Can NGEF Finally Power Its Disinvestment?

PRIVATISATION
Can NGEF Finally Power Its Disinvestment?

Kirloskar Electric is the front-runner for the Bangalore-based company, but the trade unions will decide.

By Dilip Maitra

Vijay Gore, CEO, NGEF: "We would definitely prefer to sell the entire company to one buyer" Every August, without fail, the Government of Karnataka-owned power equipment-manufacturer, NGEF, participates in the Bangalore Flower Show. Every August, without fail, the Rs 167-crore loss-maker (1998-99 accumulated losses: Rs 204.81 crore) walks away with the top prizes in most categories. And August, 1999, will be no different, claims the head mali at NGEF's factory on the outskirts of Bangalore.

It could be.

For, August 9, 1999, is actually the last date for the bids for NGEF-lock, stock, and gladioli. This is the second attempt at privatising the 34-year-old NGEF; in 1994-95, 34 per cent of the company's equity was put on the block, but there were no takers. This time, a suitably-chastened state government wants to sell its entire stake in NGEF to the highest bidder. While it will offload its 90.28 per cent stake, a financial partner, EHG Elektroholding GmbH, will also sell its 9.72 per cent stake. And a profitable fully-owned subsidiary, the Rs 12-crore NGEF (Hubli), is also up for grabs.

What's the tab for NGEF? According to its 1997-98 balance-sheet, the company has (revalued) assets of Rs 400 crore. Since it also had Rs 250 crore of liabilities, NGEF's net assets work out to Rs 150 crore, with a net book value per share of Rs 32. In the absence of a recent valuation of its assets, a BT quick estimate pegs NGEF's value, in toto, at between Rs 100 crore and Rs 140 crore. However, a bidder can either pick up the entire unit, or any of its 4 divisions-transformers, switchgears, power-electronics, and rotating-machinery-which will then be hived off into separate companies.

Explains Vijay Gore, 54, Managing Director, NGEF: ''Breaking up the company will not be difficult as we have had division-based accounting for several years. But we would prefer to sell the whole company to one buyer.'' Adds P. Venkatesh, 29, Assistant Vice-President, SBI Capital Markets, which is managing NGEF's disinvestment: ''There have been a lot of enquiries. We expect at least 4-5 bids from local companies as well as an equal number from transnationals.''

Really? Already, SBI Capital Markets has had to extend the last date for ''expressing interest'' in NGEF by 15 days to July 31, 1999. Only the Bangalore-based Kirloskar Electric and the St Louis (US)-based Emerson Electric have joined the fray until now. The delay, says Venkatesh, is because some potential bidders-which, BT learns, include Asea Brown Boveri (ABB), the front-runner 5 years ago-have asked for more time before they decide whether or not to bid for NGEF.

That NGEF hardly smells of roses doesn't, obviously, help. Unprofitable for a decade now-and a BIFR case since 1994-95-the company has a bloated and unionised workforce, a high interest burden, and is plagued by poor productivity. In 1998-99, the company reported net losses of Rs 37.87 crore after its net worth turned negative (-Rs 11.15 crore) the previous year. Intense competition, coupled with the downturn in the electrical equipment industry, has left the company in a precarious position. Admits S.R. Tambe, 55, Senior Vice-President, Kirloskar Electric: ''Manufacturers are forced to offer big discounts on their products, which are bleeding them white.''

Much of what a prospective bidder sees in NGEF is an old brand, with a 4.66 per cent share of the transformers business. It also sits on 90 acres of surplus land, which it has been unable to sell since 1996-97. ''We could have got Rs 90 crore from the sale of part of the land. But, by the time we were ready to do so, prices crashed in Bangalore,'' says R.M. Manohar, 44, Director (Finance), NGEF. Even if 55 per cent of the land is sold off to retire its debt, the company will still be left with 40 acres of saleable land which, NGEF claims, is valued at more than Rs 100 crore today.

