Rita Singhs Last Gamble

In 1995, when Rita Singh announced that her group, Mesco, was setting up two steel plants with an investment of Rs 3,800 crore, the media lapped it up. Singh was then the toast of the markets. And it looked as though if she set her mind to it, the impossible would turn possible. After all, the 42-year-old botany graduate and Ficcis Woman Entrepreneur of the Decade had created a Rs 1,000-crore empire from scratch, with nothing other than a nose for business opportunities and a knack for networking and striking export deals.

So never mind that the steel projects would need a capital base of Rs 1,400 crore, 40 per cent more than the group turnover. Never mind that over the previous three years, the group had got into four new areas, all alien to it: aviation, shipping, pharmaceuticals and financial services. And never mind that Singh was building her castles on the shaky foundation of increasingly large public issues at unsustainably high premiums.

 

Three years later, the impossible is back to looking like the impossible or almost so. At Mesco today, nobody talks about the Rs 3,000-crore Mesco Kalinga Steel (MKSL) project, the bigger of the two projects announced, which was supposed to go on stream three months ago. Nobody even talks about the second phase of the smaller steel project, Mideast Integrated Steel Limited (MISL). It is just phase 1 of MISL that the group is desperately trying to kickstart after a delay of over two years and at least one false start.

Phase 1 will be commissioned in April and by May this year, production will begin, says Singh. But neither Mescos bankers nor its suppliers or shareholders are counting on it. The group is caught in a cash crunch of a kind it has never experienced before. Dividends declared to shareholders have not been paid for two years, debts to suppliers are mounting and inter corporate deposit (ICD) and fixed deposit (FD) repayments are in default.

But what would perhaps be most galling to Rita Singh is that the once unstoppable group is being forced to roll back its plans. It has shut its ambitious shipping division which had planned to acquire 20 ships by 1999 for movement of 10 million tonnes of cargo at a cost of $500 million. It has also put its leather tannery in Chennai on the block, hoping it will fetch the group Rs 15-20 crore.

What could rival the embarrassment of winding up businesses is the humiliation suffered by Mesco scrips at the bourses. The share price of the group flagship, Mideast India, had soared to Rs 180 in April 1995. Today it hovers at Rs 3. Similarly, Mesco Pharma shares, which hit an all-time high of Rs 173 in April 1995, are now trading at Rs 6.45. This has cut the ground from under Mesco, because critical to its expansion plans was its ability to raise new money at high premiums. Between 1992 and 1995, the group had floated six public issues to mop up Rs 177 crore from the market. During this time, the equity base of Mideast India expanded exponentially from a meagre Rs 3.41 crore in 1991-92 to Rs 50.21 crore in 1995-96.

But now, as the stocks and fortunes of Mesco fall, its future hinges on the success of the steel projects. At the time they were announced, a confident Singh had declared steel is a product of the future, convinced that MISL and MKSL would propel the group to the Rs 5,000-crore mark by 2000.

Now, sitting in Mesco Towers, the corporate office of the Rs 1,200-crore group, the 44-year-old Rita Singh reiterates: Steel is a sunrise industry. The demand from the infrastructure sector will be phenomenal. According to her calculations, in its first year of operations MISL will operate above its break-even capacity utilisation level of 42 per cent and touch a turnover of Rs 800 crore which works out to nearly 70 per cent of the groups present turnover. Can ISL then lead the turnaround of the Mesco group?

The industry pooh-poohs the suggestion. Says an executive of a vendor to MISL: I doubt they will be able to fire the blast furnace. The work is incomplete. Those of us working at the site had to run away because we were not being paid. Says Vijay Mehta, chairman, Mefcoms, a finance company which had co-managed the Mideast India 1992 public issue: It is well known that the company has been defaulting on its ICD and FD repayments over the last year. They say that everything will be fine once the project starts, but the question is: when will it start?

An industry analyst explains the scepticism: You cant kill the same man twice, can you? Then how can you commission the same blast furnace twice? They had staged a big tamasha sometime ago when the blast furnace was supposedly fired. The tamasha on February 2, 1996, was spectacular: At a party on the eve of the commissioning at the Oberoi hotel, Pankaj Udhas sang to an audience of over 500 which included Orissa chief minister J B Patnaik and union ministers Santosh Mohan Dev and Salman Khursheed. At the function, the Singhs graciously accepted plaudits for turning Orissas dream into a reality. But the very next day it was alleged that the black smoke that billowed out of the chimney was not the result of the ignition of fuel, but the burning of tyre, coir, straw and cowdung!

Singh becomes irritated on being reminded of her dream projects false start. We never claimed that the plant was being commissioned that day. We were only heating the stove, she snaps. She may be right, but then is anybody listening at a time when the groups credibility has taken a severe knock?

