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Question Paper
Integrated Case Studies III (MSF3S3): January 2008
Case Study (100 Marks)
This section consists of questions with serial number 1 - 8.
Answer all questions.
Marks are indicated against each question.
Case Study*
1.Diversification of business involves entering into different industries either to exploit untapped potential or to minimize the risk of
changing business trends. In this context explain the characteristics of a successful diversification strategy. (12marks)
2.Discuss the rationale behind Videocon in going for acquisition spree. Do you think the new acquisitions will help Videocon in obtaining
a global footprint? Explain. (15marks)
3.In the cut-throat world of durables and electronics manufacturing, controlling the cost of production is a matter of concern. Discuss
the strategy of Videocon in controlling the costs. (12marks)
4.Do you think that Videocon Groups strategy of taking acquisition route for becoming global is a hasty and hazy act? Discuss the
challenges Videocon faces in case of Consumer Electronic Goods. (12marks)
5.Big brand wants to be a tomorrows equipment supplier to the world. Discus why Videocon is reversing its traditional business logic? (12marks)
6.Discuss the financial restructuring that has been adopted by Videocon Group. And also discuss the possible risks faced by Videocon in
raising capital? (12marks)
7.Videocon Group Chairman Venugopal Nandalal Dhoot, acquired Thomson SAs entire color picture tube business and the entire stake of
loss making AB Electroluxs Indian operations Electrolux Kelvinator. Evaluate the synergic benefits that Videocon can enjoy from
these twin deals. (12marks)
8.While raising capital, firms face a tough challenge of deciding upon the capital structure. In this context, discuss the various sources of
raising capital to meet various types of financial requirements. (13marks)
Videocon Group
As Indian business starts to go global, Videocon has proved that it
Part A : Basic Concepts (30 Points)
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is right in front. With 10 brands in its portfolio and with factories globally,
Dhoot has proved that with strategy and fire in the belly, you can achieve much.
Lakshmi Mittal, Chairman and CEO of Mittal Steel
Speaking on Videocon Global Acquisition.
Videocon Group, which has never been in short supply of ambitious desires to have more global presence, has scripted two blitzkrieg
acts with; by the first act, Videocon Group Chairman Venugopal Nandalal Dhoot, on June 28, 2005, acquired Thomson SAs entire
color picture tube business spread in Europe, America and China. From this deal, V N Dhoot also got Thomson SA to invest in
Videocon International and Videocon Industries, the two flagships of Videocon Group. Later, to increase falling market share of Videocon
in electronic consumer goods and appliances, he acquired the entire stake of loss making AB Electroluxs Indian operations Electrolux Kelvinator, and got the AB Electrolux to invest in Videocon Industries. After scripting the twin deals, Mr. Dhoot moved to play
the second act by merging Videocon International with Videocon Industries on the advice of Development Bank of Singapore and ICICI Bank,
giving Videocon the cash to play for a greater role in the global market. But the acts surprised the financial markets. Market analysts wondered
whether Videocon Group ambitious vision of becoming a global firm is a hasty and hazy act. The financial markets also wondered
whether Videocon had the financial strength to carry on its further investment plans.
Mr. Dhoot, after having got two high profile low-cost acquisitions amidst severe competition, began reinventing Videocon with an eye on
the global equipment manufacturing market. After completing the acquisition, Videocon Group expects to increase its total turnover
from Rs.50 billion to Rs.175 billion, with more than Rs.87 billion coming from the global markets. He adopted a new slogan for its group
The Sun never Sets in Videoconand began moving towards making the group a multinational Indian company. Currently, he is planning
to tap financial resources from capital and debt markets.VIDEOCON GROUP THE EXPANSION PATH
Videocon Group came into being with the incorporation of Videocon International Ltd. (VIL) in 1985. At present, the group consists of
four listed companies Videocon International, Videocon Appliances, Videocon Industries and Videocon Narmada Electronics
Limited. Within a decade, the group shot its way into the big league and became a leading manufacturer of consumer electronic goods
and house appliances in India.
The Dhoot family, hailing from the backwaters of Maharashtra, traveled a long way from being producers and sellers of sugar and cotton
to become producers of hi-tech products like Color TVs, refrigerators, washing machines, air-conditioners, and digital assistants.
Videocon group was founded by late Nandalal Madhavlal Dhoot, who migrated from Marwar region in Rajasthan to Maharashtra
and established himself as a successful sugarcane and cotton grower. Nandalal established sugarcane mill based on French technology in
1955 at Gangapur near Aurangabad, an important industrial center in the Marathwada region of Maharashtra. Madhavlal Dhootssons Venugopal, Rajkumar and Pradeep Kumar built their business empire Videocon Group, and raised it to become the leading producer
of electronic appliances in India.
