By R Sridharan

He's a white knight-turned- pinstriped pirate. Three years after N. Srinivasan, the 53-year-old CEO of the Rs 832.49-crore India Cements, first helped B.V. Raju, the 74-year-old executive chairman of the Rs 350-crore Raasi Cement (Raasi), ward off a takeover threat from the Rs 9,004-crore Reliance Industries, he has turned predator himself. Having accumulated 18.03 per cent of Raasi's equity over the months--both through open market purchases as well as by buying out the stake of an estranged faction of the Raju family--Srinivasan announced, last fortnight, an open offer to acquire an additional 20 per cent of Raasi's equity.

Given the price of Rs 300 per share he is offering--72.41 per cent above the stockmarket price of Rs 174 on February 26, 1998--Raasi's shareholders may find it hard to turn down his offer. Not surprisingly, on March 1, 1998, even the state-owned Andhra Pradesh Industrial Development Corporation (APIDC) sold its 2.13 per cent stake in Raasi to India Cements. However, the Andhra Pradesh High Court immediately stayed this transaction since an agreement between the APIDC and the promoters states that Raju has the first right to buy.

Even if shareholders like the APIDC decide to sell out of Raasi, whether such purchases will help Srinivasan gain control of Raasi is another question. That's because Raju claims that he controls a 44 per cent stake--including the 7 per cent owned by Raasi's transporters--and is also trying to woo the financial institutions, which hold 20 per cent of the company's equity. Moreover, unwilling to take any chances, Raju is planning to execute a series of defensive manoeuvres to stall Srinivasan.

For one, Raasi can get its shareholders to approve the hiving-off of the 37 per cent stake it owns in the Rs 166.37-crore Sri Vishnu Cements. According to R. Kunchithapatham, 65, vice-chairman, Raasi, the stake has already been sold to a closely-held investment company. But this may be rejected by the financial institutions since Raasi had promised the Board for Industrial & Financial Reconstruction, while taking over the sick company, that it would not dispose of the shares.

Else, Raju can make a counter-offer to his shareholders, and wean away potential sellers from Srinivasan. But these are expensive options, and the former may not have the funds to pull them off. As a last resort, he could get the shareholders' approval for exorbitant post-takeover severance packages for the top managers. Which, in effect, will act as a poison pill.

Yet, this may not be enough to stop Srinivasan from bulldozing his way onto Raasi's board. That's because if he manages to buy even 7 per cent from the public, he would have crossed the 25 per cent shareholding limit in Raasi and, therefore, be in a position to veto any special resolution put up for the approval of shareholders. No wonder a confident Srinivasan told BT in Chennai: "Raju cannot wish me away." And that's irrespective of the response India Cements will elicit for its public offer, which will be open between April 15 and May 15, 1998.

It is, of course, not hard to explain Srinivasan's interest in Raasi. A greenfield cement unit with a capacity of 3 million tonnes per annum (tpa) typically costs Rs 1,000 crore to build. At a debt-equity ratio of 1:1--and a promoters' equity holding of 40 per cent--such a project would entail an investment of Rs 200 crore. Instead, India Cements can get Raasi's 1.60-million-tpa unit, whose actual production was 2 million tpa in 1996, for less. For instance, the cost of India Cements' 38.03 per cent stake in Raasi was a mere Rs 155 crore. Besides, Raasi is setting up another 6 lakh-tpa cement unit in Anantpur (Andhra Pradesh), and holds a substantial stake in Sri Vishnu Cements, which will also, post-takeover, go to India Cements.

Since, in South India, India Cements is already the largest player in the business, Raasi's acquisition will further fortify its position. Says Srinivasan: "What was an economic size 10 years ago is today unviable. To reap economies of scale, and keeping future market growth in mind, size has become critical." Perhaps. But in an industry that is suffering from overcapacity, do capacity acquisitions make sense? Yes.

