If an industry cantered at a 15 per cent growth rate in 2005-06, conventional wisdom would suggest the players that make up the sector should be in fine fettle. Not quite. Not LML, which last fortnight put itself at the doorstep of the Board for Industrial & Financial Reconstruction. This follows a complete erosion of the company's net worth. That the company was in trouble became apparent when it did not declare its financial results for the year ended March 2006. According to details on the NSE website, the company's loss for the first quarter of the current year- ended June 30-was Rs 13 crore. The loss for 2005-06-if the figures for the four quarters are added -is a little over Rs 88 crore. Revenues for 2005-06 add up to Rs 322 crore.

Indeed, it's been a long, difficult road for the promoters of LML, who hold a shade over 32 per cent in the company. After its break-up with Italian scooter major Piaggio in the late 90s, the company has tried a host of things. It got into a technical collaboration with South Korea's Daelim to manufacture motorcycles, but that didn't set the Ganges on fire. Last year the Kanpur-based company completed a financial restructuring exercise that reduced the debt on its balance to about a third, to Rs 108 crore. The company also raised fresh funds when it issued shares and convertible bonds to overseas investors which included large players like Credit Suisse First Boston.

Just when it seemed as if things were getting better, the workers at LML's Kanpur factory declared a lockout in March. The notice to the stock exchanges says it was the long-drawn out lockout of the two wheeler operations, coupled with an uncertain short-term profitability picture, that contributed to LML going sick. Managing Director Deepak Singhania was not available for comment. V.K. Sharma, Head (Research), Anagram Stock Broking, says a takeover is the best option for LML. Media reports suggest a Chinese and an Italian company are looking at LML's operations. But as Sharma says: "There is not much hope for investors since this (an acquisition) is likely to be a time-consuming and painful exercise."

-Krishna Gopalan

On The Waterfront
A clutch of companies is betting big on shipbuilding.

Vizag Shipyard: Global opportunity beckons Indian shipyards

Till a few years ago, Japan was the world's largest shipbuilder. In 2004, Korea climbed to the top, with the large shipyards of Hyundai Heavy Industries, Daewoo Shipbuilding and Samsung Heavy Industries contributing 40 per cent of the industry's share in that country. Two years later, China burst onto the scene with the avowed ambition of emerging the largest shipbuilder by 2015. It plans to get there by setting up the world's largest yard south of Shanghai for $4 billion (Rs 18,800 crore).

So, what chance would you give India of breaking into the global shipbuilding club, when three countries (Korea, Japan and China) control roughly 86 per cent of the market? None at all, you would be tempted to answer. After all, the major shipyards in the country are all state-owned (seven in all), uncompetitive vis-à-vis global benchmarks and losing money hand over fist. In short, they haven't been able to take advantage of the global opportunity on the shipbuilding front (Hindustan Shipyard, for instance, makes more money from ship-repair than building). Unsurprisingly Indian shipbuilders have a meagre 0.35 per cent market share of the world industry, estimated at $20 billion (Rs 94,000 crore).

Now a clutch of Indian companies is attempting to put India on the world shipbuilding map-albeit in a small way-buoyed perhaps by a February 2005 draft maritime policy that rather grandiosely outlines the ambition of making India a global force to reckon with. Whilst the government has plans to set up two global size shipbuilding yards on the east and west coasts in public-private partnerships, the private sector projects are on a smaller size and scale. The draft National Maritime Development Policy (NMDP) proposes duty-free import of all equipment to be fitted in ships built at Indian yards, long term subsidy support of 20-30 years (the current back-ended 30 per cent subsidy for export of vessels longer than 80 metres ends in August 2007), steps to ensure availability of indigenous steel for all Indian shipyards, encouraging ancillary units to support ship repairs and ship construction (without strong ancillary back up, the shipbuilding and ship repair will not be able to generate employment and compete with global shipyards) and giving PSU shipyards the freedom to device their own procedures for procurement and make them comparable with the private sector.

