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PERSONAL FINANCE Turn, Turn, Turn Don't toss, turn. Viewed through the right lenses corporate turnaround stories could make a great investment strategy. By Shilpa Nayak
Turnaround stories-there are several doing the rounds now-make great copy. Viewed through the proper lenses, they also make for sound investment strategy. Turnaround investing, the nay-sayers will inform you with a 'surely-you- must-know-this hauteur', is risky. That it is, but there are palliatives that can lessen the risk. Like picking turnaround stocks from sectors that face little threat of imports; or avoiding those that operate in industries with a dominant local player. Most turnaround efforts are accompanied by a change at the top. Lay investors can't be expected to know all about CEOs and their track-records, but even a superficial reading of mainstream business publications like this one-there, that's this issue's quota of subliminal promotions met-should help. As will awareness of the worst-case option. Put simply, what happens to your investment if the turnaround fails? The answer: in a sector witnessing consolidation, like cement, capacity is great insurance; even if the turnaround doesn't work, a competitor may acquire the company. From the clutter of seemingly-happy stories, BT picked six that sort of stood out. Caveat: remember, we're still in Act I. RAMCO SYSTEMS
In the beginning, Ramco Systems was a division of middling cement company Madras Cements that had the audacity to compete with global ERP (you don't know the expansion, don't bother; whatever it was is dead now) majors with its offering, Marshall. Then, everything that could go wrong did. Ramco's substantial investments in R&D didn't pay off in a hurry; it focussed on the US market at the expense of local markets; and its portfolio of offerings was limited to ERP, ERP, and, well, ERP. In December, 1999, a demerger created a stand-alone company, Ramco Systems, and signs of a recovery were very much in evidence in the company's first-year financial statement: a net profit of Rs 93 lakh on revenues of Rs 117 crore. This year (2000-01) has been patchy: losses in Q1and Q3, but a significant net in Q2 that's helped nine-month profits stay just above the line, at Rs 54.71 lakh. Exults P.R.Venketrama Raja, CEO, Ramco Systems: "Investments made so far have now started paying back and we look forward to high growth in the coming years." The turnaround can be attributed in part to the company's enhanced product portfolio: the eApplications range of enterprise solutions and Virtual Works, a software platform. And yes, it comes at a time when the company is just moving out of the investment-phase. Better still, Ramco has just inked a deal with Boeing to jointly develop and market Enterprise Maintenance Systems (EMS) under the brandname Enterprise One to airlines across the world. The estimated benefits? Revenues of $650 million (Rs 3,000 crore) over five years. The company claims its revenues will reach $250 million by 2004. That certainly adds to the lustre of a scrip quoting at Rs 350 (April 10). ITC BHADRACHALAM
PAPER BOARDS Fine, the company's scrip is trading at a tenth of what it used to five years ago, but chances are, that's because not too many people have noticed its revival. First, the numbers: in the nine months ended December 31, 2000, the company recorded a net profit of Rs 30.41 crore on sales of Rs 465.16 crore, as against comparable figures of -32.12 crore and 443.85 crore for the year ended March 31, 2000. The reasons behind the revival? Pursuit of economies of scale; an emphasis on value added offerings; and the replacement of high-cost debt with cheaper loans. There are more things going for the company. A fifth of its production is consumed by parent ITC which put its weight behind the company's turnaround effort by pumping in Rs 250 crore (through subscription to a preference share issue) into its recent expansion drive. And another 15 per cent is exported: given the supply constraint in the international paper market and ITC B's enhanced portfolio, that should benefit the company. KESORAM INDUSTRIES Sometimes, value is first spotted by corporate raiders. It took a takeover attempt by Shiv Kumar, a Dubai-based NRI, for investors to realise the real value of Kesoram. He found that the company's then (January-February, 2001) market cap of Rs 300 crore didn't reflect the value of its 2.2 million tonnes a year cement plant (value: Rs 700 crore), and its tyre manufacturing facility (value: Rs 450 crore). The promoters moved quickly to raise their stake to 32 per cent; added to the 19 per cent controlled by financial institutions, this gave them a controlling 51 per cent stake. Kumar may have been the first to spot it, but fact is, Kesoram is no longer the diversified loss-making and