Corporate Front: Strategy [Can Videocon Change Its Value Perception?]

The Dhoots' open offer to buy 2 per cent of VIL is an attempt to excite its depressed scrip price.

The Brothers Dhoot are fattening their consumer electronics flagship, the Rs 1,724-crore Videocon International Ltd (VIL), for the deal. Last fortnight, Venugopal Dhoot, 48, chairman of the Rs 3,000-crore Videocon Group, announced that the promoters have made an open offer to buy 2 per cent of VIL at Rs 140 per share. Given that the Dhoots are masters in the art of street-smart business, this may be more than a cleverly-crafted stunt aimed at exciting Videocon's lacklustre scrip. In the long run, it may also be a trailer to a sellout.

For, the Dhoots are comfortably entrenched in VIL, controlling 35 per cent of its Rs 70-crore equity. Coupled with their associates' 7 per cent stake, the promoters, effectively, hold a 42 per cent stake in VIL--a figure that would deter any hostile predator. The public--with a 1.2-million shareholder base--holds 31 per cent of VIL's equity; Global Depository Receipt (GDR)-holders and foreign institutional investors, another 17 per cent; and the financial institutions control the remaining 10 per cent.

Venugopal Dhoot explains his reasons: "We are consolidating our businesses, ensuring that our strengths are better-perceived, and indicating our commitment to our company. There's no truth in the divestment theory." But it is clear that the Dhoots needed to trigger off a change in the sentiment for VIL's flailing scrip, which has shot up from Rs 62.45 on Announcement Day (April 9, 1998,) to Rs 77.90 on April 13, 1998. Contrast this with VIL's earlier scrip movement: it fell from Rs 110 in April, 1995, to Rs 60 in April, 1996. And the fall continued to Rs 30 a year later, after which VIL slid to Rs 24 in February, 1998.

Says a Mumbai-based investment analyst: "The scrip is grossly undervalued, largely due to the investor's lack of confidence in the group." That obviously rankles, since its arch-rival, the Rs 2,600-crore BPL, has seen its scrip soar over the last seven months to about Rs 170 in mid-April, 1998. Admits S.K. Shelgikar, 42, advisor, Videocon Group: "We believe that the current market price does not reflect VIL's intrinsic value. This step enhances shareholder value and is good corporate governance. There really is no hidden agenda."

Early last month, trading interest in VIL swung up sharply, fuelled by the talk that its Japanese partner, the $11.06-billion Matsushita, was picking up a 10 per stake in the company. Assuming that VIL feels threatened by a potentially-hostile raider, why has it taken the creeping acquisition route? After all, couldn't the Dhoots have made an open offer for 20 per cent of VIL's equity?

Unfortunately, this would entail an outgo of Rs 180 crore--a big sum for a cash-strapped company afflicted by low margins. VIL's net profit margins have continued to slide: from 7.75 per cent in 1995 to 5.36 per cent in 1996 and, finally, to 4.80 per cent in 1997. Under no obvious threat, the Dhoots did not deem it fit to trigger off the Securities & Exchange Board of India Takeover Code of 1994, which puts a cap of 2 per cent on open market transactions if the promoters' shareholding is between 10 and 51 per cent.

Of course, by following the creeping acquisition route, the Dhoots will rev up the cost of any acquisition attempt--friendly or hostile. Says Shelgikar: "Our timing is right. The market mood is just beginning to change, and we should drive it." This strategy is already delivering results: the Dhoots' 42 per cent stake, worth Rs 67 crore in February, 1998, has already increased to Rs 187 crore. And if the scrip goes up to, say, Rs 120 per share, the promoter's shareholding will be worth Rs 320 crore. Moreover, Dhoot's expressed desire to buy a 2 per cent stake every year--regulation and resources permitting--does give investors an exit option, and could, perhaps, keep interest in the scrip alive.

This strategy would also increase realisations if the Dhoots decide to sell out. Street-smart and aggressive they may be, but the Dhoots are also pragmatists. Stiff rivalry and a lackadaisical market are eating into VIL's margins. In fact, BT learns that the marketer is offering cash discounts of 4 per cent to its dealers, a shift from the typical 30-day credit cycle. Moreover, the group's Rs 100-crore diversifications into petroleum, power, construction, real estate, and leasing are yet to generate any returns.

As far as the consumer electronics segment goes, Shelgikar concedes that "fluidity in policy and market conditions does imply that we cannot accurately plan beyond three to five years. However, we do have our long-term vision." For one, the group is strengthening its capabilities upstream as a supplier. On the other hand, taking the lead from global majors like Sony, Videocon has been tomtomming the benefits of the communications-technology-entertainment convergence. Considering that the group lords it over the value-for-money segment--a distinction that has been severely challenged in recent times--such a strategy entails a significant change in mindset.

A beginning has been made with Videocon Infochannels, which has made a foray into the manufacturing and trading of infotech and high-end electronics-related products. While the future depends on how the group can leverage its relationship with its partners, like Toshiba, Matsushita, and Sansui, the road ahead will not be smooth, both in terms of resources as well as technology.

On the other hand, the Videocon Group has a lot to offer. Specifically, a 1,000-strong sales- force, 150 service-centres, and over 5,000 retail outlets. VIL also had a 27 per cent share in the colour TV market in 1996-97, as per org data. Assuming the Dhoots retain their manufacturing capabilities, VIL's brands and distribution network would be attractive for many a transnational.

Despite the initial enthusiasm, the Dhoots' gamble could backfire. After all, the benchmark--even if it is more than double the existing price--remains artificial. Moreover, 14 lakh shares--out of 200-odd lakh shares--is a minuscule figure. As a huge over-subscription is likely, the promoters' claim that the small investor will be favoured through a pro-rata basis. Sure, but the unlucky multitudes will still remain. For them, the only hope is that VIL's performance improves. Ultimately, that is the minimum guarantee for investor confidence.

EXIT: THE STRATEGIST

He's a man of his word. Twenty years ago, S.K. Shelgikar, then 23--and now the Videocon Group's chief financial strategist--took a decision: two decades later he would walk away from it all to fulfil his moral obligations to society in line with the Bhartrihari doctrine. Well, he's done it. Over the past few months, Shelgikar has quietly withdrawn from an active role in the group, and now operates solely in an advisory capacity.

Shelgikar's agenda over the next two years is philanthropic research. "For effective co-habitation in a society which is fundamentally not equitable, the institution of charity must be strengthened," he avers. How? Through the evolution of mechanisms and instruments--including valuation systems--to develop the resource market for non-profit organisations. Subsequently, he plans to work at the grassroots level .

Shelgikar will be sorely missed at Videocon. In 1978, while visiting relatives in Aurangabad, Shelgikar--a chartered accountant--got into a debate on tax revenues with the young Dhoot brothers. Impressed by his keenness, the Dhoots continued to seek his counsel, initially on direct taxes, and later on indirect taxes. In 1985, when Videocon moved to Mumbai, Shelgikar joined as financial consultant. Behind his detached simplicity, the Dhoots realised that Shelgikar was financially canny, a shrewd strategist, and an unconventional thinker.

It didn't take long to harness him into an empowered, all-encompassing strategic and, eventually, operational role. After handling tax and revenue matters, Shelgikar grew to be the group's key strategic planner and policy-maker. From liaising with banks and financial institutions, to crafting innovative investment strategies, this maverick has done it all. For now, the non-profit sector is richer.