Venugopal Dhoot, the eldest son of Nandalal Dhoot, graduated in electronics engineering from Poona Engineering College and had
also trained in TV engineering from Toshiba Corporation in Japan; he followed his fathers business managing the sugar mill and cotton
gins. Venugopal Dhoot sighted an opportunity for producing color TVs in India when he noticed that Indians took a fancy for Color TVs
ever since color TVs were introduced in India during the 1982 Delhi Asian Games. He procured a license and through a technical tie-up
with Toshiba, Japan, set-up VIL in the year 1985 with an initial capital of Rs.100 million and began producing Color Television sets and also
monochrome television sets. Their venture with Toshiba gave Videocon group to focus on product quality and durability and the right
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platform for establishing themselves in electronic appliances industry in India. Videocon International Limited got listed at Bombay
Stock Exchange in 1992 and at the time of listing the company had an authorized capital of Rs.200 million and paid-up capital of
Rs.82.80 million.
The company raised money from the markets whenever it required the capital for investments since it got listed at the stock exchange in
1992. It also issued GDRs and Euro issues in the year 1994. In January 1994, the company issued GDRs at an issue price of Rs.255 and
raised Rs.2.82 billion and later in October 1994 the company went for Euro issue, issuing non-convertible bond at an issue price of
Rs.100 raising Rs.340 million from the issue. In 1998, Videocon Narmada Electronics Limited, a flagship company under Videocon
Group, manufacturing glass shells that go into production of picture tube was merged with Videocon International Limited. The merger
was taken by exchanging one share of Videocon International Limited for every 12 shares of Videocon Narmada Electronics Limited.
WIDE RANGE OF PRODUCTS
Videocon International Limited, along with Color TV sets, also manufactures digital videos, and home theaters under consumer electronics.
It also manufactures refrigerators, washing machines, air conditioners and micro ovens under home appliances. In Color TVs, Videocon
was the first Indian Company to introduce Picture-In-Picture, Turbo Sound, Surround Sound, Larger Screen Sizes, the Full Flat Square
Tube, Bazooka technology and the Freedom features.
It was the first to introduce frost-free refrigerators. Videocon tied-up with leading brands that entered into India post reforms era,
and positioned itself as a multi-brand company. It also built a stronger distribution network and by the end of 1990s it steadily emerged
from being the maker of color televisions to being the largest manufacturer of consumer electronic appliances in India.
Videocon Group, taking the advantage of Tax holiday given to the industries set-up in rural areas, located its manufacturing units inpolicy-friendly locations. Its production facilities, located in the backward region of Marathwada, fall under Special Industrial
Development Zones schemes. Its plants located in the industrial belt of Aurangabad get a tax benefit of 135 percent on investment, and
about 70 percent of sales of Videocon group come from plants that are exempted from sales tax. The groups major production facilities
of home appliances are:
1. Videocon International Ltd., Chitegaon, Aurangabad. (Color TV assembly Plant)
2. Videocon International Ltd., Gandhinagar (Monochrome TV assembling Plant)
3. Videocon Appliances Ltd., Chitegaon, Aurangabad (Washing Machines and Air Conditioning assembling)
4. Videocon Narmada Electronics Ltd., Bharuch (Glass shells funnels and Glass shell panels)
5. Videocon Communications Ltd.., Bhalegaon, Aurangabad
6. Salt Lake Plant Kolkata (Color TV).
The Chitegaon and Bhalegaon plants were built with an investment of Rs.2000 million crore each and have an installed capacity of
about 10,000 CTVs per day. The plants were built to give Videocon an edge over its competitors producing on the conventional lines.
VIL manufactures glass shells (funnels and panels), electronic components such as electronic tuners, FBTs (Fly Back Transformers), ATDMs
(Asynchronous Time Division Multiplexing) and deflection yokes that go into the manufacture of CTVs. A major strength of
Videocon International is its engineering skills and tool room. The company set-up a high-level backward integration facility to ensure
a smooth flow of material. The Dhoots made efforts to build their plants with state-of-the-art-technology to give them an edge over
their competitors by constantly updating their manufacturing facilities with the changing technology and maintaining high standards of
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quality right across its spectrum of products. Built with the best technical features set to world standards, the plant has every facility,
right from the basic process of manufacturing the components to the final assembly. The machinery deployed ensured that the products are
of international class with zero defects. The accuracy of component insertion is of superior class, and about 90% of the components of
the CTV are assembled through the process of Auto Insertion. The machine works at the plants are fully programmable. Further, the
soldering of components is done in an Inert Nitrogen Chamber, which ensures oxidation free solder joints that are more reliable than
the conventional soldering process. The near zero wastage technology adopted at the plants reduce manufacturing costs by optimizing
material inputs at these plants. To ensure the smooth processing of material and to maintain product quality, Videocon adopts the Japanese 5-
S (Seiri, Seiton, Seiso, Seiketsu, Shitsuke) the five tools of quality which focus on eliminating wastage at all levels of production.
DIVERSIFICATION
The ambitious Videocon Group, diversified into other sectors like real estate, financing, crude oil business by setting up Videocon
Petroleum Limited in 1993, which was renamed as Petrocon India Ltd. and also in power and energy sectors.
