Survival could be a tough proposition for a group that is loaded with debt, and has no strategic direction.

By Rajeev Dubey Additional Reporting by Radhika Dhawan

He likes empires more than companies. He believes in diversification more than focus. He favours expansion more than consolidation. But times have been changing for Hari Singh Ranka, 68, the Chairman of the Rs 975-crore Mumbai-headquartered Modern Group, whose pet dream was vertical integration.

In 1995, Ranka wanted to plunge upstream into the manufacture of Purified Terephthalic Acid (PTA) and paraxylene. Three years later, dragged down by debt, the patriarch is sinking downstream. His Rs 1,660-crore PTA project, which has been grounded, has become a nightmare. Contraction, more than growth, now dominates Ranka's dreams.

The 25-year-old group-which incurred losses of Rs 181.36 crore in 1997-98-desperately needs a strategic direction as much as it needs to staunch its bleeding bottomline. After all, Ranka has played by instinct, gut-feel, and opportunity in the past 2 decades to build an empire that spans textiles, polyester yarn, and insulators.

Although the group has soaked up funds from financial institutions (FIs), shareholders, and depositors to fuel its expansion, it has been unable to generate internal accruals to keep itself afloat. So much so that the proud entrepreneur, who has defaulted on interest and fixed-deposit payments, may have to sell some of his prized possessions-including the Rs 96-crore Modern Denim and the Rs 525-crore Modern Syntex to become healthy.

But the convalescence may take time. His money channels choked, Ranka approached the consortium of financiers, led by the Industrial Finance Corporation of India, in April, 1998, to reschedule his interest- and loan-repayments-and was shocked by their response. While the FIs agreed to reschedule the repayments by converting them into non-convertible debentures (coupon rate: 17 per cent)-which would be redeemed by 2001 in 32 equal quarterly instalments-they refused to extend any new loans. Ranka was even grilled on his ambitious plans-including the 3-year-old PTA project, which has now been put on the back-burner.

For, the Rankas have been unable to raise money from the depressed capital markets. The Debt-Equity (D-E) ratios of their businesses tell the sad story of how risky ambition has brought entrepreneurship to its knees. Modern Syntex's and the Rs 225.89-crore Modern Thread's d-e ratios were 2.06 and 2.26 in 1997-98, respectively, up from 1.32 and 1.50 in 1996-97. That's not all. At 2.75, Modern Denim's D-E ratio is even worse. In fact, by converting loans into debentures, the FIs are only bailing out the Rankas and, simultaneously, protecting their portfolios from turning into non-performing assets.

Ironically, it is old borrowings that have debilitated the Modern Group. Although its fixed assets have grown from Rs 520.04 crore in 1993-94 to Rs 1,800.96 crore in 1997-98, the group's debt has quadrupled: from Rs 351.94 crore to Rs 1,423.28 crore. Consequently, the interest outgo has leapt dangerously: from Rs 37.57 crore to Rs 159.61 crore. Flagship Modern Syntex's borrowings of Rs 584.22 crore and an interest outgo of Rs 65.45 crore in 1997-98 has pushed it deeper into the red: the company has incurred net losses of Rs 86.33 crore. Worse would have been its affliction if the group had reflected the steep fall in the value of its investments-from Rs 308.65 crore (1994-95) to a mere Rs 14.70 crore (1997-98)-in its balance-sheets.

Simply put, the group has been funding its fresh expansions through borrowings. No wonder the FIs have asked the Rankas to pump in additional equity of Rs 100 crore to finance their projects. Unable to do that, the promoters have been compelled to put Modern Denim on the block. While Jardine Fleming and ANZ Grindlays have been hired to find a buyer before December 31, 1998, the Rankas have already pledged their 33.39 per cent stake in Modern Denim with the FIs, which will be sold if the investment bankers are unable to find a buyer by the year-end.

Another business is in danger of being sold too: Modern Syntex, which has incurred losses in the past 2 years after earning profits of Rs 15.48 crore and Rs 40.65 crore, respectively, in 1994-95 and 1995-96. In response to BT's questionnaire, a company spokesperson said: ''We do not want to dispose of any company other than Modern Denim.'' But BT learns that the Rankas are negotiating the sale of their flagship with the Rs 13,500-crore Reliance Industries.

Even if such a sale materialises, the family is unlikely to emerge unscathed from the financial abyss it has slipped into. For, the group's malaise is aggravated by its strategy: opportunistic diversification. Agrees Arup Ganguly, 27, Investment Analyst, Rathi Securities: ''The group must focus on its core businesses in order to survive. It has taken a logical step by putting its ailing businesses, such as Modern Denim, on the block.'' Still, the Rankas are wavering. ''The group plans to concentrate on the polyester business, but has not decided to keep its insulator and terry-towel businesses out of focus,'' according to the spokesperson.

Neither has the group built its fortunes on economies of scale nor has it relied on vertical integration to reap synergy. For instance, Modern Denim, with a capacity of 20 million metres, is a pygmy compared to the Rs 928-crore Arvind Mills, which has a capacity of 72.39 million metres. And Modern Syntex's 52,500 tonnes Polyester Filament Yarn (PFY) capacity is only a quarter of Reliance's 2.20 lakh tonnes. Points out Shantanu Jana, 29, Investment Analyst, UTI Securities: ''Capacities under 1 lakh will make some money in good times, but they will go under in a competitive environment.''

Assess the Modern Group on the basis of vertical integration-so essential in the textiles business-and the Rankas have only themselves to blame. While Modern Denim is a denim-maker, Modern Syntex is a PFY and synthetic fabrics producer. The Rs 35-crore Modern Insulators makes electric insulators; the Rs 94.27-crore Modern Terry Towels makes towels; and Modern Threads makes threads.

Indeed, the Rankas did contemplate backward integration. But their PTA project at Bansali (Gujarat) is languishing because of a common problem: lack of funds. Explains Jyoti Jaipuria, 35, Vice-President, DSP Merrill Lynch: ''Until the market improves, integrated players will make money while stand-alone businesses will suffer.'' Despite being in the same industry, none of the Rankas' businesses feeds or feeds on the others. All that such a diverse business portfolio needed to burst at the seams was a slowdown.

It did: as on March 31, 1998, the group had a whopping Rs 245.57 crore (25.17 per cent) of its money stuck in inventory. It also had outstanding credit of Rs 266.27 crore on goods sold in 1997-98 as against Rs 113.86 crore in 1993-94. While the average credit-period in 1993-94 ranged between 70 and 90 days, competition from South Korean and Indonesian companies has raised it to 180 days. Already hobbled by debt, the Rankas are finding it difficult to finance sales, and meet their yearly targets.

There's no doubt that the Modern Group is floundering. Even if it decides to get out of unrelated businesses-like insulators, towels, and threads-and focus on polyester-related businesses, profits could still elude it. For, a crowded market has also to contend with price-competition from global manufacturers. And with the group's market capitalisation having dipped from Rs 425.85 crore in September, 1994, to Rs 40.49 crore in September, 1998, the money that the Rankas are likely to garner from the sale of their smaller businesses are unlikely to keep them afloat. So, only a firesale can help the Rankas put their crumbling house in order.

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