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Boardroom Coup

Promoter ousted as lenders seek a management change.

What went wrong suddenly at Kolkata-based specialty steel and wire rope manufacturer Usha Martin Ltd ( Bankers, on April 25, took the call to remove chairman emeritus B.K. Jhawar and his son Prashant, the non-executive chairman, from their roles for alleged mismanagement of the company. Ironically, that happened even before the company had defaulted. Prashant was replaced by G.N. Bajpai, former chairman of Life Insurance Corporation of India and the Securities and Exchange Board of India.

The allegation against the Jhawars is that they brought in a proposal for hiving off the wire rope business at a lower valuation of Rs1,350 crore while investment banks were of the opinion that it would fetch Rs2,000-2,500 crore. In addition, Prashant objected to the appointment of investment banker for sale of the wire rope business and refused to pledge his 13 per cent shares against future borrowings, say bankers close to the development.

From an operation point of view, UML generated net sales of around Rs4,200 crore in 2015/16 (down 9 per cent compared to previous year) and earnings before interest, depreciation and tax of Rs390 crore (down 48 per cent), fighting low demand and dropping margins.


The company can sail on if it generates positive EBIDTA. But the serious issue with UML is the sizeable debt and financing charges. The financial liabilities stood at Rs5,085 crore - a balance sheet debt of Rs 3,742 crore and letter of credit (LC) acceptances of Rs1,343 crore - as on December 31, 2016. The company had paid over Rs400 crore as financing charges through additional borrowings in the first nine months of the last financial year. The bank loans have not turned sticky yet, but are facing stress due to years of losses.

In the financial year 2015/16, the company had losses of Rs415 crore, a 64 per cent increase over Rs253 crore in 2014/15. The curious part is that UML makes losses despite having captive iron ore mine of one million tonne.

"According to rough estimates, the steel plant uses 650,000 tonne of iron ore, valued at Rs10,000 a tonne, and it should add Rs650 crore to EBIDTA. Surprisingly, the company is underperforming even with captive raw materials," say sources close to the promoters.

While the wire ropes business is doing well, margins are under continuous pressure. The demand has been weighed down by a collapse in project lead demand during the year in the oil sector and a slowdown in mining activity globally. In the oil sector alone, projects worth $270 million were either cancelled or deferred in the financial year 2015/16 as the price of oil continued to fall. UML has increased focus on areas such as elevators and cranes to offset the falling demand in the oil industry. However, that is not enough to counter the lower demand globally for wire ropes.

Now the question is how the banks can save the company through the removal of father-son duo. Do they have a proper revival plan? Or has it been done only to recover their payments and costs, leaving the rest to the fate?

The Jhawar brothers - Basant and Brij - jointly founded the business in 1960. They diversified into telecom and set up Usha Martin Telekom in collaboration with Telekom Malaysia in the mid-1990s to provide mobile telecom services in West Bengal. Just as the Indian telecom sector was beginning to grow, the Jhawars exited the telecom business in 2000 after selling their stake to Hong Kong's Hutchison. Many believe that the Jhawars would have got a much better deal if they had decided to stick on longer in telecom. In the same year Prashant moved to London and acquired the European wire rope business. After the retirement of professional Joint Managing Director P. Bhattacharya, the company fell on bad times.

It is true that the Jhawars are not involved in the day-to-day operations of the company. Prashant is settled in London and not part of the executive decisions of UML. In this context, how did he mismanage the company? His cousin Rajeev Jhawar is the Managing Director, but the cousins have differences in running the business. Sources say there could be family feuds behind the removal. The promoters - the Jhawar cousins - and the promoter groups between them have a 51.28 per cent stake in the company.

Prashant Jhawar issued a statement saying that he was "improperly removed" as the chairman and that the board meeting was held "without compliance with applicable corporate governance and secretarial standards".

Earlier, Prashant informed the board about a Rs1,350 crore proposal from private equity firm Apollo for buying the wire ropes business. But the State Bank of India and other banks valued the business at Rs2,500 crore. Now it is the turn of the bankers to find a buyer for the business without compromising the valuation. Besides, they will have to turn around the steel business. The bankers made a tough move even before the company defaulted. Now it is their responsibility to ensure that the loan does not turn into a non-performing asset (NPA).

@nevinjl

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