Exhibit 1: Videocon Group
Company Name Year of Incorporation
Videocon International Ltd. 1985
Videocon Appliances Ltd. 1988
Videocon Communications Ltd. 1989
Videocon Industrial Finance Ltd. 1990
Petrocon India Ltd. 1993
Videocon Energy Holdings Ltd. 1996Videocon Industries Ltd. 1996
Source: CMIE.
Entry of Competitors
During the early 90s, Videocon International was a leading consumer electronic durables manufacturer. It controlled more than one-third
of the domestic CTV market and had a near monopoly in washing machines. Along with consumer durables, the glass shells it
manufactured were used in the manufacture of both monochrome and color television sets and added to its profits. The company claimed
that the glass shells accounted for 75 percent of its profits.
[1]
However, entry of Multinational brands in mid 90s challenged the market
leadership of Videocon. The entry of Korean chaebols LG, Samsung along with the Japanese giants Sony, National Panasonic, andother multinational companies from the US, Europe and China took the Indian electronic consumer durable market giant head on.
Videocon also lost its market leadership in washing machines to Whirlpool LG, and Samsung, which entered into the consumer
home appliances sector.
When Samsung Electronics first entered into India in 1995, Videocon International entered into a joint venture with it and produced
Samsung brands on contract basis at its plants located in Chitegaon and Bhalegaon. Videocon, through its investment arm
Reasonable Computer Solutions, entered into a 49:51 joint venture with Samsung Electronic Company in 1995 with an authorized and paid-
up capital of Rs.320 million, with VIL investing Rs.162 million. Later, in the year 2001
[2]
Samsung raised its share to 74 percent in the joint
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venture by increasing its authorized capital of Rs.1000 million with a paid-up capital of Rs.600 million. Samsung later bought out
the remaining 26% also by paying Rs.2500 million to Videocon, at the end of the year 2002.
The entry of other big players LG, Sony and other consumer electronic manufacturing companies into Indian markets unleashed a
price war in the Color TV segment. With more players in the Color TV business, prices came down by 40% at the end of 1999 when
compared to the 1995 prices. Considering the pressure, Videocon International, known for its aggressive pricing strategy, too reduced
its prices. While the multinationals with deep pockets entered into low volume, premium products cornering higher margins,
Videocon International suffered a drop in its sales and a deep cut in profit margins, and was pushed to high-volume lower-end priced
segment of CTVs.
Driven by higher volumes in the lower segment, the companys turnover increased by just 15 percent in 1999 from the turnover in theyear 1998 and its net profit stood at Rs.403.40 million decreasing by 60 percent from the previous years of Rs.1004.80 million.
Market analysts believe that most of its profits in the year 1999 came from exporting and selling glass shells that go into manufacturing
Color TVs. The once dominant player in the Color TV sector was reduced from a branded player to a commodity supplier by the end of
1999 with a market share of 10%. It fell out of dealerschoice due to its strategy of high volumes and low margins. Videocon, at the end of the
March 1999, has seen its net profit margins shrinking to 13.90 percent from a high of 16.40 percent in 1997-98. Its scrip at BSE also lost
its charm. From a high of Rs.625 in 1992, it came down to Rs.47.50 in the first week of April 1999.
Exhibit 2
Videocon International Ltd.
Year PAT (Rs.million)
March 1990 269.10
March 1991 261.70
March 1992 660.80
March 1993 460.10
March 1994 633.30
March 1995 864.90
March 1996 904.50
March 1997 884.00
March 1998 1004.80
March 1999 403.40Source: CMIE/PROWESS.
In Search of New Strategies
Struck with eroding profits, shrunken market share, Videocon hired the services of McKinsey & Company in 1999 to draw new strategies
for restoring its market leadership. Based on the McKinsey recommendations, Videocon adopted a multi-pronged, multi-brand strategy
and weighed its strategy on high volumes and low margins. It tied-up with Akai Electric Company, Japan and floated a joint venture
Akai India Limited with a paid-up capital of Rs.1000 million, with Videocon holding 70 percent in 1999, and got to market its brands
Akai, and Sansuiand also produce them at its plants at Chitegaon and Bhalegaon. Based on McKinsey recommendations the
company decentralized its management with separate heads for each brand under its umbrella.
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Videocon also planned to increase the manufacturing capacity of its Color TVs. To add to its capacity of manufacturing 135,000 televisions
from its Chitegaon plant, it acquired Phillips Indias high tech CTV plant at Salt Lake, Kolkata, for Rs.90 million in 1999. At the time
of buyout, the Salt Lake plant was producing at one-fifth of its total capacity of 600,000 CTV units annually. Videocon, in the year
2000, invested Rs.2000 million to upgrade the plant to bring it to its near full production level for manufacturing CTVs of Akai and
Sansui brands. It also invested Rs.100 million at Salt Lake plant for producing plastic moulds for television sets. The company further drew
an investment plan of Rs.11000 million crore over the next two years to increase its manufacturing capacity of televisions and also
household appliances at the Salt Lake plant.
