The recent steps taken by the Godrej group to restructure two of its group companies will go a long way towards improving shareholder value. Both Godrej Soaps and Godrej Foods, have undertaken a restructuring attempt, whereby the health of their respective balance sheets will improve. The restructuring involves asset transfer and reduction of cross holdings, aimed at improving cashflows and reducing debt. The management has proposed that Godrej Foods (a loss-making company) will transfer its 29 per cent shareholding in Godrej Pillsbury to Godrej & Boyce, a privately held company of the Godrej family. In return, it gets a cash infusion of Rs 31 crore. In the case of Godrej Soaps, a portion of that company's shareholding; 22.5 per cent out of the 48 per cent it holds in Godrej Sara Lee will be offloaded to Godrej & Boyce. This will result in an inflow of Rs 99 crore to Godrej Soaps. This fund inflow will go a long way to improving the fortunes of both companies. In Godrej Foods case, the borrowings outnumbersthe net worth by a factor of nearly 8:1. Out of the total borrowings, a large chunk consists of short- term unsecured loans. The fund inflow will reduce this debt burden. Godrej Soaps also has a lopsided capital structure which is loaded in favour of debt. The company pays out almost 80 per cent of its operating profit as interest cost. Along with the Rs 99 crore inflow, Godrej Soaps has extended an ICD of Rs 35 crore to GFL, which will also be returned. In addition, it continues to hold a 25.5 per cent stake in Godrej Sara Lee, valued at over Rs 100 crore, besides other substantial investments.The very fact that the management has embarked on this restructuring venture has gladdened the stock market. The improvement in these stocks' valuations is as much an appreciation of this fact, as is the impending improvement in the financial state of these companies. The Godrej Soaps stock has increased by 20 per cent and the Godrej Foods stock has increased by 25-30 per cent in the aftermath of theseannouncements.
Steel Tubes of India
Three years of a slowdown and a near loss in the last financial year has finally prompted a business restructuring attempt at Steel Tubes of India. The company has entered into an alliance with group company Tube Investments of India to execute job work contracts. The collaboration has been structured where TII will supply the raw materials and STI will convert these into precision-welded steel tubes, at a pre-determined rate. This exercise is designed to increase the capacity utilisation at STI as well as improve the cash flows.
For the last couple of years, STI has been surviving with liberal doses of borrowings to keep the cash flowing. It has been unable to generate free cash flow from its operations. The debt equity presently stands at 2.75:1, making the entire operation very precarious.
The company makes speciality steel tubes for the automobile sector. But for the last couple of years, it is the two-wheeler segment that has been keeping the companyafloat. Now, with the recovery in the passenger car segment, there is hope for a better performance in the current year.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.