Raymond Drops Synthetics Unit Merger

Raymond Ltd has dropped the proposed merger of Raymond Synthetics Ltd (RSL) with itself following opposition from the Industrial Credit and Investment Corporation (ICICI), Raymond's principal term lending institution.

Raymond executives confirmed the news. H D Kapadia, vice-president, finance, of Raymond Ltd said RSL has started doing well for the last two months and there is no need for a merger now.

"Goods have found demand, offtake is good and RSL no longer needs our support for funds," Kapadia explained.

He denied the shelving was prompted by ICICI. "They have not told us anything of that sort. But yes, they had clamped down seriously on polyester filament yarn projects some time back and have not been funding many lately," he added.

ICICI has indicated to the company that the proposed merger will reduce shareholder value and should not be carried through. ICICI felt the addition of a loss-making business to the already well-diversified Raymond portfolio will lead to a further loss of focus and drag down Raymond earnings, already hit by poor textiles and cement sales, a source said.

ICICI's K A Chaukar is one of the two institutional nominees on the Raymond board. The other nominee is from UTI.

ICICI has long been bearish on the polyester industry, where Raymond Synthetics operates. An industry source said ICICI feels the polyester industry is headed for overcapacity and low margins and only those with integrated structure and large volumes can survive.

RSL fails on both counts. It is not integrated and its capacity at 66,000 tonnes is just above the minimum economic size of 60,000 tonnes. Compared with this, companies like Reliance and Indo-Rama are building huge capacities of over two lakh tonnes.

Raymond started thinking about the merger sometime last year after the polyester industry started doing badly. Prices were down and raw material costs remained high. Even now, the actual realisation for many companies in yarn and polyester fibre is between Rs 15-20 per kg, against the Bureau of Industrial Costs and Pricing (BICP) recommendations of Rs 31 and above. BICP had recommended this figure in its study a few years back. RSL makes polyester filament yarn at Allahabad in Uttar Pradesh. It is currently expanding its capacity from 24,000 tonnes to 66,000 tonnes at a cost of Rs 288 crore.

In 1995-96, the company posted a loss of Rs 87 lakh on a turnover of Rs 251 crore. In 1994-95, RSL had produced a small profit of Rs 4.8 crore on a net turnover of Rs 200.4 crore. For the first half this year, RSL fared even worse. Its loss rose to Rs 20 crore on a turnover of Rs 149.29 crore.

ICICI had put its foot down as it was unsure of RSL's early recovery, the source added. The polyester industry, though growing at over 15 per cent is saddled with overcapacity and low margins. Prices have been in free fall since last year, while raw material prices have remained firm.

"If merger was done, RSL would drag down Raymond's profitability and hurt shareholder interests, which ICICI wanted to avoid," a source explained. Raymond posted sales of Rs 909.38 crore in 1995-96, a 22 per cent rise, and net profit of Rs 95.98 crore. This year, performance has suffered.

Poor growth in cement and textiles has pulled down profits in first half 1996-97 from Rs 31.33 crore last year to Rs 14 crore this year.