In the year 2000, the group also drew an additional investment plan of Rs.25000 million for upgrading its component manufacturing
facilities situated at Chitegaon and Bhalegaon. The investment includes Rs.20000 million for upgrading its three million capacity glass shellmanufacturing units and Rs.2000 million in motor manufacturing and Rs.3000 million in compressors facility. The company, in the year
2000, set-up a new plant adjacent to VILs CTV and appliance manufacturing complex at Chitegaon with an investment of Rs.1500
million and earmarked Rs.5000 million for investment in the next two years. In the year 2001, the company invested Rs.2000 million
for installing a manufacturing plant at Hyderabad for producing 5 lakh CTV, 10 lakh computer monitors and 2 lakh refrigerators and
washing machines.
Videocon International further planned to raise Rs.4500 million from the capital markets in the year 2001 for increasing its
production capacity at the plants. But, Sebi banned Videocon International from entering into the capital market till April 2004, due to
VILs alleged involvement in manipulation of prices during 1998 stock scam. Videocon in 1998 ventured into market to buyback two
percent of its outstanding shares at a price of Rs.142, when its market price was looming at Rs.62 and the stock price soared to Rs.165
causing disturbance in the market. The company was later absolved from the involvement. But due to Sebis ban, Videocon raised the
equity amount through private placement after getting a nod from its shareholders.
The multi branded strategy instead of increasing its share in the market further eroded its share in the market and also the demand
for Videocon brands. It lost its market share at the cost of promoting other brands in its kit. Its promotion of the Akai and Sansui brands
helped them penetrate the market and strengthened their market share while the Videocon market share fell down to 7 percent by the end
of 2003 and its operating profit fell down to Rs.1527.7 million from Rs.4771.2 million in the year 2002. Videocon, the household name
in metro markets with a full range of consumer durable products, was pushed into smaller towns and rural areas. While one-fourth of
the profits come from the consumer durables, the rest come from the sale of glass shell components to other CTV manufacturers and
from manufacturing CTVs for other brands.
Decreasing profits, fall in demand for its brand, and also its dominance in the Color TV segment due to the Korean chaebols pushed it to
lower price segment to cater to the needs of the consumers in small towns and rural areas. As a result, Videocon shifted its
business concentration towards manufacture and supply of glass shell panels and glass shell funnels to domestic and international markets
for their use in the manufacture of Color TVs. Moreover as the cost of glass shells made up one-third manufacturing cost of the
CTV, Videocon devised a fresh strategy to integrate backwards, to gain profits. Mr. Dhoot himself said, We no longer call ourselves
a consumer durable company, we call ourselves components manufacturers
[3]
. Market analysts said that Videocon was doing a
clever business act by cross subsidizing its consumer durables business with the profits from the glass shells division. Videocon supplies
its components to Akai, Samsung and Onida. It also manufactures CTVs for Onida and Salora and for TCL, a China based equipment
maker. It also exportes its glass shells panels and glass shells funnels to Europe, South Africa and Middle East.
After shifting its strategy from being a consumer electronic durable brand to Color TV component manufacturer, Videocon observed that
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the global electronic majors were increasingly outsourcing the manufacturing of their products and component; and therefore it eyed on
the Original Equipment Manufacturing (OEM) business in the global market, to gain economies of scale by lowering its cost of production
and to corner greater market share in the OEM. Videocon lacking in the R&D facility required for enhancing its glass shell production,
was looking for a right opportunity for a vertical integration for setting its foot in the global market and also for increasing its market share
in domestic electronic consumer goods and appliance. S K Shelgikar, group advisor at Videocon said, Videocon choosing to go
global through OEM route is a conscious decision. Since building a brand abroad was tough, we decided to go in for
intermediaries.
[4]
Videocon International looking for vertical integration for its glass shell-manufacturing units found its ally in Thomson
SA, the manufacturer of Color Picture Tubes (CPT) and provider of products and solutions to Media and Entertainment Industry.
Two Important Deals
Videocon, envisioning to become an Indian conglomerate and to increase its presence in the global markets, seized the opportunity
when Thomson SA decided to wind-up its display and components units to Media and Entertainment industry and refocus on high-
margin provider of equipment and solutions. Videocon Group, through its offshore entity Eagle Corporation, a hundred percent subsidiary
of Videocon group, clinched the deal in favor of Videocon International for 240 million (Rs.12600 million) beating 16 bids that included
LG Phillips JV and Samsung. The acquisition gave Videocon, ThomsonSAs entire Color Picture Tube (CPT) business and CPT
glass manufacturing units located at Piaseczano in Poland, Foshan and Dongguan in China and Mexicali in Mexico. The deal signed with
the Thomson SAs Chairman and CEO Frank E Dangeard on 28 June 2005 gave Videocon 19 million units of color picture tubes along with 4
million units of picture tube glasses per annum and made Videocon group the third largest manufacturer of color picture tubes in the
world after LG Phillips JV and Samsung. V N Dhoot speaking on the deal to the press said, The Thomson acquisition was in line with
our global MNC strategy. We want to be No.1 in the consumer electronics and consumer durables sectors
[5]
.
