Vinay Rai's restructuring may facilitate investment into different business, but will also increase vulnerability.

By Rajiv Dubey

It was a hectic first fortnight in March, 1998, for the Vinay Rai-controlled Rs 2,583.94-crore Group Usha. At a time when the majority of corporate India's denizens were rushing to the Registrar of Companies, final accounts for 1997-98 in hand, Group Usha's representatives were filing applications for the registration of new companies. Six, to be precise.

By restructuring his family's holdings in the 12-company group, Rai hopes to channel investments that have eluded the diverse businesses -- steel, telecom, electronics -- on Group Usha's plate. The 49-year-old chairman explains his reasoning: ''We will need to invest Rs 500 crore each in our telecom and steel businesses over a three-year period, beginning 1999. This (restructuring) exercise will do the groundwork.'' However, when -- and not if -- the going gets rough, the group's latest experiment will also increase its vulnerability.

Come June 30, 1998, Rai will transfer the Rs 901.44-crore flagship Usha India's shareholding in the telecom and steel businesses into two fully-owned subsidiary holding companies, Usha Holding Telecom and Usha Holding Ferro Metal (Usha Holding Ferro). Usha Holding Telecom will now hold Group Usha's 100 per cent stake in the private limited cellular licence operator, Koshika Telecom, which will be further split into four subsidiaries: Bihar Telecom, Orissa Telecom, Himalayan Well, and Koshika Telesys. And Koshika Telecom will transfer its licences to operate cellular services in the circles of Bihar, Orissa, Western Uttar Pradesh, and Eastern Uttar Pradesh, respectively to the four subsidiaries. Similarly, Usha India's 72.45 per cent stake in the Rs 660-crore Usha Ispat, and its 72.65 per cent stake in the Rs 735-crore Malvika Steel, will be transferred to Usha Holding Ferro.

On the face of it, the move does recast the group for future investments. Since Usha India is the holding company for the entire group, its presence in businesses as diverse as telecom, electronics, steel, ferro metals, and software development was a constraint for focused investors. With the new arrangement, Rai can now provide investors with the option of putting their money into either the holding companies, or directly in the companies in their preferred business. Says Rai: ''I will be looking for both strategic and financial investors at the holding company level, and operational investors at the individual company level.''

How will the tiered system work to Rai's benefit? Under the old structure, if the Rai family had shed 21.65 per cent of its 72.65 per cent stake in Usha Ispat (assuming that the family would want to retain a 51 per cent stake in all its ventures), the group would have been able to raise Rs 51.22 crore (at the current market price of Rs 23.76 per share). Under the new structure, the Rais can still do that, but they can also sell 49 per cent stake in the first-tier holding company Usha Holding Ferro to a strategic investor. And, based on its book value of Rs 27.40 per share, bring in an additional Rs 81.83 crore .

Indeed, the more tiers there are, the higher is the potential inflow of capital. Agrees Ravi Sharma, 35, vice-president (operations), India & SAARC region, British Telecom: ''It's not unusual for companies to have complex holding structures to enable them to raise funds.'' Thus the Rais' newly-structured telecom business will offer three tiers, excluding Usha India, to investors. Says S.K. Mittal, 38, joint managing director, Usha India: ''Usha India had become too diversified. For instance, no telecom company would want to pick up equity in the company, because they were simply not interested in its other businesses.''

There are other, equally compelling reasons behind the new structure too. The telecom business has already consumed Rs 450 crore over the last two years, and is now demanding a further injection of Rs 500 crore of equity over the next four years. The fact that most of Rai's companies are already highly leveraged does not help matters.

Among the group's three major companies, Usha India has a debt-equity ratio of 0.59:1, while pig iron producers Malvika Steel and Usha Ispat have substantially stretched ratios of 2:1 and 1.49:1, respectively. Sure, Usha India is not over leveraged. But after the transfer of its holdings, the company will be in no position to raise substantial funds for its subsidiaries. The only way out: bring in funds in the form of fresh equity.

However, while the route may have been charted, potential investors will certainly drive a hard bargain with Group Usha. First, the gestation period for its telecom business will continue for at least another two years. Second, the three listed companies in the group do not present a pretty picture to potential investors.

A depressed market for steel has taken its toll on Usha Ispat and Malvika Steel in the first half of 1997-98. Usha Ispat's turnover dipped by 8.47 per cent to Rs 269.82 crore from Rs 294.78 crore in the first half of 1996-97. Malvika Steel's performance was worse. Turnover plummeted by 31.49 per cent, from Rs 357.58 crore in the first half of 1996-97 to Rs 244.98 crore in the first half of 1997-98.

The two companies' bottomlines have not been spared either. While Malvika Steel's net profits dipped from Rs 22.65 crore in the first half of 1996-97 to Rs 1.80 crore, Usha Ispat has gone into the red with net losses of Rs 10 crore in the first half of 1997-98, against net profits of Rs 23.92 crore in the first half of 1996-97. Adds S.P. Pal, 50, the author of the book Demand For Steel, 2001-02: ''The recession in the industry has hit everyone. The industry may take couple of years to recover.''

Flagship Usha India's turnover fell by 35.06 per cent in the first half of 1997-98, from Rs 531.47 crore to Rs 345.13 crore. However, thanks to a good year for its electronics business, its net profits have gone up, albeit marginally, from Rs 22.25 crore to Rs 25.71 crore in the first half of 1997-98.

If the run of bad results continues, the Rais' holdings in their companies could prove troublesome. Warns Ashwin Parekh, 44, executive director, KPMG: ''While such a structure can help raise more money, it's yet to prove effective in India.'' Corporate holding structures are gaining popularity among capital-intensive industries, but they provide a false sense of majority holding in downstream companies. For instance, if the Rai family retains 51 per cent of Usha Holding Telecom, which holds 51 per cent in Koshika Telecom, which, in turn, holds 51 per cent in each of the four subsidiaries, its effective holding in each of the four subsidiaries stands at 12.75 per cent.

Assuming its businesses don't do well, the Rais may be forced to marginalise their stake in, say, one tier if they are unable to bring in their share of the money for funding future requirements. This situation could rapidly cascade, prompted by an understanding between the Rais' alliance partners at all levels where stakes have been offloaded. And, in the new restructured scenario, parts of Group Usha's telecom and steel businesses could then become ripe for acquisition. So, Rai had better steel himself for his restructuring to beget more risks than rewards.   

Issue Contents  Write to us   Subscriptions