kelvinator Limited (EKL) for Rs 330 crore. But the biggest bang on the acquisitions front came last fortnight, when a consortium led by Videocon Industries was named the "preferred bidder" to acquire a 97.5 stake in the ailing South Korea-based Daewoo Electronics. Dhoot's bid is reported to be in the vicinity of $700 million (Rs 3,230 crore). Woori Bank, one of Daewoo's leading creditors, named Videocon and RHJ International, the holding company of us buyout fund Ripplewood, as the primary bidders for Daewoo. Videocon's bid was preferred over four other interested parties. "We have signed a non-disclosure agreement, and therefore I am not at liberty to talk about the deal," Dhoot told BT. A terse notice from Videocon Industries to the stock exchanges said that a consortium comprising itself and RHJ International has been named as the preferred bidder to acquire a controlling stake in Daewoo Electronics. The transaction, say company officials, should be complete by the end of the calendar year.

Once it goes through, the deal will give Videocon a leg-up on three fronts: Global presence, product range and technology. "Yes, there is an advantage when you have a brand name like Daewoo, but the manufacturing facilities that someone like Daewoo offers is of more strategic importance," says Harish Bijoor, CEO, Harish Bijoor Consults Inc. In terms of manufacturing facilities, Daewoo has five factories in South Korea, apart from regional headquarters in Europe, the us and the Middle East. On the product portfolio front, it has offerings in established and emerging segments like high-definition televisions, digital televisions, DVD players, recorders, home cinema systems, refrigerators, air conditioners and microwave ovens. According to Bijoor, the deal is good news for Videocon as it gives the Dhoots an extended global reach via a readymade and established distribution network. "It is not easy to have distribution and manufacturing facilities. On the distribution front, it is even tougher for an Indian company to set up a network in an overseas market," he adds.

The Thomson deal gave Videocon a place among the largest CPT manufacturers in the world. This meant it had manufacturing units in countries like Mexico, Poland and China, apart from R&D facilities. Arun Kejriwal, Director of the Mumbai-based KRIS Securities, thinks Dhoot is in an aggressive frame of mind. "The Daewoo deal will protect him very well against any kind of play. A business like consumer electronics is all about visibility and the more number of brands you have, the better it is," he explains. The acquisition of Daewoo will also bring into Videocon's fold research institutes located in Korea, France and Europe. This could pave the way for more product launches, which will help the Dhoots enhance their portfolio. The Thomson acquisition gave Videocon an opportunity to integrate backward, and once Daewoo is in the bag, the Indian company will become a fully-integrated consumer electronics player on the global stage, which in turn will help it ride the advantages of economies of scale and keep costs in check.

Of course, the Dhoots will also need to focus on turning around Daewoo, which had a 94 billion won (Rs 470 crore) net loss in 2005 on sales of 2.16 trillion won (Rs 10,800 crore) But it's clearly the assets worth 1.65 trillion won (Rs 8,250 crore) that make the Korean consumer electronics giant attractive. The Daewoo Group went bankrupt in 1999, and subsequently many parts of the Korean chaebol were put on the block. Tata Motors bagged Daewoo CV a couple of years ago, and has since successfully integrated it into its commercial vehicle business. The Dhoots look set to follow the same path, although Bijoor does sound a note of caution. "Global businesses need to be managed with a global mindset. Most Indian companies are great at acquiring, but are terrible at managing." The Dhoots, for their part, would have some experience at both.

Suzuki Makes A Splash
Its new small car may make the Swift look dull.

At the 2003 Paris motor show, Suzuki Motor Company (SMC) showcased the Project Hayabusa, later named Project K. This concept car later went on to form the basis for the Suzuki Swift. At this year's show, SMC is showcasing the Project Splash, a concept car that will form the basis for the replacement of the WagonR and Ignis and that will hit global roads by late 2007. This is also likely to be the 'new small car' that Maruti Udyog Limited (MUL) is set to manufacture from its Manesar plant from 2008 onwards (as announced by Osamu Suzuki, Chairman, SMC (MUL's parent company) at a media briefing in Delhi recently). The 'Splash' might also form the basis of the small car that SMC (through MUL) will contract manufacture for Nissan Motor.

Suzuki has not made details of the car public as yet, though it has said the car will have a 1200cc petrol engine with a mileage of 78 miles per gallon (close to 35 kilometres per litre). And it is evident from the few official teaser pictures released by SMC that the car will have an even 'edgier' European look than the Swift. However, Indian customers should not get too excited as yet; even the Swift in India does not come with the engine it is sold in other markets with and the 'Indianisation' of the vehicle might mean it loses some of its funkier features (such as the bi-xenon headlights and wraparound taillights). But everything said and done, the Splash just highlights how SMC is going from a maker of some of the dowdiest (though reliable) vehicles to a cool company!

-Kushan Mitra

Instruments Of Alarm
Don't ban participatory notes, just regulate them better.