Videocon, earlier on 28 February 2005, acquired Thomsons Cathode Ray Tube (CRT) manufacturing plant at Anagni in Italy for an
undisclosed figure. Market analysts put the deal to be around Rs.4,400 million ($100 million). After acquiring Thomson SAs CPT
units, Videocon acquired Swedish white goods major AB Electroluxs entire stake in its loss making Indian operation Electrolux
Kelvinator Limited for Rs.5,000 million on 8 July 2005. The deal signed between AB Electrolux Asia-Pacifics CEO Peter Birch and
CFO Paul Gelardi and Videocon Groups Chairman and CEO V.N. Dhoot, approved by the board of directors of Videocon, gave Videocon
the entire (91.85 percent) shareholding of AB Electrolux (ABE) in its loss-making Indian subsidiary Electrolux Kelvinator Limited; and
it will takeover three manufacturing units of Electrolux Kelvinator Limited located in Shahjanpur in Rajasthan and Warora and Butibora
plants in Maharashtra. In a separate agreement signed with AB Electrolux, Videocon will get Electrolux brands Kelvinator and Allwyn
and also Electrolux brand to market in India. It got the Kelvinator brands for a 25-year lease with no royalty payment, and the Electroluxbrand for five years with a royalty payment which was undisclosed while Allwyn was an Indian brand bought by the Electrolux
Kelvinator Limited, when it entered into India. The agreement inked with AB Electrolux also clinched Videocon an annual supply order
of finished products and components worth Rs.50 billion to ABE for five years and the distribution and marketing of Electrolux
Kelvinator brands in SAARC countries.
.Are the Deals a Gain or Loss
The twin deals by Videocon catapulted it to becoming a major original equipment supplier in global markets. Analysts view Videocons
twin deals, which are free from the net of cash and debt, a win-win situation.They point out that the deals are a mere book transaction.
Videocon by signing the deals also got both Thomson SA and Electrolux to invest in its group of companies Videocon Industrieshttp://206.223.65.215/suggested/MSF3S3-0108.htm (7 of 30) [27/Jan/08 11:24:59 PM]
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and Videocon International. Thomson SA agreed to invest 225 million in Videocon Industries and 15 million in Videocon International
and will hold 14 percent stake in both the groups.
Thomson SA plants in Italy, Poland, Mexico and China produce most of the important components that go into a finished Color Picture Tubes
(CPTs). The plants produce all components for making electron guns and deflection yokes and its technological expertise in production
of CPTs and components allowed it to control the cost of higher value-added parts of the tubes. Its CPT manufacturing units at Mexico
and Poland develop integrated circuits and large to very large size TV picture tubes. Industry experts believe that Videocon could leverage
the technology expertise of Thomson SA to manufacture slim color picture tubes, and also leverage the R&D facilities to move into
liquid crystal displays and plasma TVs. Its plant at Anagni in Italy is among the top four leading manufacturers of CRTs and stand behind
LG Phillip JV, Samsung, and Matsushita. Compared to the leaders, Videocon has low-cost production base. It has a strong
technological expertise with 1000 engineers. Its display and components units at Poland, China and Mexico have full fledged R&D
facilities with access to a large resource of 2000 patents and intellectual property rights relating to the most basic technologies in CPTs and can
produce a wide range of products and can offer services to its customers. The acquisition gave Videocon a vast geographical market
that includes China, Asia-Pacific, NAFTA, LATAM and CIS. Except the plant at Dongguan in China, which has a minor stake of
local government, all other plants are entirely owned by Thomson SA. After the acquisition of Thomson SA plants, Mr. Venugopal
Dhoot said, We are now among the largest integrated players with economies of scale in raw materials and finished products and are in
the process of doubling our picture tube glass capacity to 34 million units a year
[6]
.
Analysts believe that the buying out of Thomson SA display and components manufacturing units, Videocon has vertically integrated
itself with its glass manufacturing units back home and gave its glass shell manufacturing units a ready market, and they also believe that
this will help the company to reduce costs of picture tube manufacturing. They argue that with its 2000 patents and intellectual property
rights obtained from the buyout, Videocon could leverage to fight the global display battle as the market moves out of CPTs to Liquid
Crystal Displays (LCDs) and Plasma TVs. Despite the cathode ray tube market shrinking and lower margins and decreasing profits in picture
tube makers, analysts term the acquisition of Thomson SA as a positive move as Videocon minimized the f inancial impact by getting Thomson
SA to invest in Videocon group. Merchant Bankers and a few corporates view Videocons acquisition as a strategic move. Ravinder
Zutshi, deputy managing director of Samsung Electronics India said, Videocon can leverage the Thomson buyout to be an aggressive
price warrior in CPT market globally, though it remains to be seen how it actually plays.
