f o r    m a n a g i n g    t o m o r r o w
JUNE 17, 2007
 Cover Story
 BT Special
 Back of the Book

Rupee Rise
Though an appreciating rupee is a cause for concern for many industries, it is proving to be a boon for some, particularly those that have large foreign currency borrowings. A weaker dollar is making repayments cheaper. Also, state-run refineries and those in the aviation sector are well-positioned to benefit from the stronger rupee. The Indian currency is up 8 per cent this year and is Asia's strongest currency against the dollar in 2007.

The ECB Route
The cap on maximum external commercial borrowings (ECBs), an annual ritual for the government, is fast losing its significance. Since the bulk of the foreign borrowings is raised under the automatic route by companies, it is becoming difficult to enforce the cap. The government had raised the annual limit of ECBs last year from $18 billion (Rs 81,000 crore) to $22 billion (Rs 99,000 crore). Now, it seems that total inflows will cross the $22-billion mark.
More Net Specials

Business Today,  June 3, 2007

Divided We Stand
De-mergers are providing focus, and value.

While some big names of India Inc. like Tata Steel and Suzlon Energy make waves globally, acquiring and merging companies from overseas, there's a parallel development taking place on the domestic front. Many companies are de-merging their different businesses in a bid to create shareholder value and to infuse a sharper focus in these separate businesses.

Last year, a large number of players de-merged their businesses. To name just two, Indiabulls Financial hived off its real estate arm into Indiabulls Realty, and Zee Telefilms trifurcated itself to focus on entertainment, news and distribution. Now it's the turn of some of the small- and mid-sized companies to walk the de-merger route. Recently, Sundaram-Clayton received board approval to de-merge its brakes business. It plans to separate this business to wabco-tvs (India), but will continue to operate its non-brakes business. Among others, Reliance Communications plans to hive off its towers to Reliance Telecom Infrastructure. Hinduja TMT is in the process of hiving off its IT/ITEs arm to HTMT Global Solutions.

The current de-merger wave is driven by a booming market that is flush with capital. But shareholder value is not the only reason for de-mergers. Different businesses within a company have widely dissimilar business models, and address different markets. Says Salil Pitale, Vice President, Investment Banking, Enam Financial Consultants: "The separated businesses get more focussed. De-mergers empower the managers in these businesses to take quick decisions."

Recently, Bajaj Auto created a holding company, even as it hived off its finance and auto operations. Asian Hotels is going for a three-way split, separating its properties geographically. Others, too, are looking at more focussed companies to tap their growth potential. Teledata Informatics is in the midst of a trifurcation plan that will result in separate marine and technology companies along with the existing business of agro biotech, networking and education. Says K. Padmanabhan, Managing Director, Teledata Informatics: "We wanted each company to focus on its business entirely as the scope is enormous in each."

But there are fears that this de-merger trend could just be used to take advantage of the current booming markets. Companies are possibly looking at splitting purely to monetise their sum-of-parts valuation and make their shareholders richer. The businesses de-merged for cosmetic reasons, with little growth potential on their own, will be exposed in the medium to long run.

King of the Hill, At Last
Dr Reddy's finally rises to the top.

K. Anji Reddy: Remarkable comeback

There is an apocryphal story on how Kallam Anji Reddy, the founder Chairman of Dr Reddy's Labs, his son K. Satish Reddy (the MD and coo of the company) and son-in-law G.V. Prasad (Vice Chairman & CEO) never travel together. The trio had never addressed an annual financial results press conference together, either. Until last fortnight, when the Hyderabad-headquartered pharma major found a very good reason to call on the media in unison: In 2006-07, Dr Reddy's emerged the largest Indian drugs company and, as Prasad adds: "We have also become the most profitable."

Describing 2006-07 as a memorable year, Satish Reddy rolls out the numbers. Revenues crossed $1.5 billion, or Rs 6,509 crore, as against Rs 2,427 crore in the previous year and Rs 1,952 crore in the year before that. Profit after tax stood at Rs 933 crore, a growth of 472 per cent over 2006's corresponding figure of Rs 163 crore (the profit in 2005 was just Rs 21 crore). In comparison Ranbaxy, which enjoyed pole position till recently, reported revenues of Rs 6,065 crore and post-tax profits of Rs 515 crore in the recently-concluded fiscal (January-December 2006). "It is a major milestone," avers Anji Reddy, the man who prefers to spend more time in the labs than poring over day-to-day operations and P&L numbers.

