Market movers turn money monsters
Slump leaves capital goods makers gasping
Ispat plans to increase Dolvi plant capacity
Motorola, Hughes to help BSNL with billing
Three FIIs cut stake in NIIT by 4.6%

Mumbai, May 19: 
Nearly a third of India’s 20 largest companies by market value are among the 10 worst wealth destroyers.

Wealth destroyers shed an awesome Rs 1,32,283 crore, while wealth creators accounted for Rs 51,292 crore of money well spent in the financial year ended March 2001. The scene is grimmer if the focus shifts to the banking industry. Of the top Indian banks ranked in terms of their assets, nine are among the 10 biggest wealth destroyers in the financial services sector.

In a presentation made to the Bombay Stock Exchange, Tejpavan Gandhok, country manager, Stern Stewart India, the Indian subsidiary of the global management consultancy firm Stern Stewart & Co, said companies should have internal systems in place to measure performance. The heart of the problem, it said, lay in poor capital allocation and utilisation.

The findings that emerged from a Stern Stewart India study only show the fast moving consumer goods companies (FMCG), pharmaceutical and infotech firms in good light. The study says leading firms in these sectors could even give global majors a run for their money.

Wealth is being destroyed despite the fact that India Inc is in the throes of a sweeping restructuring, as many firms swap old costly loans for new and cheaper ones, cut flab, improve processes and tone up supply chains.

Not everything these companies do is wrong, says A. Dwivedi of Stern Stewart. One can even argue that they could have lost more had they not invested at all. By investing, they must have pruned losses, he argued.

However, the bad news is that India’s wealth destroyers are getting worse.

Stern Stewart says almost 70 per cent of the incremental capital invested over the past five years by Indian companies was swallowed by wealth destroyers.

Zeroing in on the chinks, the study finds most firms chase wrong goals like increasing earnings per share. Inefficient use of capital and over-leveraging are some of the villains behind wealth destruction, the consultant says.

Gandhok says conventional “take-the-money-and-run” incentive systems encourage overly risky “bet-the-farm” ploys.

Instead, a well-tailored economic-value-added (EVA) system tackles such problems by factoring in the cost of debt and equity. EVA discourages over-leverage, as the cost of capital under this system is based on a prudent “target” capital structure, not the actual rate.

Stern Stewart says EVA is the financial performance measure that comes closer than any other to capturing the true economic profit of an enterprise. It is also the performance measure most directly linked to the creation of shareholder wealth over time.

Stern Stewart & Co specialises in helping clients measure and create shareholder wealth by applying tools rooted in modern financial theory. It has, in the past, advised conglomerates like Godrej apart from a few Tata group companies, such as Tata Consultancy Services.

Stern Stewart guides companies through the implementation of a complete EVA-based financial management and incentive compensation system that gives managers superior information—and superior motivation—to make decisions that will create the greatest shareholder wealth in any publicly owned or private enterprise.

Put simply, EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise.

As such, EVA is an estimate of true “economic” profit, or the amount by which earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other securities of comparable risk.

The capital charge is the most distinctive and important aspect of EVA. Under conventional accounting, most companies appear profitable, but many in fact are not.

As Peter Drucker put the matter in a Harvard Business Review article, “Until a business returns a profit that is greater than its cost of capital, it operates at a loss. Never mind that it pays taxes as if it had a genuine profit. The enterprise still returns less to the economy than it devours in resources...Until then it does not create wealth; it destroys it.”

EVA corrects this error by recognising that when managers employ capital they must pay for it, just as if it were a wage.

In other words, EVA is profit the way shareholders define it. If the shareholders expect, say, a 10 per cent return on their investment, they “make money” only to the extent that their share of after-tax operating profits exceeds 10 per cent of equity capital.

Stern Stewart developed EVA to help managers incorporate two basic principles of finance into their decision-making. The first is that the primary financial objective of any company should be to maximise the wealth of its shareholders.

More than 300 client companies world-wide now use EVA, and evidence the firm says shows that most of them significantly outperform other companies in their segments.


New Delhi, May 19: 
The capital goods industry has been badly hobbled by the economic slowdown and will continue to suffer because of negative protection, a distorted customs duty structure, shortage of funds, reduced capital expenditure and poor offtake.

Result: the sector has been battered by acute underutilisation of capacity and a declining order book position.

The worst-hit segments within the industry that have been hit by negative or low growth include air and gas compressors (2 per cent), boilers (3.5 per cent), circuit breakers (1.2 per cent), diesel engines (3 per cent), distribution transformers (-2.6 per cent), electrical cable and wires (0.4 per cent), industrial furnace (2.4 per cent), machine tools (-17 per cent), motor stampings (1.1 per cent), motor starters (-12.6 per cent), power cables (-0.4 per cent), pumps (-8 per cent), textile machinery (-27 per cent) and transmission line towers (0 per cent).

