BW Communities

A Deadly Duel

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Twenty-five years after Hyderabad-based entrepreneur E. Sudhir Reddy started engineering and construction company IVRCL, he is fighting the battle of his life to save his firm from being acquired by Subhash Chandra-led Essel Group. IVRCL has a presence in water infrastructure, construction of roads and railway tunnels, buildings and industrial structures as well as power transmission and distribution projects. It had revenues of Rs 5,651.4 crore and a net profit of Rs 157.9 crore in 2011. IVRCL has not declared its numbers for the financial year ending 31 March 2012, and its board a few days ago passed a resolution extending its 2012 financial year by another three months. The takeover battle for IVRCL mounted by Essel, however, has meant that its scrip is on fire, up from Rs 27 to Rs 71 in the past three months. Reddy's current plight comes from a series of miscalculations. In order to fund aggressive growth, Reddy over a period of time over-leveraged the company by borrowing at high cost. IVRCL's average cost of debt is around 12-13 per cent, which meant that interest outgo alone was about 5.5 per cent of sales. Revenue growth in the past few quarters has been impacted due to lack of clearances for a few projects in which the company is involved and slow decision-making because of the overall economic slowdown. A Motilal Oswal Securities report in February pointed out that execution slippages had led to dismal performance. What has, however, come to haunt Reddy is the low promoter holding of 11.2 per cent. "This is what happens when a promoter gets careless and allows his ambition for growth to override everything else. In fact, Reddy was aware of the perils of having such low holding and had actually improved it from the 9.5 per cent he held in 2010. But the action was too little and may eventually prove to be too late. One comfort for him is that hostile takeovers in India have rarely succeeded and Essel might still exit after getting a huge premium," says an analyst with a leading brokerage. Essel has declared that it now has 12.3 per cent stake in the company. Reddy is not giving up without a fight. He has quietly unfurled the banner of regional pride as an Andhra entrepreneur becoming under attack and projecting the current bid as a North versus South Indian company fight. More practically, he is trying to bring down IVRCL's debt of Rs 2,500 crore in the parent company and an additional Rs 2,000 crore debt in various special purpose vehicles it has, to more manageable proportions by cashing out of some build-operate-transfer (BOT) projects, even as he tries to shore up his holding. The outcome of the current takeover battle might ultimately be decided by institutional investors such as Government Pension Fund Global, a Norwegian sovereign wealth fund, which holds a 9.7 per cent stake and is the single largest shareholder other than the promoters and Essel. However, a recent report by Nirmal Bang Securities says: "Developments like the Essel Group making a hostile bid for IVRCL would lead to a short-term upside in the share price, which, we believe, may not be sustainable." Whoever wins the battle, will have to fix the fundamentals of the business. (This story was published in Businessworld Issue Dated 16-04-2012)