Going by the experience shareholders have had with Lakme's attempt at divesting its businesses, it is unlikely that its sale of stake in Lakme Lever and its brands (held by a 100 per cent subsidiary) to Hindustan Lever will be any different. The net consideration that Lakme and its subsidiary will receive will be reduced by the amount owed to HLL -- which could be as much as Rs 70 crore -- so the net consideration to Lakme and its subsidiaries will be around Rs 130 crore before tax.Again, going by Lakme's record in these matters, it is likely that it will announce another pointless issue of bonus shares. Despite having benefited to the extent of Rs 184 per share (before taxes) in 1995-96 as a result of sell-out to Hindustan Lever, all the Lakme management could think of doing was increasing the dividend paid by Rs 1.50 per share to Rs 7.5 per share. Of the rest, some funds were utilised in funding the two 100 per cent subsidiaries, Lakme Exports and Lakme Brands, and the joint venture with Hindustan Lever,Lakme Lever Ltd.
Besides, funds also flowed into some Tata group companies -- Tata Sons, Tata Pharma, Tata Share Registry and Rallis India -- through a mix of common equity and preference shares. But the bulk of the funds (Rs 103 crore) went into unsecured short-term finance -- where the return earned amounting to Rs 15.53 crore was strangely clubbed as part of income from operations.
Does Lakme think it is turning into an investment company? If so, will it duplicate the role played by Tata Investments (which essentially holds stakes in various Tata group companies)?
Lakme shareholders will do well to note that Tata Investment shares trade at a slight premium to their book value. If that were to be true for Lakme, then, based on its 1996-97 book value, the stock should trade at Rs 130 per share (or half its present price). It should be pertinent for the shareholders to question the management on what they intend to do with these funds before agreeing to a sale. Shareholders must impress upon themanagement the need to pay out more as there is no guarantee that it will be able to earn a decent return on capital.
As it is, Lakme has shown a flat return on capital for the last four years (around 20 per cent). And the company has not been able to meet its cost of capital after the sale of its cosmetics brands and manufacturing facilities. For 1996-97, Lakme could earn just 10 per cent return on its capital. So what is the point of retaining funds within the company. Will the shareholders not be better off receiving that amount as dividend instead?
Some press reports have indicated that Lakme might get into retailing. The basic point to ponder over is if Lakme found the going difficult in its core consumer goods businesses, why should its attempts at retailing (which will involve a large set of consumer goods with complex marketing requirements) be any more successful? After all, Lakme did not even find it worthwhile to retain its marketing network of its cosmetics business.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