Says the chairman of a finance company who has known the Singhs since Mescos heyday: The Singhs were old clients and they assured us that the amount will be returned. We gave them more than Rs 60 lakh in ICDs in the beginning of 1996 all that money is now blocked. And Delhi-based Rahul Merchandising Limited had to file a criminal case against Mesco Pharmaceuticals when a cheque of Rs 5 lakh, the first instalment towards ICD repayment, bounced! Recent newspaper reports said that SAIL was planning legal action against Mesco to recover Rs 5 crore due for 21,000 tonnes of steel as well as consultancy services for MISL.

Even financial institutions are trying to bring the errant Mesco to heel. H G Gulati, chief general manager of Mescos lead financial institution Industrial Development Bank of India (IDBI), says, We are not satisfied with MISLs progress. It is behind schedule and we are now monitoring it.

In its first phase, MISL, a pig iron plant located at Daitari near Bhubaneshwar, will have an annual capacity of 0.5 million tonnes. In the second phase, it will be transformed into an integrated steel plant with the additional capacity of 0.7 million tonnes a year to produce steel products such as rods, bars and light structurals. The Rs 307-crore pig iron plant originally had a debt component of Rs 171 crore in the form of loans from IDBI, IFCI, UTI and IIBI. In the equity of Rs 136 crore, Mescos contribution was Rs 37 crore, China Iron and Steel Industry and Trade Group Corporation (CSGC) chipped in with Rs 30 crore, and Rs 66 crore was raised from the public.

The delay has ensured that the cost of the projects first phase has doubled to Rs 610 crore, and that of the second phase to Rs 2,000 crore from Rs 1,000 crore. Though IDBI has sanctioned a fresh tranche of Rs 100 crore to meet the cost overrun in the first phase, it has also asked the group to bring in Rs 50 crore additionally as equity. Meanwhile, by slashing the proposed Rs 1,500-crore funding for Mesco Kalinga Steel by a massive Rs 1,000 crore, it has forced Mesco to put its hot rolled coil steel plant on the backburner.

The financial institutions directive to the group is clear: shape up or else. But Singh turns around and points an accusing finger at the FIs: If the FIs had disbursed the money on time, we would have completed the project on schedule. But the project was not even appraised till June 1996. V Vishwanath, general manager, IDBI, Bhubaneshwar, explains the delay: Due to allegations of inappropriate utilisation of funds by the company, we had to do a detailed audit of the utilisation and deployment of funds.

Rita Singhs ostentatious farmhouse, black Rolls Royce and five-star hotel suites have been under the glare of publicity for some time. Her political ambitions had come a cropper in the last general elections. Mescos donation to the Congress came under CBI scrutiny and her farmhouse and offices were raided. But the Singhs seem to take all this in their stride. Natasha, Rita Singhs daughter and managing director Mesco Airlines, says, We have always had a farmhouse. But nobody talked about it till 1997. Between 1983 and 1989, we lived in a five-star hotel, but nobody noticed. We grew very fast and came into the limelight. And when you are high profile, good news gets converted to bad news.

For now, only the successful firing of the blast furnace can bring good tidings for Mesco. Singhs plan is ambitious, to say the least. According to her, MISL will break even at 42.5 per cent of the installed capacity. The 100 per cent export-oriented unit has a 10-year buyback agreement with CSGC. We have already sold all our products to our Chinese partner as well as a major Japanese company. Besides, we have increased productivity by enlarging the blast furnace from 350 cubic metres to 390 cubic metres, and have reduced coke consumption by 40 kg a tonne by using oil.

An industry specialist questions Mescos claim: The size of their furnace was always around 385 cubic metre. How can it be increased once it is designed? You cannot suddenly create extra volume. Companies often give underrated values to show higher productivity to begin with that is what Mesco seems to have done.

Adds the managing director of a large private sector steel company, They cannot break even at less than 50 per cent capacity utilisation. Steel is a highly capital intensive industry and the break-even point is very high usually at capacity utilisation of at least 70 per cent. Asks another analyst: The industry is not seeing any growth. At a time when SAILs profitability has come down, how can Mesco hope to become cash rich on a steel plant which has not even been comissioned?

As it attempts to find a place for itself in the 25 million tonne per annum steel industry, Mesco is trapped in a chicken and egg situation. It needs money to complete the expansion and get back on track. And till that happens, it will find it difficult to service its debts. The total debt burden on the group has climbed close to Rs 400 crore, with the component of unsecured loans going up drastically. In the case of Mideast India, for instance, it has shot up from Rs 15 crore in 1994-95 to Rs 80 crore in 1996-97. Till it clears its dues, there are little chances of a fresh infusion of funds, and so, little hope of getting the steel project rolling. But then, you never know with Rita Singh