Retreading The Corporation

Last month when SRF Ltd divested its stake in SRF Finance, it made corporate analysts sit up. We are going to see a general restructuring of the merchant banking sector taking place, opined some experts. The depressed market and the high interest regime will see other players opting out or taking the merger route, ruled others.

A fallout of liberalisation, diversified companies are shedding unwanted businesses and swearing by core competencies. And SRF is no different.

While analysts sat and figured out the implication of the SRFF-GE Caps deal (worth Rs 48 crore), the family-owned enterprise had its own reasons for the divestment of its 50.5 per cent stake. Two years ago, the company had taken on more than it could chew when it took over the Ceat Ltds nylon tyre cord division at Malanpur in Madhya Pradesh. The Rs 325 crore acquisition, said to be one of the largest takeover deals in corporate India, had sent the company reeling into a debt burden almost to the tune of Rs 600 crore.

 

At that time, company strategists had banked on a rights issue and private placement of shares to bring in at least Rs 100 crore. But this did not materialise, since the market was in a depressed state. Understandably enough, company think-tanks were worried. The debt equity ratio had increased to 1:1. The interest burden alone was Rs 112 crore. Rather late in the day, Arun Bharat Ram, vice-chairman and senior managing director was a wiser man. Never take on a project without financial closure, he exclaimed to colleagues.

Given this scenario, there was no option but to divest. Indeed, ever since the deal, Arun Bharat Ram is a relieved man. After nearly 18 months of hectic negotiations where he examined the balance sheets of some of the suitors GE Caps and Ceat Financial he formalised the deal last month. And, as he points out, The funds that would flow to SRF would essentially be used to substitute the high cost term debt. This would enable the company to reduce its interest burden, leading to consequent improvement in the bottomline. In fact, Bharat Ram has all his calculations worked out. The GE deal will bring in about Rs 48 crore. In addition the postponed rights issue and private placement is expected to fetch the firm Rs 100 crore.

The divestment of upto 50 per cent of the groups stake in their other non-core businesses like opthalmic lenses, (estimated to fetch around Rs 20 crore) and polyester film, is likely to raise another Rs 50 crore. Consequently, the debt burden would reduce to Rs 400 crore, there by easing the interest liability to a more affordable Rs 50 crore. This will further improve the debt equity ratio to a more manageable 0.6:1, adds Arun Bharat Ram.

Besides easing the debt burden, the divestment is also part of a bigger game plan for the business group. In fact, by and by, the group plans to hive off all the non-core areas, following management consultant Mckinseys recommendations.

In a bid to become a serious global player, the DCM group flagship company had invited Mckinsey to review its business portfolio as far back as 1993. Based on these recommendations the group decided to concentrate on just two core businesses industrial yarn/fabrics (tyre cord, fishnet twine etc,) and fluorochemicals (refrigerant gases, aerosols etc). The plan was to strengthen these and gradually ease out of non-core areas. Infact, selling out their stake in SRF Finance was part of their larger plan to concentrate only on core businesses.

Its withdrawal from SRFNippondenso, which manufactured auto-electricals, in April 1993 and now from SRF Finance affirms that the group is firmly on track in implementing these recommendations. In fact, Bharat Ram indicates that more divestments may be forthcoming within the next couple of years. The company, he says, is seeking equity partners in polyester films, ophthalmic lenses and even needle bearings. Foreign collaborators, who bring in technical and financial assistance, would help secure a larger market share in respective areas and this may necessitate the business being transferred to a new company, says Bharat Ram. About Rs 50 crore is expected to be raised through these divestments.

As for strengthening core areas, the group made its intentions clear when it signed the Ceat deal. Today, SRFs nylon tyre cord has increased market share from 25 per cent to 40 per cent. Which is why Arun Bharat Ram cannot stop patting himself on the back for the deal despite all the financial problems it brought in its wake.

Says Bharat Ram pointing out all the pros of the deal, A new plant would have cost at least Rs 450 crore. The installation time and stabilisation period would not have been less than four years. In contrast, the acquisition has started paying rich dividends immediately. He says that the products have been rolling out since day one, whereas the gestation period for a new product alone would have been 18 months.

Adds Bharat Ram, Prior to our consolidation the domestic industry was fragmented and the margins were poor. With the consolidation in capacity we have achieved greater economies of scale. In fact, nylon tyre cord figures very high on the priority list of SRF. And why not? It accounts for around 60 per cent of the companys sales. Although worldwide there is a feeling that radials are gaining strength, Bharat Ram differs. As he points out that there has been a worldwide growth from 1.5 per cent to 2.5 per cent in this sector. The total base of tyre cord at the moment is 700,000 tonne with an expected growth of 10,000 tonne per annum mostly in the Asian region, with China, Indonesia, Malaysia, Pakistan and India being the major consumers.

The Ceat takeover, in fact has pushed SRF amongst the first 15 companies in nylon tyre cord world wide. Bharat Ram hopes to better that record. By focusing our energies and resources on our core areas, we hope to become among the top seven global players in the years to come, he says.

Strengthening this division further was the investment last year of around Rs 100 crore in setting up an 8,0000 tpa nylon tyre cord plant at Jebel Ali Free Zone in Dubai. This was done in technical collaboration with Ayaha of Japan. The company plans to marginally expand this by pumping in an additional Rs 18 to 20 crore mainly in infrastructure, land and building.

We want to retain our image as a chemicals company says Bharat Ram. This could one of the main reasons why the other key area that Arun Bharat Ram continues to retain is refrigerant gases. They are the market leaders in this segment. However, they are expanding their base to consolidate their position further. Company strategists figure out that with the expected high domestic growth in refrigeration and air-conditioning thanks to Indias tropical climate and a burgeoning middle class, this could be a lucrative area. Bharat Ram has set a target of capturing at least 40 per cent of the market in refrigerant gases. He plans to achieve this by expanding capacity in consonance with market demand. Sixty per cent of the production will be for exports to over 45 countries.

And of course no restructuring can be complete without a reorganisation of personnel. Although here the company officials are choosing to keep mum, several changes have been made in the past few months. Managing director Ravi Sinha, a veteran in the company, has been vested with executive powers. Brother Vivek Bharat Ram has been inducted into the SRF board to spearhead SRFs search for a new core area as a part of the Mckinsey recommendations. While elder family members will provide the vision, professionals would manage the various operations as well as provide strategic leadership to the company adds Arun Bharat Ram.

Meanwhile, the GE Caps deal has gained market acceptance. As Salil Sharma of Kapur, Sharma & Co says, The price estimate of SRF Ltd should go up thanks to the deal as the received money will lead to lowering their interest burden.

Arun Bharat Rams dream of making his company one of the top seven global players by the year 2001 may seem a mite too optimistic. But he certainly is striving hard to get there.