The Compass
The acquisition of a majority stake in Goodlass Nerolac by Kansai is a positive development as the parent company is one of the leading automotive paint manufacturers in the world. In the medium term, the stake-hike is unlikely to affect the company.
Kansai already had a 36 per cent stake in the company and also has a technical collaboration with Goodlass Nerolac. One analyst is of the opinion that Kansai may meet some of its regional requirements from Goodlass in the long-term.
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The increase in commitment will strengthen Goodlass' dominance in the industrial, especially automotive paints, segment. Goodlass has an early lead in this market, has long-term original equipment manufacturer (OEM) tie-ups and is capable of offering a complete range of automotive paint solutions.
The paints industry's growth depends on the resurgence in the housing and automobile sectors. According to Crisil RatingScan, December 1998, the sector is expected to grow at a moderate rate with the industrial paints sector growing at a faster rate compared with the architectural (housing) paints segment. Automobiles, especially passenger cars, have already shown a smart recovery in sales.
Performance in the current year can thus be expected to be steady. However, Goodlass needs to improve its performance on the working capital management front.
And lower margins could be a result of the commissioning of the Lote Parashuram plant in April 1998 which also saw its inventories and debtors increase. In this context, Kansai also needs to debate whether it is needed for the company's investments of around Rs 36 crore continue or to lower its debt of Rs 73.35 crore to whatever extent possible.
IFB Industries
IFB Industries has decided to quit non-core businesses but this itself may not suffice to achieve a turnaround in performance. A more aggressive restructuring of its business coupled with a financial recasting to lower its interest burden is required. Its non-core businesses are chiefly tea and trading, where contribution of tea is relatively small though a profitable business.
The trading business is a significant contributor to the top-line but has low operating profit margins and is also working capital intensive. If IFB sells its tea business, the cash inflow is unlikely to be significant to dent its debt burden of Rs 320 crore. The move will, however, lead to sharper business focus, better margins and lower working capital requirements.
Restructuring its huge debt burden will be crucial to its future performance. If financial institutions approve a recast plan, they may probably ask the promoters to bring in fresh equity to strengthen the balancesheet. To what extent its interest burden is lowered will influence the bottomline growth.
This can be seen from its calendar 1998 performance when it incurred a net loss of Rs 53.9 crore and interest burden alone accounted for Rs 49.75 crore.
In the quarter ended June 1999 the trend continues, though operational performance seems to have improved as visible in the two percentage point improvement in margin to 9.19 per cent. It incurred a net loss of Rs 14.08 crore and interest paid was Rs 14.36 crore.
IFB's two main businesses are automobile components which contributes to around 40 per cent and its home appliances section which