[7]
A few financial analysts in India believe that Thomson could have come for a dollar. They point out that Thomson SAs display
and components manufacturing units were loss-making units and Thomson SA has structured its policy framework to windup the display
and components units and was looking out for a buyer to bail out. Thomson SA after refocusing on high-margin consumer electronic marketfrom a low-end consumer electronic market in October 2004, decided to wind-up its loss making display and components units at
Poland, Mexico, China and also its CRT manufacturing unit in Italy and was looking out for a buyer. The company made an operating loss
of101 million in 2003 and 105 million in 2004. Its CRT manufacturing plant in Anagni had a liability of 178 million and the plant needs
to restructure for further innovations. Except its units in China, all the other units were running in losses. After selling its loss making units
to Videocon, Thomson SA, stated in its financial statement addressed to investors that it could sell out its loss making units six months
ahead than excepted.Analysts also argue that it will be costly for the Videocon Group to get the units in Poland and Mexico on track and
with falling margins in CPT business, the Group will have to reduce the work force of more than 11,000 at these plants to cut the costs and
that could be difficult considering stringent labour laws in Europe and Mexico. Industry peers question the financial strengths of Videocon and
mock that they may have to dismantle the Thomsons plants and bring them back to India, where they can convert glass shells into tubes,http://206.223.65.215/suggested/MSF3S3-0108.htm (8 of 30) [27/Jan/08 11:24:59 PM]
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and sell them at a cheaper rate.
Surplus Capacity in the Industry
Rival Indian CPT players Hotline Teletube and Samtel Colour are baffled by the Dhoots decision to buy huge capacities. They wonder that
it will be difficult for Videocon to leverage its capacities with glut in CPT markets and with prices crashing and low margins. V N
Masaldan, MD, Hotline Teletube, speaking on the Videocon acquisition of Thomson SA said, The low margins in the CPT markets
has forced global players to close their units and with the picture tube technology on wane and being replaced by plasma and LCD, it
wont make sense in buying the CPT units
[8]
. Market analysts point out that the CPT market in India has an annual supply of 23
million units, and has a demand of just 12 million and questions where Mr. Dhoot would market his capacities.Moreover, otherCPTmanufacturers BPL and JCT being Videocon suppliers, and the other players like Samtel Colour and Hotline Teletube planning
to increase their capacity pumping volumes back home will only cost Videocon in leveraging its capacity. Girish Rao, LG sales
[9]
head, argued that adding capacity does not translate into market share; it is one thing to add huge capacities and another is the ability to
sell them. Analysts argue that with the whole world moving to plasma and LCD TVs, the Dhoots may not have problems in the short-term
but will face them in the long-term when the demand falls for the CRT-based TVs. iSuppli, an electronic industry research firm, predicted
that the CRT TVs would decline at a rate of 0.5 CAGR and the global demand from 147 millions units today to 131 million units by 2010,
and that it will be difficult for Videocon to grab a major share in the global CPT markets with Chinas TCL, and Korea companies in the
fray and questioned the acquisition of a declining business. Analysts also argue that it was not Videocon, which gained buying the
Thomson SAs loss making units, but it was Thomson SA that gained by strategically investing in Videocon industries, and getting a shareof profits from the oil exploring business and the electronic business. Analyst believe that by acquiring the share in Videocon, Thomson
SA has achieved a strategic objective of selling its displaying units and magnetized their financial investment and the same has been echoed
in its CEO speech to the investor. They point to the words of Frank Dangeard, CEO of Thomson SA, after the deal that stated: Thomson
is delighted to have finalized an agreement with Videocon. With this agreement Thomson achieves the strategic objective of selling its
display units set last October and now can fully focus on its core media and Entertainment business
[10]
. The CEO speaking of its
investment in Videocon said theirs was a financial investment and that can be monetised.
Controversial View on the CRT Demand
Videocon Group CMD Dhoot observed that emerging markets like Brazil, Russia, India and China (BRIC), Middle East and parts of
Africa will drive the sales of CRT-TV. To counter the growing demand for Flat TVs, Videocon expects to launch slim tubes, which are anew invention based on the CRT technology in the next few months and also consider a launch of Plasma and LCD panels with
this technology at its Anagni plant. Mr. Dhoot is confident that with the acquisition of Thomson SA, the synergies with the Indian
operations would help Videocon to reduce the costs and produce glass shells at very low prices in India, as it has comparatively low cost labor.
The reduction in costs will help it gain profits in the low margin picture tube business. Moreover, though the demand for CRT TVs is
falling, Videocon believes that still about 80 percent of the CTV market is for CRT driven TVs. The Videocon management plans to
invest $500 million in Thomson plants in the next few years by tapping domestic and international equity markets.
Mr. Pradeep Kumar Dhoot, a director in the board of Videocon group, expressed the same confidence in the groups financial
strengths. Speaking to press, Mr. Pradeep Kumar said, As our glass, oil and gas business are profitable, and since here are very
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remote chances of raising finance through debts, the group has approached the Italian government for a grant to expand our business in
the country.
[11]
The GDR Issue and The Merger Activities in the Group
Earlier, Videocon Industries issued Global Depository Receipts (GDRs) worth US $75 million on 28 June 2005 at US$10 per GDR with
each GDR representing one underlying equity share of the Videocon Industries. The GDR issued at a discount of 3 percent to the
current market share price of 434.25. Earlier the issue hit a roadblock when BSE refused to list the underlying GDR issue. BSE refused
the listing on the grounds that it has not increased the non-promoter equity holding from 11.08% to 25% as per its under taking.
