News reports indicate that ABB is planning to demerge its power division, in line with the group's restructuring worldwide. Internationally, the business is being reorganised into five segments of power generation, transmission, distribution, automation and product & contracting.

The power division, that is expected to be hived off, contributes around 20 per cent to ABB's turnover. The division is responsible for turnkey projects in the power sector and its performance has been adversely affected due to bureaucratic hurdles. Though on paper the division has enviable orders from the power sector, most of them are awaiting clearances from the government.

Recently, there has been some good news for the company as the MP High court has given a verdict upholding the validity of the escrow cover granted to four IPPs by the state government and the SEB. The four projects are Daewoo Power (2*535 MW), Pench Power (500MW), Maheshwar Hydel (400 MW) and Bina Power. The EPC contractor for the first threeprojects is ABB. But, there is a strong possibility that the High Court's verdict will be challenged in the Supreme Court.

These projects do not figure in its order books as they have not achieved financial closure. ABB has more than a fair share of projects pending execution. To give just two examples - Korba in MP (2*535 MW) and the Videocon-ABB project in TN (1050 MW) where ABB also has an R&M contract. A 200 MW naphtha based project to be excuted for KPC-Bidadi Corporation is also in trouble because though ABB has bagged the contract, it was reported to be the third highest bidder.

In all probability when these orders will be cleared the division would have been transferred. This raises the problem of valuing the power division.

As the company has not yet shown these orders in its order book, the effect will not be shown in the valuation. Power projects though are bid on a tender basis, have a lot of hidden benefits, which are happily exploited by all companies. Margins in these projects are veryhigh. By the demerger, existing shareholders will be deprived of the long term benefits of the division, but could benefit from a one time huge cash inflow. But if the result of the demerger is a subsidiary then the shareholders will be worse off, unless there is a corresponding reduction in ABB's outstanding equity.

There is probability that Alstom India will pick up a stake in the new company. It has to be seen whether, ABB's management will (as in the case of Procter & Gamble and Glaxo pass on the full benefits) to the shareholders. Past records show that the company had not passed on the entire benefit of the sale of its transportation subsidiary.

Essar Steel

According to reports, Essar Steel is proposing a Rs 200 crore rights issue along with a rollover of the FRNs for three months to ensure that it does not default on external repayments. The management proposes to utilise the funds raised through the issue to bridge the shortfall in funds required to redeem the $250 million FRN bonds.According to reports, the company has so far managed to sign agreements to get Rs 302 crore through the sale of its stake in Essar Power, Rs 180 crore from sale of stake in Essar Minerals and Rs 200 crore is being brought in by the promoters themselves. This leaves a shortfall of Rs 393 crore and hence the rights issue may be insufficient to bridge the gap.

The company has been facing difficult times and if steel prices do not go up substantially, it would be next to impossible for company to come out of the red. Its losses would have to recapitalised and the management may in fact be already be readying themselves for such an eventuality. The ordinary shareholder has nothing to gain by subscribing to this issue. The probable outcome of this issue could be the promoter bringing in funds through rights renounciation. In all probability the issue is being made with this sole intent of availing of bridge funds from the FIs on the assurance of a subsequent funds inflow.

BGFL

From a low of Rs 11.50 onFebruary 09 to Rs 27 on June 30, the Birla Global Finance (BGFL) scrip has more than doubled in a matter of 5 months. Reports that the partnership with Sun Life has brought Rs 130 crore into the company saw the scrip flare to a high of Rs 38.40 on June 04. Since then, it has fallen about 25 per cent and has stabilised at around Rs 26-27. One may be tempted to write-off the flare-up as a one-time phenomenon resulting from the huge cash flow. However, there are indications that the price rise may be sustained on the back of the bright future prospects of the company.

BGFL is one of the few financial services companies that has managed to grow during the last three years. Though profitability has been under pressure, sales grew from Rs 66.05 crore in the year ending September 1996 to Rs 92.23 crore in 1996-97.

Sales growth has been slower in 1997-98 when the company generated revenues of Rs 94.50 crore but the fact that there has been a poitive growth in itself is encouraging. BGFL is the holding company forthe Aditya Birla group's mutual fund activities, the stock broking arm and the distribution company which markets financial products. Its retail finance division will also be spun off into a separate entity held by it. The company is in the process of identifying a partner for the retail finance business and once this is done, additional cash inflows are likely. Besides, the management may decide to allot equity in BGFL to a strategic partner and this too would lead to sizable inflows.

The company has retreated strategically from the car finance market which it feels is fraught with too much risk and offers very low returns. It has instead begun to concentrate on other financial needs of high net worth individuals. One innovative product that has been generating good business for the company is loans to apply for primary issues.

BGFL is fast positioning itself as a one-stop centre for all the financial needs of high net worth individuals. It has been going to the extent of organising loans for its clientsfrom the bankers of their choice. Says its managing director SK Mitra, "The idea is to acquire as many good clients as possible. Once we have a sizable base of good clients, profits will come." Considering that the profitability of fund-based activities depends to a large extent on the ability of the financier to keep its bad debts at low levels, the strategy will pay off in the long run.

The performance of the securities arm which was earlier a joint venture with Marlin Securites was affected by the changes in the ownership pattern of the foreign partner. However, it has begun to perform well after the partnership with Marlin was called off. The asset management company has been doing extremely well and is now in a position to declare dividends. However, in the current year, both sales and profits could be lower than the previous year. One factor contributing to this would be the fact that the retail distribution divsion has now become a separate entity and as such revenues from this activity will nolonger show on BGFL's books directly. But that would merely be a cosmetic change. With the company preparing to enter insurance and banking as well, an investment in BGFL would ensure a share in a diverse range of financial services.

Emcee (with contributions from Manish Saxena & Sarad Saraf)