Vaulting ambition could be leading the company to extinction.

By R Sridharan

June 26, 1997. Seated on the dais, Dadan Bhai Prasad--fondly known as Dadan Bhai--scans the rows of empty chairs at Pertech Computers Ltd's (PCL's) Annual General Meeting at the Salt Lake Stadium Auditorium in Calcutta, which is being attended by less than 150 people. Not that the thin attendance worries the 49-year-old chairman of the Rs 624.58-crore PCL.

In fact, Dadan Bhai is probably relieved that the shareholders have stayed away. After all, PCL--the market-leader in the Rs 2,380-crore pc segment in 1996--is on the verge of extinction. What its shareholders learnt that day was that PCL's net profits had almost halved to Rs 12.91 crore for the year ended December 31, 1996, although its sales were up by 40 per cent over the previous year. That was only half the story.

The other half, which was not revealed, was that PCL's sister concern, the Rs 728.21-crore Altos India (Altos), which manufactures the computers marketed by PCL, had also been limping along since March, 1997, and its workers were not being paid. But Dadan Bhai still refuses to acknowledge any real threat to his companies. "We'll be back in business by early next year," he swears.

Perhaps. In 1997-98, PCL has been able to sell only a portion of its, and Altos', inventory (of Rs 375.61 crore) while its marketshare has slipped from 25 per cent to 8 per cent. Indeed, Dadan Bhai's quick rise--and quicker fall--indicates the beginning of an era in which companies that operate in areas where technology becomes outdated in months can go bust in years. Points out Ajai Chowdhry, 47, the ceo of the Rs 643.12-crore HCL Info-Systems: "In this business, the biggest challenge is maintaining your consumer credibility--and technology momentum."

Look at the infotech industry. By the mid-1990s, many companies had either closed down, like the C. Sivasankaran-owned Sterling Computers, or had become fringe players, like Unicorp and dcm Data Products. And the trend is global, with one in three companies in Silicon Valley going bankrupt within five years of launch. However, the PCL tale is not limited to its inability to adapt to changing technology; it is also the story of how a business group in a hurry became over-ambitious, over-stretched, and is caught in a financial deatH-Trap.

How did things go wrong at one of the fastest-growing companies in the infotech business? Founded in 1982 by the trio of Dadan Bhai, Arjun Malhotra, 49, (the vice-chairman of HCL), and Bharat Goenka, 47, (who owns a trading company in Assam), PCL posted a compounded annual growth rate of 24 per cent over the next decade to establish itself as the company to beat. To cap it, Altos signed a $50-million contract with the $7.75-billion Dell Computer (Dell) in 1993.

As per the contract, Dell would buy mother-boards from Altos while PCL would market Dell's computers in India. By 1995, the $8.58-billion Seagate Technologies (Seagate) and the $38.48-billion Hewlett-Packard (h-p) had also signed sub-contracting deals worth $100 million with Altos. In response, Dadan Bhai expanded Altos' fixed assets--which went up from Rs 17.55 crore in 1993 to Rs 52.17 crore in 1995--by setting up two more assembly lines.

Even PCL, the marketing arm, increased its fixed assets base from Rs 19.31 crore to Rs 84.53 crore during the same period. Thus, PCL and Altos pulled out all the stops to fuel growth even if it meant raising funds at high interest rates. By 1994, the deBT of the two companies stood at Rs 103 crore, which vaulted to Rs 368.79 crore by 1996--a rise of more than 258 per cent in three years. And PCL's interest costs as a percentage of its deBT varied between 20.55 per cent and 33.84 per cent during the same period.

This happened because there was a liquidity squeeze in the economy. However, Dadan Bhai was confident that fresh orders from Seagate and H-P would enable the group to achieve the economies of scale required to earn higher profits. Says he: "Globally, companies push numbers for margins. We did the same thing."

That, however, was not to be. In the four months between April and July, 1996, two of the three foreign buyers terminated their contracts. While Dell was clearly displeased with its quid-pro-quo deal with Altos and PCL, H-P scrapped the printer model for which Altos was making the printer card. Only Seagate continued to use Altos as a vendor. However, it is surprising that Dadan Bhai did not sense trouble even though there was a cash-flow mismatch between the two companies.

In 1993, PCL, as the buyer of Altos' computers, got an average credit period of 249 days while Altos' creditors (read: suppliers) were asking for money in just 78 days. Things only worsened in 1996. Says a senior PCL executive: "It was a tight-rope walk." Actually, Altos had reckoned that with the advances it would receive under its Rs 19,000-a-computer Millennium Scheme in September, 1996, it would be able to buy kits cheap enough to assemble a pc for Rs 17,500.

That would have left a margin of Rs 1,500 per computer and, if the company sold 40,000 pcs, it would have meant a profit of Rs 6 crore for PCL. But there were too many loose ends, Although Rs 40 crore was raised as advances from customers in September, 1996, alone, the money was not used for buying kits. Instead, the cash was funnelled into Mindware, PCL's software division; paying off a part of Altos' bank dues; and pumping Rs 1.70 crore into a financial services subsidiary, Cornerstone Financial Services.

By October, 1996, the money had been spent. Says a senior banker with one of the country's financial institutions: "PCL's financial management has been particularly bad, and funds have not been properly utilised." Unfortunately for Dadan Bhai, the banks did not disburse fresh loans--as they had promised--although most of the customers' advances had been spent on paying off bank loans. As a result, PCL had neither the computers to deliver to its customers nor the money to pay them back. Says HCL's Chowdhry: "It was a mistake to take bookings against future deliveries rather than existing stock."

Now, Dadan Bhai says he has a plan to revive his group. His blueprint: split PCL into three entities--a software arm and two marketing units--and sell off the software company, and Altos' plant at the Electronic Hardware Technology Park (EHTP) in Gurgaon (near Delhi) for a sum of Rs 325 crore. But Altos' EHTP unit, already two years old, is fast becoming a vintage piece in the infotech industry, where a surface-mounted technology plant has to be upgraded once every two years.

Not surprisingly, Dadan Bhai's optimism isn't cutting much ice with either his suppliers or his bankers, whom he desperately needs to get Altos restarted. To turn around the company, he needs a minimum of Rs 300 crore to both pay off the liabilities--which must be between Rs 125 crore and Rs 150 crore--and to finance its working capital needs (at least Rs 175 crore). Assuming that the sale of Altos' unit will fetch Rs 180 crore ($50 million), Dadan Bhai would still fall short by between Rs 120 crore and Rs 145 crore. And we have not even begun toting up the numbers for PCL.

Clearly, Dadan Bhai is paying the price for spreading himself too thin, too fast. Paradoxically, BT learns that his estranged friend, Bikram Dasgupta, the ceo of consultancy firm Globsyn, may be interested in buying up PCL on behalf of a transnational company. If that happens, Dasgupta may, ironically, turn out to be Dadan Bhai's saviour. Else, the time may have come to write an epitaph for PCL.