Economies of scale and complementarity can help the merged entity emerge as the fourth-largest player in the world in the polyester films industry.

By Ranju Sarkar

It all began with a post-dinner smoke Ashok Chaturvedi had with Sanjeev Saraf on a relatively cool July evening this year. Chaturvedi, the 43-year-old CEO of the packaging major, Flex Industries (Flex), had never been a heavy smoker. At least, not until his ill-fated polyester-films business started giving him sleepless nights 18 months ago.

After all, Flex's Rs 700-crore backward integration into thin polyester-films had already resulted in a net loss of Rs 121.70 crore in 1997-98 (18 months ended December 31). That evening, he and Saraf-the CEO of the polyester-film major, Polyplex Corporation-decided to merge their polyester-film businesses together. In a single sweep, that created India's largest player in this sector.

Four months later, on October 23, 1999, the 2 CEOs inked a deal to form a 45:55 joint venture, with Polyplex as the majority shareholder. With a capacity of 39,000 tpa, the joint venture, christened United Film Technologies (UFT)-with Saraf as CEO, and Chaturvedi as Chairman-is bigger than Garware Polyester (23,000 tonnes), Ester Industries (18,000 tonnes) and Jindal Polyester (12,000 tonnes). In fact, it makes UFT the fourth-largest player in the world.

Hints Saraf, 40: ''We were willing to dilute our stake in favour of an entity that had the potential to be a viable and competitive player more than if we had been on a standalone basis.'' This could just be the beginning. Already, BT learns that Deepak Singhania's Ester Industries may be mulling over a plan to join the newly-engaged couple and, thus, form a threesome. Concedes Saraf: ''We should be able to attract a lot more capacity.''

After all, the industry has been ravaged by over-capacity and a squeeze on margins. Fact: the 8 players in the sector together have a capacity of 1.04 lakh tpa while the demand is just 35,000 tpa. And export-initiatives have failed since supply (1.18 million tonnes) exceeds demand (0.98 million tonnes) in the global market too. The result: most firms, like Garware Polyester (1998-99 net loss: Rs 105 crore) and Ester Industries (Rs 26.86 crore), fare miserably. Even Polyplex, whose finances are in a comparatively better state, saw its net profits drop from Rs 5.46 crore in 1997-98 to Rs 3.66 crore in 1998-99.

An Exit Option For Flex...

UFT hopes to buck the trend through economies of scale. While size may help, the 2 partners could also benefit from complementarity. Admits G.S. Subramanium, 50, President, Garware Polyester: ''It's a wise decision. While Polyplex is good in polyester films, Flex's strength lies in lamination, and finding new usages for polyester-films.''

It also offers Flex, which had been facing pressure from the financial institutions (stake: 23 per cent), an opportunity to exit from the polyester-films business. Says a senior manager with one of the financial institutions: ''It is a novel move. It's good to see promoters trying to address their problems in a proactive manner rather than letting their companies die a slow death.''

Back in 1994, when Flex had diversified into polyester-films, it made sense. As a manufacturer of flexible packaging-materials, Chaturvedi had wanted an assured supply of raw materials. At that time, the domestic capacity was 17,000 tpa against a demand of 20,000 tpa. Within a year, Flex commissioned its plant, comprising 3 units to manufacture 24,000 tpa of polyester film, 15,000 tpa of Biaxially-Oriented Polypropylene (BOPP), as well as 50,000 tpa of polyester-chips.

As global prices peaked at $5 per kg in Q-3, 1995, Flex made a killing, earning margins of upto Rs 100 per kg on converting chips into film. In 1995-96, Polyplex, on its part, earned net profits of Rs 29 crore on sales of Rs 91.11 crore. Lured by these margins, new players-like Jindal Polyester and MTZ Polyester-entered the fray while the existing players expanded their capacities.

Within 4 years, there was a huge capacity build-up. Worse, global prices crashed: the prices of polyester film (12 micron thick) in Asia, for instance, fell from $5.15 per kg in Q-3, 1995, to $1.10 per kg in Q-3, 1998, before recovering to $1.60 per kg in Q-3, 1999. Locally, conversion-margins plummeted from Rs 100 per kg to Rs 20 per kg in 1998 before recovering to the present Rs 35 per kg.

