Venugopal Dhoot, the architect of the first homegrown consumer durables company in India, Videocon Industries, sounds distressed while talking about the recent insolvency proceedings by banks. "How can banks recover their loans by liquidating assets in this dull market?" he asks.
Its not dificult to fathom why Dhoot is worried. At a time when the Reserve Bank of India (RBI) is pushing banks to liquidate a fourth of the Rs8 lakh crore non-performing assets (NPAs) on their books, Videocon has approached lenders for restructuring its Rs19,500 crore debt. The company is among the 50 biggest defaulters in the country but has not been included in the first list of the 12 companies which face insolvency proceedings.
Videocon's debt surged because of its failed telecom services business - it lost about Rs7,000 crore in telecom - and the picture tube plant modernisation in Gujarat that cost Rs4,000 crore. Also, things are not looking good at the flagship consumer durables business.
Indeed, Videocons troubles are mounting. In its cosumer electronics and home appliances business, it failed to counter global payers - such as LG and Samsung - technologically. The margins have shrunk for the division - which includes television, refrigerator, washing machine, AC and mobile phones - as its profit fell to Rs192 crore in the last financial year, compared to a peak of Rs1,089 crore about nine years back. Also, development of lucrative oil assets in Brazil and Indonesia have been delayed after crude prices crashed to $40 a barrel from $140.
In fact, until Videocon launched its telecom services in 2010, the company was profitable. In addition, the company spent on buying land for setting up power plants in Gujarat and Chhattisgarh, among others. As a consequence, debt rose and the interest outgo shot up five times to Rs 3,098 crore in the period between 2010 and 2013.
The market value of the fridge-to-phone company has tumbled and is now about that of a normal residential building in south Mumbai - some Rs600 crore. The decline started with Dena Bank classifying its Rs520 crore loan to Videocon as an NPA in the quarter ending March 2017. The stock lost 42 percent in the next three trading days.
The company has accumulated a debt of Rs48,000 crore - about Rs21,000 crore in its international oil exploration and production (E&P) business and the remaining in India at various companies. State Bank of India (SBI)-led consortium has given the loans in India while Bank of America is the lead lender for the foreign loans.
The 65-year-old Dhoot was quiet sanguine about settling the debt when oil prices were rising. He claims that the oil reserves in their Brazil and Indonesia assets are larger than ONGC's Bombay High, which accounts for about 38 per cent of India's domestic production. Now he is willing to sell a part of his oil assets to repay the loans in India. But the valuation will be lower considering that oil prices have slipped to $47.
Arvind K. Singhal, Chairman and MD of Technopak, a Delhi-based consultancy firm says that Videocon got into all categories and lost focus. "They failed to invest in technology, but accumulated huge debts on the book," he adds. Videocon wants to do the firefighting before other banks declare their loans as NPAs. The joint lenders' forum (JLF) has taken up his proposal for restructuring. Will Videocon get a lease of life?
ROAD TO DEBT
In three consecutive financial years until September 2008, Videocon's India business registered standalone profits of over Rs800 crore, thanks to the focused approach in the consumer electronics business. Dhoot had acquired the colour picture tube (CPT) business of Thomson SA in France in 2005 - it catapulted the company to the big league as the third largest CPT maker in the world. It took over the Philips colour television plant and three plants of Electrolux India around the same time.
Then came Dhoot's misadventure in mobile telephony. He also unsuccessfully tried to modernise the glass shells (for picture tube) factory in Gujarat to LED.
In 2008, just after Vodafone's $11 billion acquisition of Hutch, Dhoot applied for spectrum to enter the worlds fastest-growing telecom market. But the application reached the department of telecom after the cut-off date and was not considered. Undeterred, Dhoot quickly picked up 64 per cent stake in Mahendra Nahatas Datacom Solutions, which had a pan-India licence to run GSM-based mobile telephone services. The two partners had agreed to subscribe to an initial equity capital of Rs150 crore. The Dhoots also agreed to put in further equity investments of almost Rs4,200 crore for setting up the network infrastructure. But Videocon backed out from its investment commitment, instead offered a loan to Datacom to finance the project. This was unacceptable to Nahata. There was also a dispute over a foreign strategic partner. "The face-off continued for a year and the key management people started leaving one-by-one. The launch was delayed for nearly two years and the venture became irrelevant," says a former employee. In February 2010, Nahata exited the business, selling his 36 per cent stake to Videocon for around Rs1,400 crore.
Within months, Videocon started mobile services in the Chennai and Tamil Nadu circles, followed by Punjab, Haryana, Gujarat, Kerala, Madhya Pradesh and Mumbai. But in 2012, the Supreme Court cancelled its licences (and those of some other operators)after the 2G scam. By the time its licences were cancelled, the company had around eight million subscribers in 16 circles. In the next round of auction soon after, the company bought spectrum for six circles at Rs2,221 crore. But the business failed to flourish amid stiff competition. Last year, Bharti Airtel bought out Videocon Telecommunications' spectrum in six circles for Rs4,428 crore, ending Dhoot's telecom dream.
