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Restructuring seems to be the buzzword for most companies in the Old Economy facing
dwindling profits. Yet another corporate to restructure to improve its financials is the
Kolkata-based C K Birla group flagship Hindustan Motors (HM), the oldest car manufacturer
in India making the Ambassador car. The auto major has spun off its component (engines and
transmission) division into its subsidiary AVTEC.
HM’s component business comprises the power unit plant (PUP) and
the power products division (PPD). The PUP division manufactures engines, transmissions
and their components for automobiles, while PPD makes automatic transmissions and their
components for heavy-duty vehicles like dumpers, loaders and dozers.
In the first stage, the component business of HM will be transferred to
AVTEC. In the second stage, UK-based Actis Capital LLP (formerly CDC Capital) and
HM’s promoter, the C K Birla group, will acquire shares in AVTEC (secondary sale by
HM or primary issuance). Actis will acquire a 30% stake in the subsidiary through its
investment vehicle Powertrain Investments, while the C K Birla group will acquire a 21%
stake. This will lead to an increase in HM’s stake in AVTEC to 49%. C K Birla himself
will continue to hold a 20% stake. Additionally, Actis and the C K Birla group will
individually invest Rs 30 crore each into AVTEC.
The deal will help AVTEC in becoming India’s largest independent
engines and transmission manufacturer, supplying critical auto components to global auto
companies such as General Motors, Ford Motors, Caterpillar and to Bharat Earth Movers,
Mahindra & Mahindra (M&M) and Mitsubishi cars in India. Using the valuation paid
by Actis as a benchmark, the enterprise valuation of AVTEC works out to Rs 423 crore.
HM will find an increased cash flow of Rs 265 crore as a result of the
AVTEC deal and a networth enhancement of Rs 140 crore, up from Rs 60.66 crore, as a result
of its debts being transferred to AVTEC. The improved cash flow will help HM beef up its
financial performance and augment its working capital resources and growth plans. In the
year ended March 2004, the company posted a net loss of Rs 80.95 crore, against
Rs 26.73 crore in FY 2003. In the third quarter of FY 2004 ending in December 2003,
it had reported a net loss of Rs 29.82 crore as against a miniscule profit of Rs 1.76
crore in the corresponding period of the previous fiscal.
Of its four manufacturing plants, the Pithampur plant in Madhya Pradesh
supplies engines and transmissions to General Motors, Ford India and M&M, among other
car makers. It also supplies gear-boxes to M&M for its sports utility vehicle (SUV),
Scorpio. Besides India’s first indigenous car Ambassador, the Hosur plant
manufactures the Lancer sedan and Pajero SUV, using technology from its Japanese
collaborator, Mitsubishi Motors Corporation.
HM has been trying to find a suitable way to utilise the 400-acre
surplus vacant land on its sprawling 743-acre Uttarpara plant on the outskirts of Kolkata,
which has become a drag on the company’s profitability. The plant, which manufactures
Ambassador cars and has an installed capacity of 12,000 units per annum, is used
exclusively to make Mitsubishi Lancer sedan, in technical collaboration with Mitsubishi
Motors, Japan.
Earlier, HM had planned to utilise the land to make auto components.
Later, in 2004, it was in talks with five auto-makers, including Germany’s BMW and
Volkswagen and Malaysia’s Protocon, to lease out the excess capacity for
manufacturing of vehicles. Recently, it obtained the permission of the West Bengal
government to develop real estate at the surplus land and build residential apartments.
The auto major is also keen on revamping its product portfolio. This
includes the unveiling of new models and introducing variants of its existing models. The
company has an existing tie-up with Mitsubishi Motors, through which it markets the Lancer
and Pajero brands in India.
HM aims at selling 6,000 units of Lancer LX, the latest Rs 6.93-lakh
model of Mitsubishi Lancer launched recently, in FY 2006, up from 3,000 units in FY 2005
and FY 2004. Plans are afoot to up Lancer sales by slashing the prices of Lancer spares by
almost 56%.
In a bid to generate more revenues HM is in the process of launching
Mitsubishi Carisma in the D segment with a price tag of Rs 10 lakh-Rs 12 lakh. In the SUV
segment, the company has decided to tap the premium and middle ends of the market through
the Pajero family: it plans to discontinue the 2.8-litre Pajero and substitute it with a
premium and a regular SUV. The regular SUV Pajero will cost Rs 18 lakh and will be
equipped with a 2.5-litre engine. Montero, its proposed premium SUV offering will be
imported as a CBU and powered with a 3.2-litre engine with a price tag of Rs 35 lakh.
HM has tried to tap the foreign markets, too. In April 2003, it set up
Hindustan Motors, US, its wholly-owned subsidiary, as a front-end engineering services
provider for clients based in US. However, following a net loss of $6821 in FY 2004, the
company has already moved its operations from New Jersey to Michigan.
Making a foray into the power generation arena, the automobile giant
plans to set up a 6-MW captive power plant at Uttarpara in West Bengal. This is aimed at
helping the manufacturing plant of Ambassador, with utilises 16 MW power with an annual
power bill of Rs 1.5 crore, to satiate its power requirement and reduce its power bill.
The captive power generation will be done using rice husk, a major renewable energy
source. It further plans to develop its forging and casting-based components business in
the Uttarpara plant in West Bengal.
A major reason for HM’s declining net profit was its huge interest
burden. In FY 2004, the interest outgo was a huge Rs 55.35 crore, which resulted in a net
loss of Rs 80.95 crore, over a Rs 26.73-crore loss in the previous fiscal.
Thanks to a favourable debt restructuring package from ICICI Bank-led
financial institutions in FY 2004, its interest rate burden fell to Rs 10.72 crore in the
December 2004 quarter, down from Rs 14.2 crore a year ago. The Rs 300-crore debt
restructuring package comprised a reduction in interest rates on terms loans to 10.25%,
down from 14% to 15%, enabling the company to convert its term loans worth Rs 18 crore
into preference shares and amortised the loan repayment schedules till 2007.
The result of the debt restructuring package is already visible in the
form of improved results. In the quarter ended December 2004, the auto giant recorded a
net profit of Rs 1.76 crore, against a net loss of Rs 29.82 crore in the corresponding
period last fiscal. Net sales jumped 47.7% to Rs 242.72 crore, from Rs 164.23 crore in the
previous fiscal. In the previous quarter of September 2004, HM reduced its losses to Rs
4.99 crore, from Rs 19.01 crore in the September 2003 quarter.
The HM stock witnessed hectic activity in the past few trading sessions. It staged a
rebound from the lower level of Rs 8.56 in mid-2004 to hit an all-time high of Rs 33.5 on
21 February on huge volumes of over 1.15 crore shares. This indicated a sharp rise of 291%
within eight months from its June 2004 low of Rs 33.5. On NSE, the scrip hit a high
of Rs 34.40 with volume of 3.3-crore shares on the day of the announcement of the AVTEC
deal. |