The much-touted public-private partnerships haven't yet materialised, but companies like Larsen & Toubro (L&T), ABG Shipyard, Bharati Shipyard and the P.K. Ruia and Adani groups have announced investments in shipbuilding facilities which total over Rs 5,500 crore (see The Great Indian Boat Show). Such an outlay is of course small beer when compared with the Chinese, but a beginning has been made. L&T will invest upwards of Rs 500 crore in phase I, extending up to Rs 2,000 crore by 2015, in a new yard which will build high technology and automated commercial vessels. M.V. Kotwal, Full-time Director and Senior Executive Vice President, Heavy Engineering, L&T, says the company is evaluating three sites (across the east and west coast) for the new yard. The P.K. Ruia group has plans to invest Rs 2,000 crore in the first phase in a shipyard at the Kolkata port "as soon as the land is allotted," says Ruia. The group plans to build vessels with capacities of 60,000-80,000 dead weight tonnage (DWT). Among the existing players, ABG Shipyard will spend Rs 400 crore on a second yard in Dahej to build ships of 120,000 DWT, whilst Bharati is investing Rs 450 crore to build 60,000 DWT ships in Mangalore.

These ambitions are doubtless steps in the right direction. Yet, uncertainty persists with regard to the policy, which hasn't moved beyond its draft status. Crucial to the industry's prospects is the proposed subsidy, although you may wonder why a country with a vast coastline, and low-cost as well as skilled manpower needs to depend on government largesse. But as a research report from IL&FS observes: "India's advantage in labour costs is largely offset by the purchase of components from abroad. The Japanese shipbuilding industry gets 97.8 per cent of ship components from domestic plants. Although the ship component industry in Korea is relatively young, it caters to 80 per cent of its domestic needs. India has an immature ship components industry and therefore has to import nearly 80 per cent of ship components from Europe, Japan and the Korea annually." A key requirement for the industry is competitively-priced steel. L&T's Kotwal feels the government has to create a structure to incentivise steel producers to produce for the shipbuilding industry. He adds that "it is just not possible for any country to sustain the industry without subsidy or support." Sure enough, the Japanese, Korean and Chinese governments have supported their shipbuilders with substantial subsidies. Even in the US, it was former President Bill Clinton's national shipbuilding initiative that helped the industry achieve a turnaround in the mid-1990s.

In the long run, Indian companies will also need to develop skills to design their own ships. Currently designs are purchased from overseas. Indian shipbuilders have a long way to go, but the good news is that they've at last set sail.

-ShivaniLlath

Betting The House
Indian acquirers are forking out huge sums for overseas buys.

What's common to Betapharm's acquisition by Dr Reddy's, Azure Solutions by Subex, Eight O'Clock Coffee by Tata Coffee, Sinvest by Aban Loyd, and Mincas by Transworks? Answer: All the Indian acquirers paid up sums that are bigger than their annual revenues for the overseas companies they bought out. Transworks from the A.V. Birla group for instance purchased Minacs for Rs 587.5 crore, over five times its 2005-06 top line. Aban Loyd paid a little over four times its year ended March 2006 sales for Sinvest, and Tata Coffe paid a little over Rs 1,000 crore for Eight O'Clock Coffee in the us, over five times its latest annual turnover (see Taking it to the Limit). Says Rohit Kapur, Executive Director-Advisory & Head-Corporate Finance, KPMG: "Robust and clean balance sheets of Indian companies coupled with the huge growth potential they enjoy mean that financing is readily available." For instance, market sources reveal Citibank had little hesitation in financing the entire all-cash deal of Dr Reddy's for betapharm. There's little reason why these big gambits won't pay off. It has in the case of Tata Tea, which forked out Rs 1,900 crore for Tetley six years ago, when its annual revenues were just over Rs 1,000 crore. Today, nearly 70 per cent of Tata Tea's Rs 3,100 crore revenues come from overseas, thanks largely to Tetley's international presence.

-Mahesh Nayak

SemIndia: Hype & After
If you can't afford to make chips, just test them.

SemIndia's Agarwal: Testing times

For what was touted as the biggest single investment for decades to come in the hardware sector seven months ago, the actual kick-off hasn't quite matched the initial hype. SemIndia, a consortium created to set up a $3 billion (Rs 14,100 crore) silicon chip manufacturing facility near Hyderabad in two phases by 2010, is going to start with a rather trifling investment of $100 million. "We will begin with the back-end," says Vinod Agarwal, a Silicon Valley researcher-turned-entrepreneur and the CEO of SemIndia. What this essentially means is that the company is not to begin work on the FAB facility to make the chips. Instead, what will come up first is a facility to test them.

The reason for this dramatic scale-down is that the FBA project is linked to the government taking an equity stake (in the region of 25 to 30 per cent) and for that it will have to have first a policy in place. Predictably the policy is still being debated and there is as yet no clarity on it. Explains Agarwal: "On June 7 when the foundation stone for the project was laid, we were given the impression that in a month from then a policy would be announced." With the test and assembly facility, he adds: "Our key message is that of a commitment to the project and that, independent of the policy, our investors are taking a chance and going ahead with this. It is a smaller project and our investors are willing to take that risk.''