For Flex, the new joint venture allows it to concentrate on its core business: flexible packaging. With commodity marketers shifting to flexi-packs because of their better properties, the Rs 2,400-crore industry is expected to grow at 25 per cent a year. Moreover, the unit pack segment (pouches), which accounts for 20 per cent of polyester-film consumption, is growing at 10-12 per cent per annum, with usage in pan masalas, shampoos, and detergents.

Obviously, the sector is likely to grow in tune with the flexible packaging industry. With the demand for polyester-films expected to increase from 40,000 tonnes per annum (tpa) in 1999 to 97,660 tpa in 2004, which implies an annual growth of 25 per cent, this will, more or less, match the supply of 1.08 lakh tpa.

...And Scale For Polyplex

As a medium-sized player, Polyplex has utilised its 15,000-tpa capacity through long-term contracts. And it has been scouting for ways to increase capacity. Given the present glut and overcapacity, acquisitions seem a better option but, explains Saraf, few companies were up for grabs. Avers he: ''There was really no one. Small capacities were available, but they didn't meet our needs.''

When Saraf met Chaturvedi the conversation veered round to the wave of consolidation in the global polyester-film business, where Britain's ICI first sold off its division to DuPont, which then sold it to Japan's Teijin, and Japan's Sahean, which had sold out to Japan's Toray. ''We thought that if everyone is doing it, why don't we also think of something?'' recalls Saraf.

Polyplex, which has a single-minded focus on polyester-films, has managed its financials well. For one, the company's investment-costs have been low: Rs 58,000 and Rs 70,000, respectively, for the first 2 lines compared to Flex's Rs 128,000 and Rs 83,000. Besides, Polyplex's long-term contracts ensure a higher capacity-utilisation of 85 per cent compared to the industry average of 60 per cent. For instance, it exports 30 per cent of its output to Atco Rubber Products of the US, and sells 20 per cent to flexible packagers in the US through a 50:50 joint venture with the same company. Agrees Chaturvedi: ''They are more experienced, and will be able to handle the business better.''

...Plus Gains For Both

The new joint venture will help both Chaturvedi and Saraf to reap operational benefits. With 2 plants-Polyplex's Nainital facility and Flex's Noida unit-under its belt, UFT can slash the number of changeovers during production. Typically, each plant has 20 changeovers a month, which can be reduced to just 5. Other cost benefits could also accrue.

At present, for marketing the same product, both Flex and Polyplex spend on overseas travel. But since Polyplex has a base in the US, cost-duplication can be avoided for several products. Similarly, finance and administrative costs could be reduced. Says Saraf: ''With savings in operational- and procurement-costs, we can save upto 35-40 per cent of our current combined costs.''

Even his competitors concede that. Says M.R. Ramaswamy, 42, Senior Vice-President (Marketing), Essel Packaging: ''There will be synergy in UFT's operations, reducing costs.''

Chaturvedi has his eyes set on another benefit: transferring Rs 300 crore of Flex's Rs 679.58-crore debt to the venture. Saraf wants to transfer Rs 53 crore of Polyplex's debt. Although that would suit the financial institutions-which have already rescheduled Flex's debt in December, 1998-Saraf is far from pleased. He says: ''The merged entity should not have a debt of more than Rs 180 crore. How Flex's debt has to be dealt with must be looked at by the institutions.''

Even the stockmarkets agree that Chaturvedi will gain more from the venture than Saraf. After the deal was announced, while Flex's scrip-price zoomed from Rs 19.95 on October 21, 1999, to Rs 33 on October 28, 1999, before coming down to Rs 22.25 on November 4, 1999, Polyplex's scrip-price fell from Rs 23.35 on October 21, 1999, to Rs 14.30 on November 4, 1999. Clearly, Saraf will need to flex his muscles to ensure that the new merged entity is viable, and his agreement with Chaturvedi is poly-profitable for him.

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