"It is a matter of survival," says MP Munot, the chairman of the Rs 150-crore Caprihans India, candidly. His is one of the several companies that have given majority stakes to foreign companies. The foreign companies have either been technical collaborators and/or companies looking for a entry vehicle in a new country. For Caprihans, the Rs 3,800-crore EVC was an example of the latter.
Caprihans is a leading domestic producer of PVC rigid film and extruded sheets. EVC, on the other hand is the largest PVC resin manufacturer in Western Europe and also a leading player in PVC rigid films there.
It has three 100 per cent subsidiaries making rigid films, of which VKW is one. VKW is taking a 51 per cent stake in Caprihans through a preferential allotment of 66.98 lakh shares at a price of Rs 57. Post-allotment, the equity will rise to just over Rs 13 crore. The announcement came at a time when the stock was close to its six-year low.
But since then it has recovered to Rs 46 on increased volumes. Much of the optimism surrounding the stock, is obviously a result of the change of guard.
Bereft of ideas and ideology, several local companies instead of fighting competition are joining hands. What is also true in this case, is that the event will lead to an enhancement of shareholder value for two reasons.
One, it is unlikely that Caprihans today would attract the discounting that it used to attract in the past. Management credibility was also under cloud, given its connection with the real estate business.
Two, under a new management, the company will not only witness an infusion of technology and application of global standards, but the stock will also receive a re-rating as a result.
In fact, the latest annual report gives a clear idea as to how serious the current management is about implementing change. It also clearly spells out its future strategy.
The company suffered a Rs 11.19 crore loss in 1996-97. Part of the losses is essentially due to certain one time write-offs. In 1997-98, there could be more such write-offs.
This year the company will exit from all commodity businesses, dispose paper plant and also exit from laminates. It will also cease to be in real estate. It will focus on PVC rigid & flexible films with applications in pharmaceuticals, ID cards and print, and extrusion sheets. This will be a niche business. This business constitutes approximately 65 per cent of its turnover in 1996-97.
This partnership will also benefit EVC. As Peter Gaspar, managing director of VKW explains, "Making PVC rigid films for pharmaceuticals and cards have progressively become global businesses."
Though EVC has licensed technology in China and Egypt, this is the first manufacturing base it will own outside Europe. Adds he, "There is a process of consolidation on our customers side with multinational
locations.
More and more of our customers ask us to follow them to the various locations in order to avoid cost intensive transportation, logistical problems.
This was one of the main reasons as to why we had to look for partners outside Europe, especially in countries like India, which have a large
market."
The new management will first upgrade technology and improve operational standards. This is critical since Caprihans' main competitor is Supreme Industries has access to technology from Klockner Kalle, whose parent company in turn is EVC's principal competitor in Europe. Says Gaspar, "There is an overlapping as far as the technology, product range and standards are concerned. They also understand business the way we do."
In the domestic market, demand from the pharmaceutical business is growing at 15 to 20 per cent. There is also a shift towards better quality blister packaging and hence to that extent margins there are higher. But the technological upgradation will take over a year or so to reflect on the working of the company. Because the movement of a single calender from Europe to Caprihans' plant at Nasik will take at least nine months.
Meanwhile, workers from Caprihans will be given training in Europe, and these people will also be involved in implementing the same systems, standards and procedures which EVC has in Europe.
So what is the upside for the stock? As a principle, VKW would like to ensure that Caprihans becomes a debt free company. It also would like to ensure a return on net assets of 20 to 25 per cent in the long run.
Look at the ten-year financial position given in the annual report. It shows how Caprihans' financial position has weakened over the years.
There is a lot of flab on the working capital front that can be reduced by taking tough decisions. Also, capital employed can be trimmed as the company becomes focused and consequently returns improve.
Additional growth in sales will also come from exports, which says Gaspar, "will be an unique opportunity for Caprihans' to use our marketing network."
All these bold initiative will not transform the company into an investor's delight overnight. With the ball set rolling, there is little reason to believe that things can go wrong henceforth. At Rs 46, it is worth the risk.