For one, South India is likely to face a production shortfall of cement in the near future since capacity additions are happening at a slow pace. Only two projects are in the pipeline: the Rs 5,453.72-crore Larsen & Toubro's 1.75-million-tpa project at Tadapatri (Andhra Pradesh), and Zuari Cement's 1-million-tpa expansion in the Cudappah district of Andhra Pradesh. In sharp contrast, annual demand is growing at 8 per cent. Thus, the near-stagnant cement capacity of 20 million tpa will be unable to cater to the demand of 26 million tpa by 2000. Notes Manishi Raychaudhuri, 30, analyst, I-Sec: "The southern states could be staring at a cement deficit in five to six years."

Add to this the peculiarities of the market. Kerala has just one cement manufacturer, Malabar Cements, with an installed capacity of 3.15 lakh tpa, because the state has no limestone deposits. Karnataka faces a similar problem although on a lower scale. While Andhra Pradesh is dominated by Raasi, with a marketshare of 16 per cent, India Cements has a 19 per cent marketshare in Tamil Nadu, and leads the pack in Kerala. By acquiring Raasi, India Cements will gain more than a foothold in Andhra Pradesh, and account for 7 million tpa of South India's 20-million-tpa capacity.

In other words, a marketshare of 35 per cent. And the combined stockists' network of 3,500--India Cements' 2,500 and Raasi's 1,000--will help protect its price realisations. Incidentally, India Cements' profitability is the least sensitive to a rupee change in the average price realisation per bag. According to an I-Sec report on the sector, the Rs 2,511.67-crore Associated Cement Companies' (ACC) sensitivity is as high as 34.50 per cent; the Rs 952.69-crore Gujarat Ambuja, 8 per cent; the Rs 419.65-crore Madras Cement, 9 per cent--and India Cements, just 7 per cent.

While this may mean a notional loss in earnings whenever cement prices firm up, it also guards India Cements against a drop in profits during adverse times. Points out T.S. Raghupathy, 46, vice-president (marketing), India Cements: "Cement prices are dependent on the demand and supply position. But if you are a big supplier of quality cement, you can protect your realisations to an extent." That's probably another reason why Srinivasan has chosen to adopt an M&A strategy.

How will India Cements finance the offer? Through a rights issue and the private placement of shares. Obviously, Srinivasan is relying on the equity route because India Cements has a debt-equity ratio of 1.09:1, and had a relatively high interest outgo of Rs 48.42 crore in 1996-97. It could not have taken on more debt without impacting its earnings. If one considers the premium of Rs 40 per share that India Cements can charge for the proposed rights issue (market price: Rs 60), its Earnings Per Share (Rs 12.84 in 1996-97) will come down substantially after the issue. But Srinivasan is not too worried about that. In fact, he will, probably, be happy if his shareholders renounce their rights. By buying them, he will be able to shore up the promoters' stake of 35 per cent.

What Srinivasan is preoccupied with is size. If he pulls off his raid on Raasi, India Cements will become the second-largest cement manufacturer in the country with a capacity of 7 million tpa--next only to ACC's 9.03 million tpa. In retrospect, Srinivasan's gameplan actually began unfolding in October, 1994, when the company launched its first $50-million Global Depository Receipts (GDRs) issue. Then, Srinivasan had said that India Cements' future growth would be either organic--or acquisition-led. He has stuck to his word.

In September, 1997, India Cements snapped up the 9-lakh-tpa cement unit of Visakha Asbestos in Andhra Pradesh. Barely four months later, it successfully bid for the Rs 441.52-crore Cement Corporation of India's Yerraguntala (Andhra Pradesh) unit, picking up the 4lakh-tpa facility--which allows for an addition of 1 million tpa capacity--for Rs 198 crore. And if the Rs 14.23-crore Dharani Cements--a company that India Cements will, possibly, bid for in the near future--is acquired, India Cements will almost be at par with ACC in terms of size.

Declares Srinivasan: "My focus in the next four years will be on consolidation, and improving our units' operational efficiencies." While it is obvious that Srinivasan is unlikely to face any hurdles in becoming a significant stakeholder in Raasi, whether he can become its single-largest shareholder is uncertain. Even if his present bid succeeds, Raju will try his best to stop him at the gates. But the raider could well come charging back--and, next time, with an offer for Raasi that even Raju won't be able to refuse.

Write to us   Subscriptions