labour-strife ridden conglo it used to be. Over the last two years, the company has been busy restructuring itself. Its textile division has been spun off into an independent company; the management has adhered firmly to the cost-cutting mantra; and its finance-jocks have striven to reschedule debt. Expectedly, operating profits jumped 60 per cent in Q3 (over Q2); and Kesoram's net profit for the same period (three months ended December 31, 2000) stood at Rs 3 crore, as compared to a loss of Rs 4.9 crore for the corresponding period last year. Hidden Value Tip: Kesoram has created subsidiaries to develop and market its real estate assets. ESAB INDIA You can't get any more old economy than welding electrodes, and that's what ESAB, a subsidiary of Sweden's ESAB AB (now part of the Charter Group) makes. The company's dismal performance in 1999-2000 was a function of two factors. The first was the economic downturn that caused its topline to slip from Rs 162.8 crore in 1998-99 to Rs 127.8 crore in 1999-2000. The second was the company's desire to become a zero debt company, one that proved just a little expensive. The result: ESAB's net profit dipped from 8.7 crore in 1998-99 to Rs -19.93 crore in 1999-2000. But retiring debt did help the company slash interest costs to zero, and an emphasis on cost-cutting and better working-capital management helped ESAB effect a turnaround in 2000-01: for the nine months ended December 31, 2000, it recorded a net profit of Rs 8.74 crore on sales of Rs 117.9 crore. Any upturn in economic activity now can only benefit the company. TATA TELECOM If Tata Telecom's financial statements for 1998-99 and 1999-2000 were a deeper shade of pink, blame it on the company's Tatafone division that manufactures, what else, telephone instruments. On April 1, 2000, the company demerged Tatafone into an independent company called ITEL Industries, a 100-per cent subsidiary of Tata Industries. The last mentioned paid Tata Telecom Rs 18.5 crore for the business-not a bad going rate for a loss-making company. The results of the separation were immediate. For the quarter ended December 31, 2000, Tata Telecom showed a net profit of Rs 62 lakh against losses of Rs 2.8 crore for the corresponding period last year. The born-again Tata Telecom will focus on the high end business communication market. To this effect it has an alliance with the US-based Avaya Communications (whose parentage can be traced back to Lucent and AT&T). Avaya is the dominant player in the enterprise communication, converged voice and data products, and call centre systems, and holds a 25.5 per cent stake in Tata Telecom. The company also retails business communication products on offer from LG, Nice, and Polycom. The boom in the it-enabled services sector in India should boost demand for these products and investors, know what that means. As Sundar Subramani, an analyst with Insight Asset Management puts it: "There are huge opportunities in the call centre business that the company is getting into. We expect the company to grow at a compounded annual rate of 65-70 per cent.'' ACC Four funerals and a wedding... That is an apt descriptor of ACC's financial performance. After registering losses in four successive quarters, the company finally turned the corner in Q3 2000-01. The increase in cement prices-the Monopolies and Restrictive Trade Practices Commission (MRTP) suspects the existence of a cartel-had a role to play in this. But that isn't the reason to pick ACC; cartels rarely last. What is, is the indication that ACC's management is hard at work to improve operational efficiencies. Energy consumption and raw material costs are down and the company is now working to slash transportation costs and reschedule its debt. True, the long-term prospects of ACC are contingent on an increase in demand, but the cost-introspection will help see the company through trying times. And the Gujarat Ambuja group's 14.5 per cent stake in ACC may prove to be of use when the next round of consolidation happens. Manish Saxena, an analyst at Motilal Oswal believes ACC will benefit from a rally in demand, but warns against looking for quick gains: "Though inefficiencies are being removed and the cost structure, being rectified, it is going to take some time for these to have a dramatic impact on the financials and the share price of ACC." |
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We
won't make that mistake again.'' The words come with a suspicion of
contrition. The speaker is the CEO of a company that is, in the man's own
words, 'back in black'. There's nothing surprising about these utterances.
Everything has been written into the script: an admission of how greed
forced the company to diversify; an explanation of how the turnaround-team
pulled things back; and the promise to stick to the straight and narrow in
the future.