With total biscuit production estimated at around 1.2 million tonnes and a price tag of Rs 1,800 crore, Sara Lee's decision to takeover Nutrine's biscuit business makes eminent sense at first sight. However could this be another case of an over ambitious MNC being overawed by sheer figures?

The Indian bakery and confectionery industry has been dominated by the small scale sector, which accounts for more than two-thirds of total biscuit production. It has been government regulations which had rendered the organised sector uncompetitive due to the excise differential.

However all that has changed with the deregulation of the industry and the cut in excise duties from 10 per cent to 8 per cent. This has been the catalyst for the entry of MNCs like Sara Lee.

But the story does not end here. Even in the organised sector there are two companies ,Britannia and Parle, which between themselves account for almost 68 per cent of the total market share. Other players like Ampro, Kwality, Nutrine and Bakemans have a regional scale of operations.

Coming back to Sara Lee - at a time when core competence, sharper operational focus and downsizing operational streams are the buzzwords for a leaner company, Sara Lee's acquisition of Nutrine's biscuit business is quite inexplicable. Especially considering that the company's current product profile consists of varied consumer goods catering to the hair care, shoe care and household care segments.

On the other hand, Nutrine's reason for divesting the biscuit business is to generate a sharper focus in its confectionery and other businesses on a national and international scale. This also reflects the fact that Sara Lee is in reality inheriting a regional brand.

But here Sara Lee would probably argue that its can utilise its own distribution network for marketing its biscuits. While this is true, the products being acquired although an assortment have minimal brand recall due to the regionality problem. Thus Sara Lee will also have to spend extensively on creating brand awareness, positioning and recall.

These concerted marketing efforts would also have to be backed up by operating efficiency at all levels to neutralise the threat of spiralling input costs of flour, fats and oils. Thus given all these problems would it not be better for Sara Lee to stick to what it has?

TEC-MSEB - subsidy MSEB's desperation for funds is a clear reflection of its cash starved position. The electricity board is now asking Tata Electric Companies (TEC) to share its subsidy burden if it wants to go ahead with the 450 MW power project in Bhivpuri.

In other words MSEB is asking TEC to subsidise the populist political decision of pampering the agricultural sector and in turn penalising the already burdened industrial sector. The dispute relates to the licenced area. TEC wanted the industrial area of Raigarh and MSEB was willing to offer the agricultural belt of Jalgaon. Bhivpuri would not in any case have affected the demand charge which MSEB extorts from TEC and in fact would have resulted in higher demand charges as it would have been charged for Bhivpuri as well.

But MSEB realises that state will remain power starved if it pursues with its policies. Hence, a compromise is being offered. MSEB expects to clear the pending projects of both the licencees-TEC and BSES, if they share the agricultural subsidy. Neither BSES nor TEC should accept this condition. It is not a company's job to create vote-banks.

As for investments in IPPs, the financial strength of MSEB and its desperation, reflects that recovery will be one of major area that will prevent investments in the sector.

Considering these developments it is likely that installations of captive power plants will be on the rise. If the industrial clients start moving away from purchasing power from MSEB, next on the line to be asked to bear the burden of subsidising the agriculture sector will be the domestic consumers who themselves are beneficiaries of subsidy.

Exide Industries

The proposed rights issue (1:4) at Rs 100 per share of Exide Industries sends a clear exit signal to existing shareholders. The reasons are very simple - this is the second rights issue in two years. The previous one was in December 1995, at Rs 45 per share. Second, the company thought of a realistic means of financing the acquisition of Standard Batteries, a bit too late (earlier it was to be financed through debt and internal accrual).

Three, equity dilution will simply raise the cost of funds and affect Exide's valuation. Lastly, Exide has had negative cash flows for the last three years.

Probably the only reason that can be offered for equity dilution is that it will not result in cash outflow. But does it make sense for shareholders to cough up Rs 100 per share for a company which has poor cash flows?

Interestingly had Exide raised its entire fund requirement through debt, its debt:equity ratio would not have been uncomfortable at 1.9:1. This includes the recent debt issue of Rs 35 crore and is based on the assumption that the PAT in the second half will be lower than PAT in first half by 30 per cent and dividend will be maintained at Rs 3.2 per share. If one were to go by the projections for 1997-98 made in December 1995 (PAT:Rs 31.8 crore), the debt :equity ratio works out to be 1.8:1.

The company will remain a cash guzzler. This puts a question mark over the equity dilution of 48 per cent, especially when the same can be achieved through the debt route.

Emcee (with contributions by Percy Dubash and Urmik Chhaya)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.