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Banking on gas

The $5-billion Videocon Group is dipping into its oil and gas assets to tide over its debt, but scaling up new businesses remains a challenge.
twitter-logoAnand Adhikari and twitter-logoMahesh Nayak         Print Edition: Sept 29, 2013
Venugopal Dhoot, Chairman, Videocon Group
We will get Rs 17,000 cr from the sale of our Mozambique assets, with which we will reduce our domestic debt. The value of our Brazilian oil and gas assets is around Rs 68,000 cr: Venugopal Dhoot, Chairman, Videocon Group Photo: Bhaskar Paul

In 2010, when the 2G telecom spectrum allocation scam hit the headlines and the Videocon Group's mobile licence faced the threat of cancellation, Chairman and Managing Director Venugopal Dhoot quietly landed at Heathrow Airport to negotiate a new business deal. Dhoot was in London to meet senior executives of the $120-billion insurer Liberty Mutual Group.

Liberty was desperately looking for an Indian partner to replace the Dabur Group. The American group's entry into India in 2008 ran into trouble because the Insurance Regulatory and Development Authority objected as the Burmans, who own Dabur, had an equity stake in Universal Sompo General Insurance through a subsidiary. Dhoot saw an opportunity to get into the general insurance business, which is more stable than capital-hungry life insurance. Instead of three days, the meeting lasted all of half an hour, and Videocon agreed to take a 74 per cent stake in the joint venture, which would be called Liberty Videocon General Insurance Co Ltd. It would have the advantages of Videocon's distribution network and brand equity, and Liberty's heritage, expertise and global network.

"Videocon's commitment can be seen from the capital base of Rs 350 crore, although new players generally start with Rs 100-120 crore," says Liberty Videocon CEO Roopam Asthana, who earlier worked with HSBC and SBI-GE Cards.

Considering it had never been in financial services, Videocon jumped in at the deep end: it followed up its insurance venture by throwing its hat in the ring for a banking licence in July this year. "We have been studying the financial services businesses for some time," says CMD Dhoot. "We would like to extend the Videocon brand to financial services. We believe the next phase of banking expansion will be in small towns."

The belated entry into financial services is the latest diversification by the consumer electronics and home appliances maker, which also has interests in oil and gas, telecom, direct-to-home television (DTH), mobile handsets and power.

In 1955, Dhoot's father, Nandlal Madhavlal Dhoot, laid the group's foundation by starting a sugar mill. In the early 1980s, he tied up with Japan's Toshiba Corporation to launch what he claimed was India's first colour TV. He encouraged sons Venugopal, Rajkumar and Pradeepkumar to get involved in business. When 61-year-old Nandlal died in 1993, Venugopal, in his early forties, was ready to take over. Today at 61 he is the face of the group. His youngest brother, Dubai-based Pradeepkumar, manages oil and gas, while Rajkumar, a Rajya Sabha MP, is Managing Director of Videocon Industries Ltd, the group flagship.

Videocon has not been shy about its diversification attempts. In the early 2000s, its announcement that it would launch a news channel got a lot of publicity, but the venture never saw the light of day. More recently, the group bid unsuccessfully for the Pune franchise of the India Premier League (IPL), and was also among the contenders to acquire another IPL team, the Deccan Chargers.

Consumer electronics and home appliances remain the group's bread and butter, contributing nearly 90 per cent of the turnover of Videocon Industries. Over the years, the Dhoots have invested Videocon Industries's surplus cash in new businesses. Their first successful diversification was in oil and gas in 1994, when they took a 25 per cent stake in the Ravva field in the Krishna-Godavari basin. The next big one was in telecom, but the cancellation of its licence pushed it into a debt trap. In June, the group, under pressure from banks, had to sell part of its oil and gas assets to reduce its debt which has grown to Rs 27,000 crore. It has now re-started its telecom business, in which it has already sunk Rs 10,000 crore.