SEBI's Damodaran: Wary of PNs

For the amount of foreign institutional greenbacks that come through this route-40 per cent on an average, reckon market pundits-participatory notes (PNs) ever so often keep coming under scrutiny. From M. Damodaran, Chairman, Securities and Exchange Board of India (SEBI), to Y.V. Reddy, Governor, Reserve Bank of India (RBI), regulators have shown their concern about the inflow of money coming into the country through PNs. Last month, the Tarapore Panel, in its proposals for full capital account convertibility, even suggested phasing out these derivative instruments. What is it about PNs that spooks the regulating mandarins?

PNs are instruments issued by registered FII brokerages in India to foreign funds (even hedge funds) or investors who are not registered with SEBI, but are interested in trading in Indian securities. FII brokers buy and sell securities on behalf of their clients on their proprietary account and issue such notes in favour of such foreign investors. PNs are mostly used by hedge funds that are not welcome by SEBI and by non-resident Indians, who do not want to directly invest in Indian securities. SEBI's worry is that the ultimate owner or beneficiary of PNs is not known as PNs are transferable. On a similar track, RBI feels the non-transparent nature of these instruments make them ideal money-laundering vehicles. The unstated fear of the regulators is that money belonging to Indian residents is being 'round-tripped' through the PN route.

"The FII regulation says that they (FIIs) ought to give us monthly reports on who are the holders of PN. They have all signed this regulation when they got this registration, but some of them say we don't know because these are transferable instruments and at a point of time (we don't know) who is a holder, which isn't good enough," the SEBI Chairman told BT in a recent interview. Now that's a valid concern, but then are the transgressions so severe that they call for a ban on PNs? And what would that do to the bull run on the bourses, fuelled as it is almost entirely by foreign money? "The rise in FII flows through PNs has been increasing due to India being a favourite investment destination. The money coming into India through PNs is not completely hedge fund money; there are FIIs whose registration is pending with SEBI who are taking this route," says Gurunath Mudlapur, Managing Director, Atherstone Institute of Management. Since 2004, 446 new FIIs have registered with SEBI to take the total to 963.

Mudlapur's view is that a certain element of misuse will always exist, and as long as checks and balances are in place to ensure that PNs are not abused on a large scale, there shouldn't be such a flutter about the instruments amongst the regulators. Speedy FII registration and stringent know-your-client (KYC) norms are more prudent than a blanket ban, he concludes. Damodaran too indicated to BT that the issue isn't as simple to warrant an instant solution. "I think all of US (SEBI, RBI and the Finance Ministry) together have to address this question of how we regulate effectively all those who are significant to the Indian market until such time when India becomes a market where anybody can come in and invest. There are concerns about (how much of FII investments are) 'round tripping'. At the same time, why do you need to address the question of round-tripping when there could be an NRI sitting somewhere, who has legitimate money and wants to invest legitimately here can't. And he says if a foreigner can invest in the market why can't I invest in my motherland...There are no easy solutions." A ban isn't one of them.

-Mahesh Nayak

Fuel For Thought
A crucial competitive bid in the power sector comes a cropper.

The lowest tariff that Gujarat recently received in a bid to procure 1,000 mw of power was Rs 3.25 per unit. Bidders quoted up to as high as Rs 3.75 per unit. While this price matches the power purchase cost from new private stations in Gujarat, it compares adversely when pitted against public sector units like National Thermal Power Corporation that produce power at as low as Rs 2 per unit.

Ironically, this response came from two bidders, one of whom will procure coal at controlled rates from Coal India Ltd mines while another has a captive mine.

The Gujarat government is now planning to seek fresh bids. This time around, the conditions are likely to be different. Instead of seeking a single tariff, the state plans to bid out only one part of the tariff-that arising out of the cost of the power plant. It is planning to source fuel for the power plant, which constitutes the other part of the tariff. "We believe the bidders are making huge margins on the fuel component. Hence, we are planning to seek only the fixed cost," says a senior official associated with the bid process. Whether it goes through with its plans or otherwise, the bid results are a reflection of the lack of deregulation in the fuel market in the country-free mining is not allowed. This reflects adversely on the power market since fuel constitutes over 50 per cent of the cost of power generation.

The question then is: Will the Gujarat bids leave an imprint on the power sector? Bidders argue that it could since two large bids are expected in the market shortly, one each in Andhra Pradesh and Haryana.

More importantly, if the Gujarat bids are anything to go by, the government's expectation of eliciting bids in the region of around Rs 2 per unit for the ultra-mega projects might be belied. The first of the bids is expected to hit the market by the end of the year.

Surely, the industry will not be enthused by the bid results, argue analysts. For it only reaffirms its faith in captive units, which often are not optimally efficient as they lack scales. Equally so, it also points to the need for a greater pace of reforms in the power sector, where aggregate technical and commercial losses are in the region of 35 per cent, crippling the viability of the power generation and distribution businesses.

The Gujarat bid result was a 9/11 of sorts for the power sector, and not just because the bids were opened on September 11.

-Balaji Chandramouli