The only sectors reporting somewhat high growth rates are capacitors (19 per cent), energy meters (13.7 per cent) and transformers (16.5 per cent). Growth rates in most of these sectors are in fact now turning positive.

The outlook for the electrical machinery segment over the next six months is a moderate 5 to 10 per cent growth. The main problems reported by the sector are lack of demand because of less addition to electric power generating capacity and non-availability of funds through public and private financing.

The segment, which has received the greatest setback in terms of growth, is textile machinery. While this sector had witnessed a positive growth of 20 per cent in April-March 2000-01, it registered a negative 27 per cent growth in 2001-02, according to the CII’s latest Ascon survey for the period April-March 2001-02.

The sector also reported a lower growth in exports, from a positive 17 per cent last year to a negative growth of 8 per cent this year. The key constraints hampering growth are non-availability of matching export credit with easy repayment facilities as offered by competitors abroad.


Calcutta, May 19: 
Ispat Industries Ltd, the Rs 2,600-crore flagship of the Mittals, plans to raise the hot-rolled capacity of its Dolvi plant by 60 per cent, from 1.5 million tonnes to 2.4 million tonnes. This is the first major expansion the company will carry out following the firming up of steel demand and prices in the domestic market since the beginning of the current financial year.

The company needs to invest around Rs 200 crore — to be raised mostly from internal accruals — in an expansion that will be completed by December this year. Ispat, which has been reeling under severe losses due to depressed market conditions and heavy burden on account of interest charges and depreciation, is set to bounce back into the black during the current financial year, sources said.

“World wide, the steel market had been under pressure for the last few years, sending several companies into a tailspin. This year, the market looks a little better and if it stays this way, we will certainly be back in profit,” they added.

Flat product prices, particularly the hot-rolled products, have increased in the range of Rs 2,000-3,000 per tonne since April. If this jump is taken into account, Ispat’s income will be boosted by more than Rs 400 crore. Hence, funding the expansion programme from internal resources is not going to be a tough proposition, provided steel prices stay at current levels.

The Mittals are also planning to set up a sinter plant and a coal processing plant in Ispat Metallics which has a capacity of two million tonnes of hot metal.

The total investment for this project will be around Rs 170 crore which will be funded primarily through debt.

Sources said these two new plants will increase Ispat Metallics’ production substantially in order to take care of the demand at the hot rolled plant in Dolvi. The price increase also helped the company’s sponge iron manufacturing facility to post handsome earnings this year. “On an average, prices of sponge iron have increased by Rs 1,500 per tonne. So the company is going to have an additional income of Rs 150 crore if the price continues to rule in the current level,” sources said.

With the increase in HR capacity, the company’s cold-rolled capacity is also going to increase from three lakh tonne to 3.8 lakh tonne. Sources, while refusing to divulge what kind of profitability the company is look at, said Ispat has set a target to attain a turnover of Rs 3,000 crore during the current fiscal year.


New Delhi, May 19: 
Hughes Software Systems (HSS) and Motorola are joining hands to deploy billing mediation solutions and service activation system for Bharat Sanchar Nigam Ltd (BSNL).

HSS, a global provider of communications software, and Motorola, a manufacturer of integrated communications solutions and embedded electronic solutions, today announced their partnership for Hughes’ product mediation and service activation system. The solution will be used in BSNL’s south zone network being set up by Motorola. This is the first time Hughes has partnered with a leading vendor such as Motorola to implement its ready-to-deploy billing mediation solutions.

The HSS mediation solution comprises a billing mediation system that collects, processes and dispatches data records, and the service provisioning platform, which performs near real-time service provisioning on integrated networks.

“BSNL, as part of their network contract awarded to Motorola, required it to set up an end-to-end network which also included billing solutions. Motorola chose to partner with Hughes Software Systems for its mediation and service activation domain expertise and leadership in this space,” said Pramod Saxena, country head, Motorola India.


Calcutta, May 19: 
Three foreign funds belonging to the Prudential stable have reduced their holding in NIIT Ltd by 4.6 per cent in April. The three funds had a combined holding of 5.67 per cent in the software education major at the end of April.

The three were bullish on NIIT and had amassed a stake of 9.31 per cent in the company. Nick Scott, chief investment officer of Prudential Portfolio Managers Asia, which manages the three funds, reported the sale to the company. NIIT, in turn, informed the bourses.

A number of foreign institutions have invested in NIIT. The total overseas institutional holding in the company as on March 31 was 33.59 per cent. Among the leading foreign investors in the company are Chrysalis Capital, UBS Warburg and Oppenheimer Funds.

Chrysalis Capital trades on the Indian bourses through Kotak Mahindra. It holds a shade under 5 per cent in the company, while UBS Warburg holds 1.93 per cent and Oppenheimer Funds 3.83 per cent.

The total FII holding in NIIT has fallen marginally during the last financial year, while the promoters increased their stake by over 3 per cent to 38.45 per cent. Unit Trust of India, however, has reduced their holding in the company by 6 per cent to 4.08 per cent.


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