This clearly means that prior to taking over DLF, Ambuja has done no due diligence worth the name and although competitors do have knowledge of its rivals, a due diligence exercise is still necessary. Ambuja might have been eyeing DLF for a year but that is no substitute for due diligence. The argument gains substance because while announcing the deal, Nimesh Kampani who is a director of Gujarat Ambuja had stated that the deal was clinched in just five days.

In five days, one cannot even complete the due diligence of an SSI. Also the haste and manner of acquisition gives credence to the belief that it was not just a strategic deal as claimed by Gujarat Ambuja but a survival deal. The reason is that among DLF's markets, in Delhi and Rajasthan, it will be hard to reach a price agreement because Rajasthan is cement surplus and in Delhi, the top 10 suppliers account for 70 per cent and top five account for 51 per cent. In Delhi, which is almost as big a market as Mumbai, the market share of Ambuja is just 2.5-3 per cent whereas DLF's share is 13 per cent.

The other major markets of DLF are Rajasthan, which accounts for almost one-fourth of its sales in quantity terms, with a 7 per cent market share. Punjab accounts for 19 per cent of its sales, with a market share of 6.5 per cent, while for Haryana, the figures are 17.5 per cent and 9 per cent respectively and in UP it is 15 per cent and 1 per cent respectively. Now consider Ambuja's presence in Punjab and Harayana.

In Punjab, the market share is 31 per cent and in Haryana, it is 9 per cent. The Haryana market incidentally, is almost the size of the Mumbai market and Punjab is about 20 per cent bigger. Ambuja is expanding the capacity of its grinding unit at Ropar by 0.5 mtpa and the last thing it needed was Lafarge triggering a price war. According to dealers, the cartel in the Eastern region was broken by Lafarge.

Ambuja management had indicated a takeover of any unit only at a price comparable with its own expansion cost which without DG sets for captive power works out to be Rs 2,500 per tonne. DLF has an 18-month FY 1998-99 ended in September. The equity, post loan conversion is Rs 213 crore and debt of Rs 250 crore. As on March 1999, the accumulated net loss of DLF was Rs 122 crore; the figure as on September 1999 is not available and neither is the figure of preliminary and pre-operative expense to the extent not written off. It is clear that cash infusion by way of preferential allotment was to prevent negative networth.

According to the Ambuja management, the equity infusion should be adjusted against the debt of DLF to calculate the acquisition cost per tonne and it works out to be Rs 2,800 per tonne (inclusive of a captive power plant of 15 mw). If this is applied, the net debt is about Rs 50 crore. Unless Ambuja manages to pre-pay debt the cost per tonne works out to be Rs 4,000 per tonne. The preferential allotment price will depend on the ``relevant date'' which is the date 30 days prior to the date of the shareholders general meeting in which the preferential allotment was approved. If the relevant date is last Friday when the deal was not signed, the equity infusion by Ambuja will be Rs 205-210 crore.

But if it is December 16, the cost per tonne will work out to be Rs 200 higher. The reason is as per the Sebi formula on preferential allotment, the price has to be higher than the average of the weekly high and low of the closing prices during the six months preceding the relevant date or during the two weeks preceding the relevant date. The price rise in the DLF stock post the Ambuja takeover will not only result in Ambuja having to infuse more equity but probably a hike in the open offer price also. The impact will be a higher acquisition cost per tonne.

Strategically, it is an excellent deal but Ambuja shareholders will not benefit directly as DLF is yet to create a debenture redemption reserve and hence there is no question of a tax-free dividend to Ambuja. Along with its expansion plan, this strategic investment will also, for all practical purposes, be like capital W.I.P. earning no return at least for a period of two years. The impact of which should be reflected in the stock price.

Synthetic yarn
After a four-year recessionary phase, fortunes of players in the synthetic yarn industry look set for a turn around. Thanks largely to a substantial reduction in the carryover stocks in some East Asian countries. But there remain some grey areas which could well create a dampener. Incidentally, most of the carryover stock were built-up during the east Asian crisis.

During October 1999, export volumes saw a jump of 27 per cent to 14,791 tonnes, while exports in value terms increased by 24 per cent to Rs 121 crore.

Incidentally, September 1999 also reported a healthy 14 per cent increase in export values. Thus exports of synthetic yarn in value terms are now showing a healthy growth of 14.22 per cent for the first seven months of current fiscal year 1999-2000 at Rs 877.07 crore compared to Rs 767.86 crore for the corresponding period last year. In volume terms, the growth was still higher by 23 per cent at 1,06,726 tonnes.

Incidentally, for the period from April to October exports of polyester-viscose, polyester cotton and polyester spun has grown a solid 27 per cent, 30 per cent and 47 per cent respectively. What with countries like Spain, Turkey, Italy, Belgium, Portugal, Bangladesh and the UK being the largest importers, accounting for as much as 53 per cent of the total exports.

However, in spite of this encouraging scenario of improved sales, realisations have declined by average 8 per cent. But the industry remains optimistic of improved realisations in the coming months, which will translate into better profits. Here again though the rising prices of crude in the past 10 months could well have a dampening effect. Especially, since most raw materials ultimately are the final products of crude, the price of which is generally reflected after a lag of six to eight months. Therefore, the rise of crude price from $13 per barrel to $25.90 per barrel in the last 10 months could well be reflected in near future, counter-balancing the volume gains.

Correction
We have been informed by Switzerland KMK Maschinen AG that S Chandra is not the owner of KMK Switzerland, as reported by us in this column. The error is regretted.

Emcee (With contributions from Urmik Chhaya and Dhruv Rathi)