India inc.'s rope trick

Koushik Chatterjee remembers it like it was yesterday. Tata Steel was just coming to grips with its biggest overseas acquisition - and the country's largest - when the recession hit the West late in 2008. It was clear to the Indian steelmaker that it had to do more with less if it did not want its $12.9 billion, or Rs 52,000 crore then, buyout of Corus Group to be written off as a failure. It didn't help that it had paid one-third more than its first offer for the asset to stave off counter offers for Corus from Brazilian steelmaker CSN.

It was also clear that a performance improvement plan that targeted savings of 150 million, or Rs 1,230 crore, a year would not save the day for Corus and Tata Steel, recalls Chatterjee, who then headed the finance function for the Indian operations and today is the Group CFO for Tata Steel. "The (cost-cutting) targets were increasing on a week-to-week basis," he says. It takes many factors to reach a tipping point and Corus set to work on reducing energy costs and overheads such as travel and overtime.

It brought back jobs in-house from contractors and worked on supply terms. By end-March 2009, the numbers were there for all to see: Corus had trimmed total costs by 700 million, or about a sixth. That was only the first step. Starting April 2009, Tata Steel started recasting Corus's steelmaking schedules, pushing production of different products to factories where it cost less, trimming staff and realigning its sales people to be better attuned to customer needs (the salesforce was earlier organised by product categories, not by customers).

The work is paying off: Corus has returned to profitability in the last nine months and repaid debt of some $1 billion. And Tata Steel is no longer worrying over its own $3.5 billion expansion in India.

Tata Steel is not the contrarian among the ambitious acquirers of India Inc. Most of the big overseas buyouts (see Big Shopper India) made by some of India's largest companies just before the Western world slipped into recession seem to have turned the corner.

"Most of the large outbound acquisitions made by Indian companies have given significant advantages in terms of size, scale, global reach, leadership position and better profile to the acquirers," says Sanjay Bansal, Managing Director, Ambit Corporate Finance, a Mumbaibased investment bank. "Most of them have moved up from a leading position in domestic markets to a leading position globally."

Novelis, which the Aditya Birla Group bought in February 2007 for $6 billion, seems to have rebounded so well that the Atlanta, United Statesbased manufacturer of rolled aluminium products plans to expand capacity. Its performance today reflects on the stock of Hindalco Industries, the Indian group's aluminium company.

From around Rs 38 each in late February 2009, Hindalco shares have grown four times to around Rs 163 - outpacing the BSE Sensex two times in the period. Hindalco reported record operating profits of $263 million in the quarter ended June 2010, and it has reserves of over $1 billion.

Not Just Commodities
If the turnaround of Hindalco-Novelis and Tata Steel-Corus can be attributed in part to the uptrend in commodity prices - aluminium prices are up over two-thirds since February 2009 and steel about 25 per cent since July 2009 - there is the example of United Spirits Ltd or USL, controlled by Vijay Mallya.

USL's $1.2 billion acquisition of Whyte & Mackay made it the second-largest liquor company in the world by volume sales, as it took ownership of brands such as The Dalmore, Isle of Jura, Whyte & Mackay blended scotch, Vladivar and Glayva liqueur. "We got a basket of scotch brands catering to markets such as the US, Europe and the Middle East," says Vijay Rekhi, USL's President and MD. The acquisition also brought it an inventory of bulk scotch - some 96 million litres aged between three and 60 years - valued at 411 million today.

Finances at the United Breweries Group, with group asset Kingfisher Airlines bleeding cash and carrying debt of $2 billion, may still be under a cloud. But Whyte & Mackay, experts agree, has been a rock-solid buy. "For United Spirits, it would have been impossible to build such a huge inventory in such a short time span," says Harish H.V., Partner, National Management, at consultancy Grant Thornton India.

Tata Motors, which bought the Jaguar and Land Rover (JLR) assets from the Ford Motor Company six months before the recession hit the US, has also reported promising numbers. Cost reduction measures begun in June 2008 and accelerated in September 2009, together with a 58 per cent increase in sales of JLR vehicles in the last three months has powered the consolidated net profit in the April-June 2010 quarter to Rs 1,989 crore, nearly double analysts' estimates.

