Kinetic Engineering's (KEL) move to buy out Honda Motor's stake in the JV, Kinetic Honda, marks the second case of divorce in the scooter segment. The parting, which comes close at the heels of the LML-Singhania spat, has long been anticipated by the markets. This is clearly reflected from the southward spiral of the Kinetic Honda stock from the Rs 90 levels in June to a new fifty-two week low of Rs 42 on Tuesday. Market fears regarding Kinetic Honda's fortunes are not totally unfounded, given that Honda Motor's exit is likely to restrict its access to the Japanese major's world-class product portfolio.

The possibility of a divorce was strongly evident in the stringent terms of the JV, according to which Kinetic Honda had to compulsorily source its components from KEL. This aside, the marketing and distribution functions of the JV were also handled by the promoters of KEL, the Firodias. Probably the last nail in the coffin for the Japanese partner, was a relative stagnation insales and market shares. Despite operating for 14 long years, the market share of the JV remained at a dismal 10 per cent. Compare this to another JV floated by Honda Motors--Hero Honda, which has managed to achieve a dominant market share in the motorcycle segment.

As for KEL, the payout at Rs 45 per share amounting to Rs 34.47 crore will definitely put a drain on earnings. Besides this, the fact that KEL is already strapped for cash due to its micro-car project is already well known. Furthermore, analysts state that raising resources for the micro-car project through the debt route will only cause a drain on the company's future earnings streams.

Besides, the cash flow problems at KEL are quite apparent given the poor working capital management. On virtually stagnant sales of Rs 243.96 crore, debtors have practically doubled from Rs 31 crore to Rs 59 crore for the twelve months ended March, 1998. The average collection period for 1997-98 works out to over 100 days. More importantly the situation willhardly improve in 1998-99, with the debt repayable during the year standing at Rs 11.95 crore. To tide over the cash flow problems, the company has resorted to heavy borrowings and this re-iterates the poor discounting for its stock, which has dipped from the Rs 155 levels in April to Rs 97.

Given KEL's divided attention to the micro-car project and its financial troubles, Bajaj Auto could well emerge as the major beneficiary.

Philips India

The price wars in the color television market that Baron International had sparked off have brought it within the reach of the ordinary household. All the established Indian brands that once sold at a premium are now being offered at huge discounts with attractive consumer financing options thrown in for good measure. Some of the Korean multinational companies are selling color television sets at less than half the market average if one were to consider the freebies that go along with the purchases. However, for the consumer electronics majors, the intenseprice competition has meant lower margins and they are being forced to re-orient their strategies.

BPL has taken to aggressive advertising and brand building in an attempt to position its products as `the best'. It believes that if consumers perceive its color television sets as better products they would be willing to pay a higher price. The company has also acquired Uptron's color picture tube manufacturing facility, apparently to control the quality of key components. However, most other players have responded by attempting to bring down costs and to increase efficiency. Philips India's decision to sell its Calcutta plant to Videocon International needs to be seen in this light.

The company rightly believes that it would be better off if it left the relatively low value-adding manufacturing processes such as final assembly and testing to supplier-partners close to the marketplace. These suppliers would not only have much lower cost structures, they would also be far more flexible. By having severalsupplier-partners in different parts of the country, the company would be able to reach out to customers in the shortest possible time and with very low inventory in the pipeline. Philips India would, therefore, be able to compete effectively on the price front.

The company's focus would shift from manufacturing to the strengthening of its established brand equity, better logistics management and to improving its distribution processes. Concentration would be on higher value-adding activities and Philips India's profitability would improve as the capital employed in the business would be lower. The Calcutta facility was, anyway, hardly being put to much use and was becoming a major distraction for the management with teething industrial relations problems.

With capacity utilisation being less than 20 per cent, Philips India had already been outsourcing most of the color televisions that it sold. Under the circumstances, the facility was merely a drain on the company's monetary and managerial resources.During the year ended December, 1997, it recorded a loss only because it spent over Rs 50 crore on voluntary retirement schemes for its workers. If the company had retained the Calcutta facility, the drain on resources would have continued. On the other hand, by selling it off, Philips India has managed to generate a positive cash flow on account of this facility. The extent of the flow, off course, is yet to be known.

Usha Ispat

The proposal of Usha Ispat's management to alter the terms of conversion of its warrants is an ill-disguised gimmick. The shareholders will be worse off accepting the proposal. Though their cash outflow would remain the same, the number of shares held will be 2.5 times more. Considering the track-record of the company, the shareholders will have a tough task disposing off their holdings without substantial erosion in value.

(With contributions from Percy Dubash, Sarad Saraf and Urmik Chhaya)