Videocon Industries approached Securities Appellate Tribunal (SAT) as a matter of urgency in the second week of June 2005 and soughtits intervention in the issue. On June 13, the tribunal gave a conditional clearance to the company GDR issue to be listed on the
Luxembourg Stock Exchange. On the day of issue of its GDR, which coincided with the acquisition of Thomson SA CPT units, the
company stock fell by 1.05% to Rs.445. The company again placed 94,10,145 Global Depository Receipts on 8 July 2005, at the price of
US$10 per GDR, aggregating to US$94.10 million on Private Placement Basis to AB Electrolux. Each GDR represents one underlying
equity share of the Company, issued at the current market price of Rs.435.25. The company thereby increased its total paid-up capital
to Rs.497.9 million. AB Electrolux picked up 5 percent stake in Videocon Industries Limited. After the issue of the GDRs, the company
now has non-promoter share equity holding at 27.59 percent and fulfill the SEBI condition.
Industrial analysts believe that Mr. Dhoot, setout to carve a global image of Videocon, has planned well for its twin deals and believe
that Videocon is banking on its cash cow crude oil investment through its venture Petrocon. Petrocon holds 25 percent equity in the
offshore Ravva oil fields of Krishna-Godavari basins, While the rest is held by Cairns Energy (25 percent), ONGC holds 40 percent andJapan based Marubeni Oil (10 percent). The JV oil field with proven oil reserves of more than 250 million barrels and 450 million cubic
metric tonnes of gas is operated by Cairn producing around 50,000 barrels of oil per day and is sold to domestic companies. It is one of
the lowest operating costs in the world, with a cost production less than $1 per barrel of crude oil produced. The Videocon Petroleum
(later renamed Petrocon) invested $20 million in the Ravva oil field in pre National Exploration and Licensing Policy (NELP). Currently,
the company rakes in Rs.6000 million a year from the oil field.
Mr. Dhoot before going for global acquisition merged his cash cow Petrocon with Videocon Industries in December 2004. The board
of directors approved the deal and the company informed BSE about the amalgamation scheme and proposed five shares of the company
for every two shares of Petrocon India Limited held. Soon after the amalgamation, the share price of Videocon Industries that was
looming below Rs.30 a year ago jumped to Rs.240 per share. And soon after the merger with Thomson SA, Dhoot merged
Videocon International with Videocon Industries on July 7, 2005. After the boards approval for amalgamation and complying with
the necessary approval, the company fixed the swap ratio at 1:5, for every five equity shares of Videocon International held, the
shareholder would get one share of Videocon Industries. Thomson, which sold its picture tube business to Videocon, will have a 14
percent stake in the company. The amalgamation was made on the basis of advice given by Development Bank of Singapore and ICICI.
Post-merger, Videocon Industries will have under its umbrella an entirely vertically integrated multi-brand domestic Indian consumer
durable business and also make a conglomerate with diversified business under its arm that includes oil and gas ventures.
Issues and Challenges Ahead
Videocon, having successfully raised the capital through its issue of GDRs, further plans to raise the capital from international and
domestic markets. Videocon in its ambitious plans to increase its presence in the global market has vertically integrated itself by acquiring a
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CTV manufacturing unit and is betting on the broad technology and huge capacity of the Thomson Units. But the CRT TV is on a decline
and a sharp drop in prices in Plasma and LCD and are likely to hit the bottom line plant hard, believes industry analysts. And few
analysts question the Videocon plans to divest cash flows from oil business. R Vartharajan
[12]
analyst in Motilal Oswal, a stock broking
house in India believes that Videocon plans to divert cash flows from oil business for global expansion as unsound, as one dry well can
wipe-out its cash for years. Videocon Industries is now eyeing oil exploration blocks in Sudan, Nigeria and Jordan and is investing
around $100 million. It has signed a memorandum of understanding with the Government of Khartoum provinces in Sudan and is investing
$100 million for a 76 percent stake in the oil field in Sudan.
Analysts believe that Videocon may face big competition in the space from big branded players like LG and Haier in view ofVideocons acquisition of Thomson SA and Electrolux Kelvinator to have a huge slice of worldwide market for OEM. iSuppli estimated
that the present worldwide market for OEM to be around $131 billion and projected it to grow to $163 billion by 2008. iSuppli also
estimated that the revenue generated from electronic manufacturing services to touch about $2.03 billion in 2009, rising at a CAGR of
21 percent. Industry analysis also argue that Videocons monopoly in CPT glass could be challenged as Hotline Teletube, the picture
tube manufacturer, has set to produce glass shells next year from its integrated 12-millon CPT glass line at Gwalior that has been completed.
