Hurling a spanner

BS Compass

A recent report by the Department of Company Affairs, if implemented, could put serious obstacles in the way of mergers, acquisitions and other corporate restructuring exercises.

The DCA had appointed an expert group for recommending valuation guidelines in the context of corporate assets and shares, and the thrust of the group's report is that corporates need to appoint an independent third party valuer for evaluating the worth of the corporate assets in corporate M&A and restructuring exercises.

The report has specified the entities to whom these valuation norms will be made applicable""-it covers all listed companies, most unlisted companies accepting public deposits, private companies which do not fall into the other two categories and so on. It also talks about two or more valuers being appointed for each such transaction.

The point is - what would it do for the M&A scene in India? The valuation might not be acceptable to the parties concerned, in which case the entire exercise would have been a waste of time.

While there have been numerous instances of shareholders not being satisfied with the share values in such restructuring exercises, the appointment of valuers might not set out to achieve what is intended by the DCA.

First of all there is no guarantee that the independent valuers' pricing will be acceptable to the minority shareholders. The report has also set out a uniform standard according to which the valuation would have to be done.

At present no corporate law provides for any provisions governing valuations - prices are now determined by an informal due diligence which is performed by the corporates themselves and a price is agreed upon after negotiations between the buyer and seller.

And when the buyer and seller are in agreement, what is the need for a third party valuation? Besides, it's well known that valuations are more an art than a science, and they vary widely according to market conditions and the eye of the beholder.

What's value to one may not be value to others""-that's what makes a market. This attempt to straitjacket value into an accountant's definition is bound to fail.

The whole problem has arisen out of the now abandoned demerger scheme of Sterlite Industries where the small investors cried foul over the buy-back price. At that time the small investors along with Sebi had dragged the company to court.

Incidentally, buy-backs are also to be valued by the independent valuers. Under Sebi regulations buy-backs are to be done by a reverse book-building method where market forces would determine the ultimate price. The appointment of a valuer would make a mockery of that objective.

Asahi Glass

The impact of the surge in car and commercial vehicle sales has been seen in the stock prices and performance of the various auto component manufacturing companies.

A lesser tracked ancillary company that has also benefited from the auto sector growth is Asahi Glass, which caters to the glass requirements of auto companies.

But the real benefit has come after its merger with its subsidiary""Floatglass India"" in January 2003. As a result, the major portion of revenue is now being generated by the floatglass business.

On the automotive side, Asahi Glass is the preferred OEM supplier to most of the car manufacturers. Further, the high growth in sales leads to an increase in after market (replacement) demand for glass.

Additionally, the quality of cars has been improving leading to use of higher quality and therefore higher margin glass.

With the construction sector witnessing high growth, the floatglass business will be a significant earnings driver. While business volumes are expanding, floatglass prices have also appreciated around 12 per cent since FY03.

The merger with Floatglass India has also given the company a tax benefit in the form of carry-forward losses. This was due to the fact that floatglass prices have been low due to the low growth in construction industry.

Being a capital intensive business, fixed costs are high and hence in times of low demand, the losses are magnified. Floatglass business has also received an impetus with the government increasing anti-dumping duties on imports of floatglass from China will help improve realisations.

The risk to performance arises mainly from additional capacity. Being a capital intensive business, manufacturers may be forced to maintain production to cover fixed costs, which will lead to weak prices. But gestation periods are long in the business and there are no immediate capacity additions expected.

With contributions by Janaki Krishnan and Mobis Philipose