The consolidated figure includes Tata Motors and JLR. The automaker's stock is at a 20-year high. Elsewhere, Imperial Energy has returned to the black after two years of cash losses, making the UK-listed oil explorer less of a heartburn for acquirer ONGC Videsh, the overseas arm of Oil and Natural Gas Corp.

The initial months of the acquisition were jittery. Just four months into the acquisition, in December 2008, the entire economics of the $2.1-billion deal had changed, with crude oil prices falling below $50 a barrel from $120 in July that year when the bid was made. Returns on investment sank to between three and four per cent from 12.6 per cent.

"Although Imperial had proven and probable reserves of around 920 million barrels of oil equivalent, we cautiously decided to restudy all the 17 fields again and spread our investment over a longer period," says R.S. Butola, ONGC Videsh's Managing Director. Imperial today produces around 16,500 barrels per day (bpd), more than three times the 5,000 bpd it produced at the time of acquisition.

The company, which had recorded cash losses of $40 million in 2007 and $100 million in 2008, posted cash profits of $9 million for the yearended March 2010. It is now targeting an output of 25,000 bpd - expected to generate profits of around $30 million by March 2011. This is small change for ONGC, which reported net profits of $3.63 billion in the fiscal year gone by, but is an important overseas milestone nevertheless.

Then there is Wipro, the tech and back office outsourcer ranked third among its Indian peers by revenues. It had been managing information technology, or IT, infrastructure services for its clients in the US, Europe and Japan but hardly found itself on preferredvendor lists when it came to IT managed services. "Customers were not very comfortable due to lack of end-to-end solutions," says K.R. Lakshminarayana, Wipro's Chief Strategy Officer.

The solution was the $600 million purchase of Infocrossing, which has helped Wipro register a 9.3 per cent growth in the IT infrastructure business in 2009-10 at a time when its overall revenues grew just 1.6 per cent. Infocrossing has been contributing to big deal wins, such as the healthcare programme run by the state of Missouri in the US. The average contract value for Infocrossing deals - ranging from $30 million to $400 million - is more than three times its previous contract sizes, says Lakshminarayana.

Odd One Out
There is, to be sure, the instance of an Indian company that has not been able to turn around its overseas acquisition yet: Essar Steel-Algoma. When it bought Canada's Algoma for $1.63 billion in April 2007 to add width to its flats-dominated product portfolio, steel demand was red hot, prompting Essar to raise production capacity to over 4 million tonnes from 2.4 million tonnes, all within a year.

But the downturn soon struck. "The prices of steel went down 50 per cent from $1,000 a tonne in 2007-08 to $500 in 2008-09," says Malay Mukherjee, who took over as Essar Steel's CEO in September 2009. Starting fourth quarter of financial year 2008-2009, sales and profits of Essar Steel Algoma have been on a slippery slope. For 2009-10, sales were at $1.41 billion, down $1.14 billion on the figure for the previous financial year, and net losses at $398.9 million attributed to lower shipments and weak selling prices.

"In the past six months, steel prices have picked up slowly. They have now reached $650 per tonne levels. However, demand has not shown any major improvement yet mainly due to uncertainty in the global markets on account of the eurozone crisis," says Mukherjee. The Algoma acquisition was funded through $1.2 billion of debt, of which Essar Steel has repaid $400 million.

While Essar may not have trouble repaying the remaining debt, the big worry, say industry experts, is going to be refinancing some of the loans taken to finance the acquisitions. "In 2007-08, financing was not a big issue for companies with a debt equity ratio as high as 10:1. Today, companies even with debt equity ratio of 2:1 need to back their financing with more collateral," says Harish, the Grant Thornton partner.

With worries around a eurozone crisis and double-dip recession looming large, debt refinancing could be a hurdle for the Indian acquirers. But for now, the buyout brigade from India seems to have made it. In good shape.