What Agarwal is only clear about at the moment is that in a year from now (by next August) the test and assembly line or the ATMP (assembly, testing, marking-of the brand-and packing) facility, as it is called, will be up and running. Alongside, SemIndia, he says, has been working parallely with "anybody and everybody that has anything to do with FAB'' so that an ecosystem for a such a facility could be put in place. So far, it has announced three partnerships. One, with Advanced Micro Devices (AMD), a leading global semiconductor company covering manufacturing, technology licensing and business development activities in India. AMD is to supply the technology. Then, it has a two-part tie-up with Flextronics, one in which the electronics products maker is an investor, and the other in which Flextronics will source chips from SemIndia. And finally, there is an agreement with BOC (Base Oxygen Corporation) Gases, a supplier of specialised industrial gases. Any FAB needs gases (which could be as simple as nitrogen and oxygen) and BOC is to set up a major facility within the FAB city to generate those gases.

"Typically, in the business of FAB there are close to 200 suppliers and today we are in touch with most of them,'' says Agarwal, who feels BOC, with its announcement of putting in $27 million (about Rs 126.9 crore) investment in fabcity is a major endorsement of the project and goes beyond the ATMP facility.

Meantime, unconfirmed reports suggest there is little agreement within the government on the contours of the policy. The finance ministry is said to have its reservations on the exact nature of incentives and on the technology-argued to be obsolete-that the project is to get from AMD. Agarwal says all of this is pure media speculation. As far as technology is concerned, he says, "there are no two ways about it and that the technology being got, from AMD, is the best. On the issue of government stake, those tracking the project say any stake less than 25 per cent could well make the project unviable, at least for its foreign investors. Evidently, Agarwal cannot afford to let the chips fall where they may!

-E. Kumar Sharma

Psst...Looking for a Buyout?
India's biggest cross-border deals are thanks to PE firms.

Question: what would be common between the recent outbound acquisitions made by Tata Tea, United Phosphorus, Tata Coffee, Ranbaxy Labs, Suzlon Energy, Dr Reddy's Labs, and Tata Chemcials? Well, besides being mega-deals-three of them are worth over $500 million (Rs 2,350 crore)-all the sellers were willing private equity (PE) funds. In the most recent deal, Tata Tea bought out TSG Consumer Partners' 30 per cent stake in Energy Brands for $677 million (Rs 3,182 crore). Similarly Ranbaxy bought out Terapia from Advent International and Suzlon purchased Hansen Transmissions from Allianz Capital partners (see The PE Connection). Interestingly, of the eight companies that acquired overseas targets between December 2005 and August 2006 by buying out stakes of PE investors, three of the acquirers belong to the Tata group. But if India Inc is homing in on the PE fraternity, it's simply because PE investors are easier targets (than the target companies themselves) and natural sellers. Says Aditya Sanghi, Country Head-Investment Banking, yes Bank: "The trend is emerging to acquire companies owned by private equity players, as it's easier to do a deal because they don't have any emotional attachment to the business. As long as you manage to give them a decent return, they are willing to exit."

There are other reasons too for taking the PE route. As Sanghi puts it: "Unlike inbound acquisition, there are many unknowns in a cross-border deal, such as regulatory approvals. As an entrepreneur you would not want to take on these challenges. Therefore, to avoid such hassle corporates are acquiring through the PE route." That's because the onus of putting the processes in place lies with the PE investor. "Apart from cleaning the balance sheet, operationally they are benchmarked to the best practices, which is a comfort factor for an acquirer."

The largest proportion of outbound acquisitions via private equity has been in Europe, which accounted for over 67 per cent of the total deal value of $3.96 billion (between January and June). "Many family businesses that have been acquired by PE investors are in Europe; therefore we are witnessing higher cross-border deals in Europe. Once their (the PE investors') investment horizon and targets are achieved they move on by selling their investments," explains Rohit Kapur, Executive Director-Advisory & Head-Corporate Finance, KPMG.

Back home, meantime, few PE firms have reached an exit stage; rather, they're on an aggressive buying spree. Firms like KKR (Kohlberg Kravis Roberts & Co), which recently bought Flextronics, Warburg Pincus, and Actis to name just a handful, are busy gobbling up stakes in (if not entire) Indian companies. For PE investors, entries and exits are two sides of the same coin, and it won't be long before companies-Indian and foreign-begin eyeing their chunky stakes in Indian businesses.

-Mahesh Nayak