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Videocon seeks to unlock value through demerger

Viveat Susan Pinto  |  Mumbai 

Venugopal Dhoot

Sum of its parts will fetch a better valuation than the whole, gambles Dhoot.

His firm may be embroiled in the current 2G controversy for not fulfiling the stipulated network rollout requirements, but that hasn’t prevented Venugopal Dhoot, chairman & managing director of Videocon Industries, from looking at a possible reorganisation of his businesses.

Earlier this month, Videocon told stock exchanges that its board had approved the appointment of a reorganisation committee to look at options to “segregate various business segments with a view to ensure greater focus to the operation of each of these businesses providing enhanced value to shareholders and improvement in the business prospects of the firm”.

Company watchers see this as a definite step towards demerger. Talks about such a move have been doing rounds for some time now. In fact, the stock ran up over 5 per cent in August following speculation that the Rs 11,526-crore firm was looking to split its businesses into three parts: consumer durables, oil & gas and telecom.

Videocon did not confirm or deny this news in August, but a notice over two months later seeking a reorganisation indicates that the market wasn’t far off the mark. But, why is the firm contemplating a demerger? Not too difficult to gauge, say analysts tracking the company.

Videocon has been underperforming its peers — part of the Bombay Stock Exchange’s Consumer Durable Index — indicating that as a conglomerate, the full value of the firm is not reflected in the share price. BSE data shows that while the Consumer Durable Index saw an over two-fold jump between August and November, Videocon’s share price rose less than 50 per cent.

“The sum of its parts will definitely fetch better valuations for Videocon in comparison to the whole,” says V V L N Sastry, chief research officer at Mumbai-based brokerage First Call. “The firm can raise money, look to induct strategic partners, do a lot more than it is now when it chooses to demerge,” he says.

That’s because even as Videocon remains largely a consumer durables major, with over 70 per cent of both its top line and bottom line coming from this business alone, newer segments show bright prospects. Its oil & gas business, which contributed close to 10 per cent to top line for the 12 months ended September, contributed even more to bottom line: close to 23 per cent.

Dhoot has never denied the potential that oil & gas has in the future. In the last two years, he said in a statement a month ago, the firm and its partners had made a total of seven discoveries internationally. This included three finds each in Brazil and Mozambique, plus one in the Tarakan basin of Indonesia. Since then, the company has made one more find in Mozambique, which takes its overall tally to eight.

Both telecom and oil & gas are capital-intensive businesses and the firm requires money to grow and sustain them, say analysts. Dhoot hinted as much when, in the same statement, he said of his oil & gas business: “The international oil & gas assets will unlock value for Videocon Industries soon. The discoveries made abroad only confirm the strong prospects of our global exploration portfolio spread over more than 30,000 sq km.”

Since then, the firm has reportedly appointed merchant bankers ICICI Securities and Morgan Stanley to help unlock value from its oil & gas assets through demerger or initial public offering.

Trai trouble
With the Telecom Regulatory Authority of India (Trai) saying that errant firms in the 2G scam could lose their licences, the fate of Videocon’s telecom business — under subsidiary Videocon Telecommunications — appears a bit uncertain.
 

BACK-TO-BACK COMPARISON
  Net sales (Rs  crore) PAT (Rs  crore) ROCE (In %)
2007-08 2008-09 2009-10 2007-08 2008-09 2009-10 2007-08 2008-09 2009-10
Videocon Inds* 9753.66 9163.04 11526.50 854.30 400.66 594.93 13.38 7.97 -
Whirlpool India 1786.18 1933.98 2544.10 32.32 70.52 145.02 14.3 25.91 58.01
Blue Star 2221.58 2502.63 2524.97 174.09 180.29 211.48 71.81 73.77 63.73
Bajaj Electricals 1381.59 1765.71 2228.62 73.10 89.13 117.1 39.01 42.62 43.66
* 2009-10 figures are trailing 12 months
; All figures are standalone 
Source: Capitaline; compiled by BS Research

Trai had recommended that Videocon’s licences in 10 circles be revoked for insufficient network rollout. This includes Andhra Pradesh, where the firm reportedly deferred plans to start its services recently. The firm was awarded a licence to provide services in 22 circles and has also been allotted spectrum. It launched GSM-based wireless services this year in five circles: Haryana, Tamil Nadu, Mumbai, Kerela and Gujarat.

Long-drawn process
A firm contemplating demerger has to first work out the assets and liabilities that will go to each business that is part of the split. Once this is done, the firm appoints merchant bankers to value each business and decide the ratio in which demerger will take place. This done, an in-principle approval from the stock exchanges is sought.

Once received, an approval from a high court is then sought. This approval in place, the firm has to then seek the nod of shareholders and lenders to the demerger plan. The matter goes back to the high court, which gives its final approval to the demerger. The firm then has to go back to the stock exchanges seeking approval for corporate action to demerge. All of this, typically, takes three to six months from the time in-principle approval from the stock exchanges is received.

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First Published: Tue, November 30 2010. 00:57 IST
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