The group is estimated to have lost around Rs7,000 crore in the telecom business. According to the March 2015 financial report, Videocon Telecommunications had a paid-up capital of Rs7,450 crore and debt of Rs3,967 crore. The accumulated losses until then were Rs7,060 crore.
Similarly, the television business also took a big knock. Videocon was the leading brand in the 90s just after the era of Dyanora and Weston. BPL and Onida were the other Indian brands dominating the segment along with Videocon. But the Koreans and the Japanese ousted the Indian television makers using the tactic of lower prices, large distribution network and better technology. Indian incumbents lost the plot but Videocon managed to survive acquiring assets.
But its decision to acquire colour picture tube plants also proved wrong. The television technology changed fast, paving the way for LCD, LED and plasma sets. At present, they have over 10 per cent market share in the Indian television market. Dhoot says that the company has lost heavily, about Rs4,000 crore, in the modernisation of the picture tube plant in Gujarat. "We wanted to convert the glass shells plant into an LED factory. Between 2010 and 2014, we poured in about Rs4,000 crore but were unsuccessful. By the time, the loans became a burden for the company and we decided to cancel the project," says Dhoot.
The plant is lying almost idle. Dhoot believes that he could convert the plant into LED with an additional Rs1,000 crore. "I will put the money again in it after selling some oil assets," he adds.
In the 15 months ending March 2017, Videocon Industries registered a standalone loss of Rs 1,916 crore, on a revenue of Rs 12,829 crore. The company has been making losses at the consolidated level since 2010. The accumulated losses would be above Rs 9,000 crore after discounting the one time gain from telecom spectrum sale to Airtel.
Sales of consumer durables companies are growing fast in the country because of rise in income levels, larger penetration and the trend of micro families. Analysts expect that the industry's growth target of $20 billion by 2020 is likely to be achieved much before as it already reached $15 billion levels now. Most of the products are growing at 12-15 per cent annually. The highest growth is happening in AC and washing machine sales. Only in refrigerators growth has been hit because of a saturated market.
But the performance of Indian companies in the consumer durables space has been abysmal, except in the AC category, where Voltas and Lloyd give tough competition to the global giants. Videocon started off well with its large portfolio of brands like Sansui, Kelvinator, Electrolux and Kenstar, in addition to the marketing of Akai and Philips televisions. The global acquisitions and partnerships strengthened their position in the television market but the rise of Korean players proved to be a spoiler. According to Euromonitor, last year Samsung, LG and Sony occupied the top three slots in terms of market share, leaving Videocon and its brands together at the fourth place. "International brands have a significant weight and aspirational value in the consumer's mind, as they are perceived to be up-to-date with global product standards," says Devangshu Dutta, CEO of retail and consumer products consulting firm Third Eyesight.
Since the consumer durables market is shifting online, pushing the products has become a big challenge, says a former executive of Videocon. "The company doesn't have the professional bandwidth for countering the global players," he alleges. "Indian companies need not be complacent about having any 'home advantage'. The Indian consumer wants the best product at the lowest feasible price," says Dutta. Continuous investment in product development and marketing, and short life-cycles, are a given in the durables and devices market, and the business needs to be structured with that in mind, he adds.
Dhoot claims that they are the lead player in home appliances and that focus will continue. "In the mobile phone category, we will focus only in the Rs1500-3000 range smart phones." But Indian brands like Micromax, Lava and Intex have gained sizable market share in the low-cost category. It will be tough for Videocon to survive. "They will not be able to regain the lost ground in this technology intensive market. I don't see any chance for the company," says Singhal of Technopak.
THE WAY OUT
In the past six years, Dhoot says the company has paid Rs26,000 crore as interest to banks. So he thinks that the debt restructuring will be approved by the banks. But bankers in the JLF say that more banks will classify Videocon's loans as NPAs in this quarter.
Videocon has requested the banks to defer the repayments by 10 years. It has also asked for a deferment of one portion of interest. "We have an average interest rate of 16 per cent. Of this, we are ready to pay nine per cent now and proposed to defer the rest," says Dhoot. We don't want the banks to take a haircut, he adds.
Videocon is also looking to make repayments through sale of assets. Dhoot claims that it has a land bank worth Rs10,000 crore on its books and is ready to monetise a part of it. The company is also looking at reducing its majority stake in the general insurance venture with Liberty Mutual of the US at a valuation of Rs5,000 crore. Also, it has reportedly put Kenstar consumer goods business and brand for sale to raise about Rs2,000 crore. The company's direct-to-home (DTH) business is being merged with Dish TV for creating the largest satellite television company in the country.
Diversification into oil and gas in the mid-1990s worked well for the group. In 2000s, they ventured globally, acquiring stake in hydrocarbon blocks in Brazil, Australia and Indonesia, among other countries. In 2013, they made loan repayments by selling gas assets in Mozambique for $2.5 billion. Videocon also plans to sell some of its oil assets to repay debt at an opportune time. Its oil fields in Indonesia and Brazil are valued at $12 billion, claims the group.
It is not a dead-end for Videocon. But its not far away from there.