Diversification Blues
The group may have been unafraid to diversify in the past, but today Dhoot sounds cautious. "There is a lot of uncertainty in the economy," he says. "We will not commit to new investments until a clear picture emerges after the general election."

The group's immediate task is to get the telecom business back on track. The licence cancellation in February 2012 was a setback. The company is yet to declare its consolidated accounts for December 2012. The company has released standalone results for the 18 months ending June 2013, with revenues of Rs 18,575 crore and a net loss of Rs 71.63 crore.

The first red flag went up when India Ratings & Research, part of the global Fitch Group, put Videocon Industries on 'rating watch' in September 2012. "The rating watch was negative because of the company's deteriorating business and financial profiles," the agency noted in its report. Infuriated, the Dhoots went to court, and India Ratings was restrained from publishing its rating action. But two months later, another agency, CARE Ratings, suspended its rating for Videocon Industries, saying the company was not providing the information required by CARE in time for ratings to be updated. In February this year, India Ratings also withdrew its rating due to lack of adequate information.

"Our ratings are based on hard numbers and not on promises," says a source in one of the two agencies that rated the company, on condition of anonymity. Today, broking firms are silent on Videocon Industries. The last available research report, by Mumbai-based NVS Brokerage, published in December 2012, had a buy recommendation. The stock has since fallen from Rs 214 to around Rs 170. "The group is conservative in terms of dividends and bonuses and hence has relatively lower valuations,"says Avinnash Gorakssakar, Head of Research at financial services firm Miintdirect.com.

Oil to the Rescue
Perhaps it was the pressure of debt, or perhaps the impetus to spur growth in new businesses, that prompted the Dhoots last year to consider selling some oil and gas assets. The decline in profits was making it difficult to raise funds from banks.

In May 2012, the media reported that London-based Cove Energy had sold its 8.5 per cent stake in its Mozambique assets for $2.2 billion. Videocon had a 10 per cent stake, valued at $2.6-3 billion, in the Rovuma block there. In 2013, it contacted Standard Chartered, Credit Suisse and UBS to look for a buyer.

In July this year, the deal went through - ONGC Videsh and Oil India bought out Videocon's stake for Rs 17,000 crore. "It was a strategic sale," says an investment banker involved in the deal. "Only part of the proceeds will go to retire debt."

Dhoot, however, says the entire sale proceeds would go towards reducing domestic debt. The foreign currency loan of Rs 8,000 crore will remain.

Roopam Asthana, CEO, Liberty Videocon General Insurance
Videocon's commitment in the general insurance industry can be seen from the capital base of Rs 350 crore, although new players generally start with Rs 100-120 crore: Roopam Asthana, CEO, Liberty Videocon General Insurance Photo: Rachit Goswami
Diversification into oil and gas in mid-1990s worked well for the group. Selling assets was emotionally difficult for the Dhoots, but they had little choice as bankers refused to fund expansion. Oil and gas contribute just under 10 per cent to group revenues, but asset valuations are high - for instance, the group claims its Brazil assets are worth $15 billion, though there is no credibile valuation report.

The Dhoots plan to demerge oil and gas assets from Videocon Industries and create an independent company. This would let them raise funds through private equity or an IPO for the new company. It doesn't hurt that oil is at over $105 a barrel.

Telecom: Cash Guzzler
The capital-intensive telecom business is the group's biggest challenge. In January, the group re-launched it in a small way. It had spectrum in 21 of the country's 22 telecom circles. Last year, the Supreme Court cancelled its licences (and those of some other operators), calling them illegal. They were awarded during the tenure of former telecom minister A. Raja, an accused in the 2G scam.

Diversification into telecom wasn't easy. Videocon's first attempt, in 1994, was unsuccessful. The second, in late 2000, also ran into trouble. Differences between the Dhoots and their partner, Mahendra Nahata, led to launch delays, which in turn led to Videocon Telecom Ltd CEO Ravi Sharma leaving in October 2008. In February 2010, the Dhoots bought out Nahata's 36 per cent stake to kick-start operations.