A key growth driver for Dr Reddy's, a company established in 1984, has been its core business, with active pharmaceutical ingredients (api or bulk drugs) posting a 44 per cent growth over the previous year.

Acquisitions in Germany (of betapharm) and Mexico (Roche's API business) together contributed 21 per cent to overall sales and authorised generics products pitched in with 24 per cent. Says Prasad: "We have identified the us, India, Russia and Germany as Tier-I markets and the focus now will also be on Tier-II markets like CIS, South Africa, Brazil, Mexico, Canada, Spain and Italy.'' During the year, the company got a 180-day marketing exclusivity for generic drugs in the us with the launch of Ondansetron, a generic version of GlaxoSmithKline's blockbuster, Zofran. Dr Reddy's claims to have a 62 per cent share in this segment, with sales from this drug alone contributing 4 per cent to the company's overall sales.

Here's plenty more to look forward to, as well. In Dr Reddy's pipeline are 69 andas (abbreviated new drug applications) pending before the USFDA, 23 DMFs (drug master files) filed in the US and 46 in the rest of the world, two generic biopharmaceuticals in the market, and close to 10 under development. On the drug discovery front, Dr Reddy's has eight new chemical entities (NCEs) under development, with one of them set to enter phase III trials.

Dr Reddy's may be comfortably ahead of the rest of the Indian pharma pack, but things could change fast. A big challenge would be to ensure sustainability in Germany, where pricing pressures and changes in healthcare policies may make betapharm a difficult acquisition to come to grips with. Dr Reddy's has already begun working towards shifting manufacturing to India. Overall, Dr Reddy's test would be to keep the growth engine humming on a much higher base.

Smart Move on the Cards
Bartronics prepares for its next big leap.

Bartronics' Rao: Cashing in on cards

It has just begun production at the first smart card-making plant in the country and perhaps one of the biggest in Asia, with a capacity to manufacture 80 million cards a year. For the Hyderabad-based Bartronics India, smart cards is also a new business.

Known more for its bar-coding, radio frequency-based identification (RFID) and biometric technologies, Bartronics will now spend Rs 270 crore to make smart cards. "We realised that if we continue in the way in which we were growing we would, at our full potential, not be more than a Rs 200-crore company (revenues currently stand at Rs 62 crore), and this is a small size from a business perspective,'' says Sudhir Rao, MD and CEO, Bartronics India. "We will need to be a Rs 1,000-crore company in the next three to four years to be a major deterrent to major competition, and to help get there this was the space to be in," adds Rao.

The idea of smart cards originated 18 months ago, courtesy Frost & Sullivan, which Bartronics commissioned to survey the market. Rao quotes a study by the consultants, which pegs the demand for smart cards at over 150 million units (in India) in 2007, and describes it as a space that is growing at a cumulative average rate of around 45 per cent. In India, much of this demand is coming from the telecom and banking sectors. "We intend to first break into the Indian SIM card market and dominate there as currently there is no domestic player here; this market itself is today valued at around Rs 100 crore annually," says Rao. He adds that in the next couple of years demand from the banking sector would pick up as banks begin to switch from the current magnetic tape cards to smart cards given the approaching Visa/Mastercard deadline on this (which is 2008 as of today, but which could be extended by a couple of years).

But if Bartronics decided to take the plunge into smart cards, it's not just because of the growth expected from the banking sector. The biggest trigger for the foray is a project that could well take it to the next level in terms of visibility and profile.

This is the Multipurpose National Identity Card (MNIC) project, which is proposed to be implemented by the Centre over the next five to 10 years. Early this year, the National Informatics Centre (NIC) approved its technology (for a scosta-based card-scosta standing for Smart Card Operating System for Transport Applications) which can be used for all government projects, including the MNIC project. "We feel we have a good chance for getting a share of the project as we are aware of what is required (the company has been part of a technical committee appointed by the ministry of commerce under NIC to define the standards and operating systems). We are an Indian company crucial for the project from a security point of view and, most important: By the time the project roll-out begins (expected in the next two years) we would be making over 50 million cards on an annualised basis. That's significant enough for the government to look at us as a serious player." Surely, even a small share of this business could prove to be a game changer for the company!