Spotlight Shifts From Glass

NPIL's glass container division, which accounted for 20 per cent of 1996-97 sales, will be spun off into Gujarat Glass (GGL). NPIL will hold 60 per cent of this company's equity and the balance will be held by a group of investors. This will fetch Rs 255 crore, of which Rs 118 crore will be in cash and Rs 120 crore by the transfer of debts of the division to GGL. NPIL's debt equity ratio will improve from 0.75:1 to 0.40:1.

The reason for the divestment was NPIL's inability to commit further investments to this business. As a separate entity, GGL will be able to leverage on its balance sheet to raise funds for its requirements without affecting NPIL. The return on capital employed (ROCE) of the pharmal division was higher at 23 per cent compared to 19 per cent of the glass division in 1996-97. Thus, investing in the pharma business was more profitable.

The next leg will involve spinning off the bulk drug unit (a result of the Sumitra Pharma acquisition) into a one hundred per cent subsidiary. Later, 51 per cent of its equity will be placed with a leading European company. NPIL plans to reinvest the proceeds of this sale back into the bulk drug subsidiary to improve its operations.

The bulk drug division, which accounted for around 20 per cent of NPIL's turnover, is yet to recover from problems faced by the industry like excess capacity, dumping and falling prices. This division has a relatively low ROCE of 8 per cent. But the segment offers considerable scope in the long term in the form of healthy demand for high value-added fine chemicals and intermediates. Entry into this segment will be possible only with the help of a global giant giving it access to technology and market penetration. The hiving off of these divisions (which contribute to 40 per cent of its turnover) will see a drop in operating income in 1998-99. However, the high level of extraordinary income will prevent a sharp erosion in profits and recurring dividends from these JVs will also help.