Within two months, Videocon started mobile services in the Chennai and Tamil Nadu circles, followed by Punjab, Haryana, Gujarat, Kerala, Madhya Pradesh and Mumbai. By the time its licences were cancelled, it had around eight million subscribers in 16 circles, of which two million were in Mumbai, 1.5 million in Gujarat, a million each in Chennai and Tamil Nadu, and 800,000 in Kerala. Rollouts were planned for other circles, but uncertainty after the 2G scam and eventual licence cancellation tripped those efforts.

"The challenge was to keep the company running during difficult times," says Arvind Bali, CEO of Videocon Telecom. Bali was moved from the group's glass business to the top management team of the telecom subsidiary in 2008. He is as enthusiastic today as he was in 2010. "The good thing that happened to us is the liberalised spectrum," he says. Earlier, the government allocated restrictive spectrum for 2G, CDMA, 3G or 4G. Bali explains: "We can use our spectrum for 2G or 4G or any other G."

More than 45 per cent of new deployment worldwide is on LTE networks in the 1800 MHz frequency band. LTE (Long Term Evolution) is a type of 4G high-speed data network. "We will use part of the spectrum for voice, and part for LTE," says Bali.

In January, Videocon began operations in four circles - Punjab, Haryana, Madhya Pradesh (which includes Chhattisgarh) and Gujarat. Bali expects business in these circles to be on autopilot by October. The next step would be to build the business in Uttar Pradesh (East and West) and Bihar-Jharkhand. The company will then expand services to either eastern or western India or the metros. "We have pan-India ambitions," says Bali. "There is, however, no time-frame for covering all circles."

Analysts are unimpressed. Videocon has 2.5 million subscribers in a business where giants such as Bharti Airtel, Vodafone, RCom and Idea have between 125-200 million subscribers. Shobhit Khare, telecom analyst at Motilal Oswal Securities Ltd, says of Videocon: "They don't have a commercial business presence in most circles. The sector is in consolidation mode. It's a business of scale. You have to have 15-20 per cent market share in a circle to be a meaningful player."

Some question why Videocon is hanging on in a business with thin margins and intense competition. Recently, in a consultative paper, the Telecom Regulatory Authority of India noted that the industry's EBITDA (earnings before interest, tax, depreciation and amortisation) shrank from Rs 43,000 crore in 2007/08 to Rs 15,000 crore in 2011/12, while debt grew two-anda-half times to Rs 1.83 lakh crore. Dhoot, however, has his own calculations. "The telecom business takes three years to break even," he says. "We will gradually expand operations."

However, one telecom expert, who does not want to be named, reckons that the Dhoots will remain in telecom till their licence becomes saleable. "The bankers would have hounded them if they had decided to shut the business," he adds.

Bali counters this by saying that Videocon is in for the long haul, and its strengths are distribution and a brand that promises value for money. He says: "Two decades ago, there were 10-15 electronics brands in India. Where are they?"

On Videocon's telecom market strategy, he says: "We will be 10-15 per cent cheaper than the competition." As with consumer electronics, the group is cost-focused in telecom, aiming to offer the cheapest minutes. The strategy will extend to data. "The data business is picking up," says Motilal Oswal's Khare. He says data accounts for over six per cent of overall telecom business, up from four per cent a year ago.

Potential Synergy
Staying on in telecom makes sense, given the Dhoots' two other growing businesses - DTH and mobile handsets. The three are linked, as videoon-demand on smartphones will soon become reality.

The group's mobile handset arm, Videocon Mobile Phones, recently launched a 10-inch tablet in a growing market, where it sold over three million tablets last year. "Mobile handsets is a huge business - 150 million pieces a year," says Dhoot. "We are doing just 10 million pieces."

