ITC's decision to acquire a 51 per cent stake in Rollatainers comes as no surprise as the company has been exploring growth opportunities in the packaging & printing business. It already enjoys a leadership position in cigarette and liquor packaging and has been trying to tap opportunities in the growing foods & personal care product industries.

Taking a majority stake in Rollatainers, which serves the needs of dairy products major Amul and processed foods & personal care products giant Hindustan Lever, would enable ITC to significantly increase its presence in the foods & personal product segment. A number of business houses, including ITC and Hindustan Lever, have been planning to set up a network of food & personal product retail shops across the country. Any thrust on retailing entails a significant expenditure on product packaging and therefore, the food & personal products segment promises very high volumes. That perhaps explains ITC's strong desire to target this segment ofthe market. Being numero-uno in the cigarettes and liquor segments, it can ill-afford to let a promising opportunity go by. The question that arises is, if Rollatainers was really addressing such a promising market, why would its promoters agree to let an outsider take a majority stake.

Rollatainers is a small company when compared with ITC. It is in fact, even smaller than the packaging & printing division of ITC. While ITC has an installed capacity of around 30,000 tonnes per annum, Rollatainers produces barely 20,000 tonnes. It is true that Rollatainers is at an advantage as far as the food and personal products segment is concerned because it has been specifically addressing the segment. However, for future growth, a strategic partnership with a larger and more resourceful player would be essential.

The Bhargavas perhaps realised that ITC is better placed to pump in the necessary resources for future growth and that they would be better off as minority shareholders in an ITC group company than ontheir own.

Raymond Synthetics The only thing interesting in Raymond Synthetics is whether it will be merged with its parent Raymonds or will the company be taken over by Reliance Industries. In any case it is very clear that Raymond Synthetics will have difficulty surviving on its own. Everyone except the company's banker thinks so. News reports say that the public sector banks have opposed the move by Singhanias to sell the company to Reliance on the ground that the prospective buyer may negotiate for lower interest rates and other concessions on Raymond Synthetics loans if the sale materialises. The banks seem to be more concerned about a minor cut in interest rates and not bothered at all about the prospective loss of the funds lent.

With the increase in polyester prices, bankers feel that the company will be able to show better operating profits and if the current situation continues it would be possible for the company to wipe out its losses. However, in spite of higher demand and prices, the companyhas performed poorly during the first quarter of the current fiscal. Losses of the company during the period increased from Rs 7.56 crore to Rs 8.22 crore in the current fiscal.

Among the problem of Raymond Synthetics is its location and high cost of loan. Raymond Synthetics polyester filament yarn plant is located in Allahabad, Uttar Pradesh and has an installed capacity of 66000 tpa. The location of the plant is a disadvantage as the PFY markets are in Surat and Silvassa. The higher transportation cost increases the cost of production.

In contrast, market leader Reliance has its plant in Surat. The PFY industry in the country is already overcrowded with 32 players, among which Raymond Synthetic is the third largest. However, its plant is well below the minimum economic size of 100,000 tonnes. Another problem for the plant is that it is not integrated, with the reduction in import duty and opening up of the economy, the company will have trouble marketing its product.

As far as the domestic marketis concerned, the current market size of PFY is around 700,000 tonnes, which was expected to increase to to 850,000 tonnes in the next two years. However, this projection does not take into account the growth in usage of cotton. In past PFY growth has been mainly on account of substitution of cotton. However, with the permission of imports of cotton under OGL, prices of cotton have fallen. The slide has been temporarily halted due to poor rainfall in Gujarat in the earlier part of the cropping season. However, with recent rains, traders say that the current cotton prices is at its peak. Under such circumstances, future for Raymond Synthetics seems to be very bleak, if it continues to stand on its own. Going by the trend in the first quarter of the current fiscal, the company will be eroding its entire net worth, unless corrective actions are taken immediately.

Apart from the fact that the company will have to be merged with its parent or sold off, the fact remains that in order to survive, the company willhave to cut down its interest cost. Currently, its entire operating profit is consumed by interest charges. Interest cost would have been higher, but for the fact that its parent company, Raymonds, had given a loan of Rs 112.31 crore, on which it shall not be charging any interest unless it declares dividend on its equity. In short, on its own it is very difficult for Raymonds Synthetics to survive.

Dr Reddy's Laboratories

The annual report of Dr Reddy's Laboratories for 1998-99 provides lot of of additional information. For the last few years, the company has been voluntarily providing useful additional information such as brand value and EVA, among others. These valuation models are an attempt to bridge conventional accounting practices with the market's perception of the value of the company. However, the problem with such valuation models is that they are subjective. For example, while formulating the model for Calculated Intangible Value (CIL), average Return on Assets of the industry iscalculated. It is not specified which companies are included in the industry.

Another factor is that the tax rate is taken as 13 per cent but normally for calculating the NOPLAT (net operating profit less adjusted tax) in Free Cash Flow, the prevailing tax rate and not effective tax rate is used. It may be noted that even for calculating brand value, the actual tax rate-13 percent is applied. Infosys on the other hand applies the prevailing tax rate. The management should at least explain the rationale for applying the effective tax rate as it makes a material difference to post-tax brand earnings. The difference between the two rates works out to Rs 80 crore.

Dr Reddy's Laboratories provides lot of relevant information which it is not required to provide. However, for the Intangible Accounting information section, it would be a better idea to provide the brief summary of assumptions also.