With the West Bangal government scouting for suitors, M.R. Chhabria's plans for reviving the sick tyre-maker could skid.

By Rakhi Mazumdar & Dilip Maitra

Early in the morning of June 26, P.J. Rao, 54, the managing director of the ailing Dunlop India (annualised sales for the year ended December 31, 1997: Rs 277.03 crore), woke up with the knowledge that he had a difficult day ahead. A few hours later, at the company's Annual General Meeting (AGM), he would have to convince the shareholders that the management had a viable plan to revive the Calcutta-headquartered Dunlop, which had been declared sick by the Board for Industrial & Financial Reconstruction (BIFR) on June 22, 1998. What he did not know was that West Bengal's Left Front government was secretly trying to get in another suitor to take over the company .

Indeed, the day before, Asim Dasgupta, the state's Finance Minister, met K.M. Mammen Mappillai, the 75-year-old Chairman of the largest tyre manufacturing company in the country, the Chennai-based Rs 2,122-crore MRF, at Delhi's Banga Bhavan, the state government guest house. Dasgupta urged Mappillai to submit an alternative revival plan for Dunlop to the BIFR. Mappillai was interested and replied that he would soon send a team to Calcutta to conduct an initial due-diligence. Only after that, said Mappillai, would his company put in a proposal to the Industrial Development Bank of India's (IDBI, 1997-98 income: Rs 6,109 crore), the operating agency appointed by the BIFR for Dunlop's rehabilitation.

Confirms Philip Eapen, 60, President (Marketing), MRF: ''We have been approached by the West Bengal government to take over Dunlop. We are discussing the terms of the agreement, but the talks are at an initial stage.'' In fact, Mrinal Bannerjee, 59, West Bengal's Minister for Public Undertakings & Industrial Reconstruction, goes a step further and says: ''We have initiated a dialogue with many leading players in the tyre industry, like MRF and Apollo Tyres.'' These developments have, obviously, made it tougher for Dunlop's Chairman, the Dubai-based Manohar Rajaram Chhabria, 52, to retain control over the company.

Ever since the management declared a lockout at the Sahaganj (West Bengal) factory on February 7, 1998, the state government has been trying to wrest control from Chhabria. Initially, it considered running the company itself. But the plan failed once the company went to the BIFR, after reporting a loss of Rs 231.84 crore for the nine months ended December 31, 1997, which wiped out its net worth of Rs 144.74 crore. And now, Dasgupta-supported by the Centre for Indian Trade Unions (CITU)-affiliated trade union-wants a white knight to turn Dunlop around. Admits Dipankar Roy, 43, the General Secretary of the Dunlop Workers Union: ''Our slogan is Chhabria Hatao, Dunlop Bachao. Hence, we will welcome any promoter willing to take over the company.''

Not surprisingly, MRF too welcomes the overtures made by the state government. That's because MRF can extract synergistic advantages through the acquisition. For one, the addition of Dunlop's capacity of 32 lakh tyres per year will increase MRF's existing capacity of 100 lakh tyres per year to about 4 times that of its nearest rival, the Rs 1,203-crore Ceat Tyres, whose capacity is 32 lakh tyres per year. In the volume-driven tyre business-where margins are getting squeezed-this will enable MRF to consolidate its position. And two, MRF-whose plants are in Tamil Nadu, Kerala, Andhra Pradesh, Goa, and Pondicherry-will find a foothold in the East.

The acquisition of Dunlop's units at Sahaganj, and Ambattur (Tamil Nadu) will also enable MRF-which only makes tyres-to diversify its product portfolio. For, apart from tyres, Dunlop manufactures fan and V-belts, hydraulic brake hoses, conveyor belting, and transmission belting. Moreover, Dunlop is one of the largest producers of industrial belts in the country. Admits Eapen: ''It (the acquisition) will give us more volumes, a manufacturing base in the East, and product synergy.'' Another reason why MRF is interested in Dunlop is that although its marketshare has fallen from 25 per cent to 3 per cent in the past decade, the brand still enjoys high recall.

Even on the financial front, the acquisition makes sense for the Mappillais. One, MRF is the most profitable of the country's tyre manufacturers. With a net profit of Rs 62.46 crore in the year ended September 30, 1997, the company's gross margins-profits before depreciation and tax as a percentage of sales-were a high 7.50 per cent. And Earnings Per Share of Rs 147, and a 44 per cent Return On Net Worth of Rs 265 crore only accentuates its financial strength. Even if one takes into account the seemingly high borrowings of Rs 378 crore, MRF's debt-equity ratio is still a comfortable 1.42:1. To top it all, Dunlop's losses could provide a tax-shelter to a company which paid an average of 37 per cent of its profits as tax during the past 4 years.

The only snag: Dunlop's weak financials. Knowing Chhabria's penchant for overstating profits in the past, MRF will have to go through the company's balance-sheet with a tooth-comb. But, on the surface, Dunlop incurred an operational loss of Rs 62.58 crore in the 9 months ended December 31, 1997. However, the actual loss was a higher Rs 231.84 crore since the company provided for Rs 169.26 crore that had been booked as income 2 years ago. That was because of the cancellation of the proposed sale of its real estate in Mumbai and Chennai. In addition, Dunlop's total borrowings were a high Rs 84.30 crore while its net current liabilities were Rs 92 crore.

However, this should not prove to be a deterrent since the Dunlop's management itself maintains that the company can be turned around within months. Says Dunlop's Rao: ''We can achieve a turnover of Rs 600 crore, and cash profits of between Rs 15-20 crore in the next 12 months, if we are allowed to go ahead with our revival plan.'' At the moment, the rehabilitation plan, which will be submitted to IDBI, includes:

• Raise Rs 80 crore through the sale of non-performing assets like the 88,000-square feet office space in Worli (Mumbai), and the headquarters in downtown Calcutta. Says Rao: ''Although the real value of the property in Mumbai alone is Rs 100 crore, I am not expecting more than Rs 80 crore from the sale of the various properties (in Mumbai, Calcutta, and Chennai) because of the depressed property prices.''

• Raise Rs 40 crore through a rights issue at a premium of Rs 15 per share (face value: Rs 10). Since the existing shareholders may not be willing to invest more money in a sick company, the promoter company, the Mauritius-based DIL Rim & Wheel Corporation, has given an undertaking to subscribe to its rights entitlement as well as the unsubscribed portion of the issue.

• Downsize the high-cost workforce from 7,500 to 4,500 by offering a generous Voluntary Retirement Scheme, which will cost Rs 45 crore. This will drastically prune the manpower cost from an existing Rs 22 per kg while the industry average is only Rs 6 per kg. To give another example of low productivity levels, Dunlop's sales per employee figure is Rs 7.51 lakh per year while the corresponding figure for MRF-which has a higher capacity and a smaller workforce of 6,500 people-is Rs 32.65 lakh.

However, Dunlop's managers will have to convince the banks and the financial institutions of the practicality of the revival plan. For, the BIFR has declared the company sick under Section 17(3) of the Sick Industrial Companies (Special Provisions) Act. Which implies that any rehabilitation package will be thoroughly screened by the lenders, who have constantly maintained that the company was mismanaged. In fact, the consortium of lending banks, led by ANZ Grindlays, have frozen Dunlop's working capital limits at Rs 38 crore for the past 5 years. Given this strained relationship between the banks and Chhabria, the latter may find it difficult to convince IDBI about his revival plan. In that case, MRF may stand a good chance of laying its hands on what is still a prize acquisition-and zoom ahead of competition.

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