Over the next year, the group plans to open 500 small-format stores that will sell handsets, mobile services and DTH products. The common Videocon brand will be an advantage, says Bali. "If Videocon sponsors a movie award night or an IPL team such as Mumbai Indians, the telecom, handset, DTH and all other consumer-facing businesses get mileage out of it," he adds.

The DTH business, called Bharat Business Channel Ltd, has grown quickly. Three-and-a-half years ago, Videocon was the new entrant, after Zee's Dish TV, Tata Sky, Airtel TV, Sun Direct and Reliance Big TV established themselves. Today, Videocon says it has nine million DTH customers and a market share of over 17 per cent, up from 13 per cent in 2012. "We expect market share at over 20 per cent by 2017," says Anil Khera, CEO, Bharat Business Channel. Consulting firm KPMG expects the industry to be worth $4.5 billion (Rs 27,000 crore) then. Khera says Videocon has the industry's lowest customer churn, and the lowest number of late payments.

Arvind Bali, CEO, Videocon Telecom
We will be 10-15 per cent cheaper than the competition in the telecom business. We follow a cost-focused approach, and aim to produce minutes at the lowest cost: Arvind Bali, CEO, Videocon Telecom Photo: Shekhar Ghosh/www.indiatodayimages.com
Besides programming, revenue streams include music, films and advertising. The company achieved operational break-even in the first half of 2012/13. "We expect to achieve cash flow break-even in 2014," says Khera.

In DTH, profitability is driven by scale. Dish TV is making losses even after nearly a decade of operation. Videocon incurs a cost of around Rs 1,400 per new subscriber. A quick calculation shows that it will need capital of Rs 400-450 crore a year to add three million customers. It does not plan to follow the telecom model of aggressive price cuts to gain market share. "We have learnt that price wars can be damaging and you never build a brand by fighting on price," says Khera, who is focusing on high-definition and digitisation.

Power and Retail Lag
The power business never scaled up as it might have, although Videocon firmed up its plan as far back as the mid-1990s, when it bid for the beleaguered Dabhol Power Corporation. Later entrants, such as the Adani Group, have built capacity of 7,200 MW. However, Adani Power is deep in losses, because of coal shortages and policy issues. In hindsight, the sluggishness of its power business may have saved Videocon some heartburn.

Videocon recently acquired land for its planned 1,200-MW thermal power project in Gujarat, through its subsidiary, Pipavav Energy Pvt Ltd. The group is also building a power project of similar capacity in Chhattisgarh, through its subsidiary, Chhattisgarh Power Ventures Ltd. The industry as a whole has been hit hard by the mining ban and coal shortages.

"We have put the business on hold now," says Dhoot. "There are a lot of issues that the government has to resolve. The policy is not clear." Many credit Dhoot for a timely call to halt the plan. "They were actually negotiating for a power plant and boilers from BHEL," says a power company official on condition of anonymity.

The group's diversification into modern retail in early 2000, through its a multi-brand consumer electronics retail chain, Next Retail, has yet to scale up. The company's website says the chain has 550 stores in 25 states. However, industry insiders say that it has closed many stores. Videocon is unwilling to share numbers.

The company recorded revenues at Rs 1,228 crore and a net loss of Rs 12.23 crore in 2011/12. Sources within the group say the Dhoots are keen to sell a part of the stake in the company. "The talks failed mainly on account of uncertainty over foreign direct investment in multibrand retail," says a company insider who does not want to be named.

Talks to sell a stake in the company were held over the past year with US and European retail chains. "We are not that successful, but it takes time to develop a retail business," says Dhoot. "We are also waiting for clarity on the FDI policy." Videocon's new businesses - telecom, power, DTH, retail and financial services - all need continuous capital to become meaningful players in their markets. Its core business - consumer electronics and home appliances - is funding them. But there are challenges, too, in its core business, as the economy slows down.

The group needs to hurry up and find other ways to financially support its new ventures - or get ready to sell more oil and gas assets, if the economy does not pick up.

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