That's not all. Explains Kirloskar Electric's Tambe: ''We are interested in our synergies with NGEF's product-range. Its larger range of transformers and switchgears will extend our own.'' For instance, while Kirloskar Electric's transformers-range extends from 0.50 to 50 mva (Milli Volt Amperes), NGEF's range spans 0.50 to 400 MVA. Moreover, NGEF's 8 per cent share of the electrical motors market will supplement Kirloskar's 26 per cent. And, apart from the scale economies, the locational advantage-Kirloskar Electric has a plant in Bangalore-definitely gives it a reason to acquire NGEF. But the twist to this M&A tale is that Kirloskar Electric reported net losses of Rs 14 crore in 1997-98, and is itself in the throes of a torrid restructuring.

Emerson Electric, on the other hand-the $13-billion motors-manufacturing company-has no local presence, but is interested in the rotating-machine divisions of NGEF and NGEF (Hubli) as an entry-strategy. Then, there's ABB-which refused to comment-which, in August, 1998, commissioned its own greenfield transformers plant at Vadodara a la the other majors like Crompton Greaves (transformers marketshare: 17.09 per cent) and Alstom (6.35 per cent).

Finally, a wildcard bidder: Bharat Heavy Electricals Ltd (bhel). After the last attempt to sell a stake in NGEF fizzled out, the Karnataka government tried to entice the Centre. However, BHEL wanted full control-and that was the end of the matter. This time, the public sector unit hasn't evinced any interest; at least, not so far. But, given the present political realignments-the Janata Dal's J.H. Patel, the Chief Minister of Karnataka, has allied with the Bharatiya Janata Party-the possibility of a BHEL bid cannot be ruled out.

With NGEF, BHEL would gain access to a range of transformers, motors, and switchgears that will be complementary to its own. Not only does the latter not have a presence in the lower ranges, the two manufacture different kinds of products. For instance, NGEF may make transformers upto 400 MVA for power-distribution and transmission, but BHEL also manufactures a variety of transformers, like electrostatic precipitators and traction-load transformers. On the other hand, bhel's motors may be used mainly in the electrical industry, but NGEF has a range of special motors for industrial applications, like crane-duty motors and roller-table motors.

The catch is that NGEF has some catching up to do. As it no longer has any tie-ups, the company faces a 10-year technology-lag in the case of most of its products. Equally disconcerting is the fact that capital expenditure of at least Rs 20 crore, according to the company's own estimates, will be required to debottleneck its machinery and refurbish its equipment. Still, NGEF's real bane is its workforce.

Slowly, with the aid of a Voluntary Retirement Scheme (VRS), the number of workers has been reduced by 41 per cent: from 5,690 in 1995-96 to 3,377 in 1998-99. The tab: Rs 70 crore. Points out Gore: ''We now have a fairly young team, with an average age of 43 years.'' Of course, according to BT's estimates, the workforce must be reduced by another 15 per cent if NGEF is to survive. That said, the NGEF Employees Association is highly politicised-it played a vital role in the previous disinvestment-and will, definitely, pressurise the state government this time too.

Declares B.R. Pundarikakshya, 45, Vice-President, NGEF Employees Association, which is affiliated to the All India Trade Union Congress: ''We are not opposed to the company's privatisation, but we want NGEF to go to one investor.'' Ergo, the unions will oppose any fragmented sale of NGEF. This could jeopardise the disinvestment process. Particularly as Kirloskar Electric's Tambe warns: ''At the moment, we are interested in the whole company. But, after a due diligence, our decision may change to taking over a division or two.'' Clearly, any acquirer, in sum or in part, will have to grapple with these labour issues.

Meanwhile, NGEF has been trying to become efficient in order to attract a suitor. By converting a Rs 93-crore loan from the state government into equity, and selling off real estate, the company hopes to clear all its outstanding term-loans (Rs 51 crore to the Nuclear Power Corporation and Rs 36 crore to the financial institutions) this year. If all goes well, NGEF will be left with only a working-capital loan of Rs 57 crore. Even then, the company will carry liabilities of Rs 83 crore in its books: Rs 70 crore on account of the VRS, and Rs 13 crore of statutory liabilities.

Clearly, the glimmers of hope are overshadowed by the clouds of gloom enveloping NGEF. Not only does the extent of its overstaffed workforce worry every prospective acquirer, NGEF's trade unions could stymie any M&A deal they do not approve of. That's why all that NGEF seems to have to safeguard its future, at the moment, appears to be flower-power.

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