Termed as a `merger of equals', Swiss multinationals Ciba Specialty Chemicals and Clariant AG announced the creation of the world's largest specialty chemicals company with combined global sales of $13.2 billion. Shares of both the companies have increased in all the markets where the two companies are traded. India was no exception, with both the scrips touching the ceiling on Monday.

On paper, the merger makes a lot of sense, with a range of complimentary products in pigments, additives, polymers, etc. The most important point in the merger is that, for Clariant, there will be one competitor (and perhaps the most competitive) less in the market. Apart from the 600 million franc savings at the pre-tax level, the company will benefit from the combined R&D effort, which is one of the best in specialty chemicals in the world.

However, in the Indian context, the merger will be not as easy as that of Sandoz and Hindustan Ciba-Geigy. It may be noted that Clariant is thedemerged specialty chemicals entity of the former Sandoz group. Ciba Specialty Chemicals (India) was formed as a part of the international demerger of the specialty chemicals business from Ciba-Geigy Ltd, Switzerland.

Problems that could arise for the merger between Clariant and Ciba Specialty are somewhat similar to that between Clariant and Colour-Chem. Apart from the fact that Sebi has asked Clariant International to make an open offer for acquiring 51.1 per cent of Colour-Chem's equity in India, there is a problem arising from the transfer of the textile dyes division to Dystar (a joint venture between Hoechst and Bayer). Colour-Chem had entered into a non-competing clause with Dystar as far as textile dyes are concerned. As Clariant has a substantial portion of its turnover coming from the textile division, it is reluctant to merge.

Similarly, Ciba Specialty has entered into a non-competing clause arrangement with Indian Dyestuff Industries (IDI) through a joint-venture company Indo Swiss TextileChemicals Ltd.

In other words, the textile division of the two companies is, thus, likely to prevent Clariant from merging with Ciba Specialty and Colour-Chem. Though the merger makes sense, the joint-venture arrangements are preventing Clariant's Indian arm from becoming a Rs 850-crore company. Thus, for Indian shareholders, the waiting period for the merger between Clariant and Ciba Specialty is likely to be long drawn-out, as has been the case between Clariant and Colour-Chem. While the merger plans per se offer no special reasons to buy the stocks of these companies in India, all the companies involved are doing well, and investors would, therefore, do well to stay invested.

Hotel Leelaventure:

Icra recently placed the Rs 130-crore NCD issue and the Rs 49.1-crore fixed- deposit programme of Hotel Leelaventure under ratings watch largely because of the uncertainties that had cropped up with regard to loans from banks and FIs for funding its five-star hotel projects in Mumbai, Bangalore,Udaipur and Goa. Icra must be lauded for this measure, as any delay in disbursements would not only affect the company's cash flow, but also cause cost overruns. Further justifying the rating watch is the fact that the hotel industry as a whole is in the throes of a recession.

The half-yearly performance of Hotel Leelaventure has failed to inspire. Net profit for the six-month period has dipped 18.12 per cent to Rs 16.40 crore. This clearly reflects the problems of operating a single property in Mumbai. The completion of renovations and refurbishment at its Goa property at the fag end of the second quarter and the consequent charge on the P&L account have affected the company's performance.

The company's high debt gearing (reflected in the debt-equity ratio of 1.98 for the year ended March 1998), has resulted in an increased interest burden. Interest costs have risen 85.45 per cent to Rs 3.95 crore for the half-year ended September 1998, thanks largely to a charge of Rs 2.17 crore in the second quarter.Similarly, the commissioning of the Goa facility has also resulted in a higher depreciation charge of Rs 2.11 crore in the second quarter. All this has eroded Leela's bottomline, which has dipped from Rs 20.03 crore last year to Rs 16.40 crore.

Sales have dropped 2.72 per cent to Rs 52.50 crore for the half-year ended September 1998. This is in stark contrast to the 2.76 per cent jump in hospitality sales registered by EIH for the same period. This is where the company's problem of being a single property hotel with lower room availability stood exposed. However, the Leela has managed to keep occupancy levels at around 70 per cent, which, although not as good as yesteryears, is still the highest in the industry for the lean season. More importantly, the revenue per available room at Rs 5,066 is also the highest in the industry.

But while occupancy levels were maintained, the task of managing costs proved to be more difficult. This, together with increased power costs and employee payrolls, has squeezedmargins. Operating margins in the second quarter have thinned from 51.17 per cent to 42 per cent.

For the future, the commencement of operations at the Goa property should buoy revenues. The charge to P&L could offset earnings growth in the interim. Hotel Leelaventure has also lined up investments, which include projects in cities like Udaipur and Bangalore, but given the company's high debt gearing, taking the debt route would be unadvisable. Some of these projects are still in the drawing-board phase, and consequently, revenue accruals are still a distant dream. Lastly, with the sluggish trend of lower occupancy levels and stagnant ARR's slated to continue, any revival for Leelaventure currently seems distant.

With contributions from Shishir Asthana and Percy Dubash