Videocons acquisition of AB Electroluxs Electrolux Kelvinator Limited began showing teething problems. Electronic consumer
durable industry grapevine believes that Videocon is considering closure of Electrolux Kelvinators refrigerator manufacturing plant
at Shahjanpur in Rajasthan as also the washing machine plant at Butibori in Maharashtra due to its low capacity utilization. If this
happens, Videocon has to churn out the Electrolux brands from its plants, while the Electrolux plants lie idle.
It is observed that with component and raw material prices rapidly going down there could be more drop in prices of CTVs and added tothis the Government of India reduces the custom duty from 25 percent to 20 percent, the market is expecting huge drop in the price of
CTV. The Indian Government in its Budget 2005 reduced the customs duty on raw materials like plastics, metals, glass shell from a peak
duty of 25 percent to 20 percent. Analysts argue that with the reduction in customs duty domestic prices of major raw materials that go
into making a television will be coming down forcing domestic vendors becoming more competitive and customer-friendly under pressure
to reduce costs and this could have an effect on Videocon, as the domestic players like Samtel and Hotline Teletube the
domestic manufacturers of color picture tube are having reasonable market share. Industrial analysts also argue that with global
markets already moving from normal CRT TVs to Plasma and LCD technology, it could decrease the sales of CRT based CTVs.
Moreover analysts also argue that Videocon group could face problems in raising capital in future. Videocon group, which has raised
capital by going into the capital market either through public issue or GDRs or debentures or bonds, was banned by SEBI for three years from
entering into the market in 2001, for manipulating their scrips in 1998. Securities Appellate Tribunal (SAT), though later repealed the ban
in June 2002, the ban had nevertheless hit the business profile and dented its image. Videocon is likely to face problems from Petrocon
India, the flag ship of Videocon Group engaged in Oil and Petroleum business. Petrocon ran into trouble, when the Government of India
found fault with Videocon Petroleum for wrongfully pledging the assets of Ravva oil field with IDBI and UTI for raising a loan of over
Rs.990 crore and warned that the contract would be cancelled, which Videocon refuted. Later in 2003, the Ministry of Petroleum and
Natural Gas and Directorate-General of Hydrocarbons issued show cause notices for the Rs.800 crore dues owed to the government
and warned that it would terminate the production-sharing contract. Videocon and its partners in the joint venture owed money to
the government on account of the wrong methodology of calculation of post tax rate of return and Videocon has not paid to Indian
government the profit for petroleum as per the provision of Production Sharing Contract (PSC). The proceedings dragged to
International Arbitration Court at London, which held the Indian government claim against Petrocon India. While the company claimed that
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it owed only Rs.3000 million, ignoring the company claim the government in 2004 began deducting Rs.30 million every month from the sale
proceeds of the oil towards the dues. Videocon Industries will now be losing Rs.30 million every month till it completely pays out the money it
owes as Petrocon India is merged with Videocon Industries. Petrocon merged with Videocon Industries Limited and was approved by
the Board of Videocon Industries on 13 April 2005 the board proposed exchange ratio of 5 shares of Videocon Industries for every 2
shares held in Petrocon India.
Its GDR issue also may face problems because it is placed under non-promoter holdings. The Securities Appellate Tribunal (SAT) has
now directed SEBI to clarify whether the issue of Global Depository Receipts (GDRs) amounted to public issue of shares and whether
GDRs should be considered as non-promoter holdings. If Sebi rules the GDRs issue on negative note, Videocon will have further decrease
in its promoter share in order to increase the non-promoter share to 25%. This issue propped up due to Videocon challenging NSEs refusal
to accept GDRs under the public holding criteria
[13]
.
Videocon Group is moving towards making the Group a global conglomerate by acquiring in global markets. Speaking about its ambition
to become a global conglomerate, S K Sheilgikar, advisor to Videocon Group, says, If we do not leverage the huge opportunity we are
not entrepreneurs
[14]
. Videocon Group through its twin deals is set to emerge as a strong player both in India and globally. The group
has now set its eyes on taking a global plunge by bagging and acquiring oil exploring and production stakes in Jordan, Sudan, Yemen,
Ukraine and Niger.
ANNEXURE I
World Market for TVs (in billions of US $)
Source: www.displaySearch.com
Worldwide Television Shipment Forecast by Display Technology
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Source: iSuppli/November, 2004.
ANNEXURE II
Global TV Forecast by Display Technology
Display Type 2005 2006 2007 2008 2009
CRT 146678 143931 141555 138402 131618
Projection 6563 8141 9314 10711 11971
Plasma 4052 6702 10117 14118 18157
LCD 14338 20986 30501 41288 53724
All figures in thousands
Source: isuppli Corp.
ANNEXURE III
Thomson Income Statement
(accounts in accordance with French GAAP in million euros)
1999
(in Euro)
2000
(in Euro)
2001
(in Euro)
2002
(in Euro)
2003
(in Euro)
2003
(in US $)
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Net Sales 6619 8995 10391 10187 8459 10239
Content and Networks 927 1581 3460 3924 3714 4495
Components 1279 1686 1642 1560 1072 1297
Consumer Products 4125 5339 4884 4264 3198 3870
Licensing 278 378 395 429 462 559
Corporate 9 11 10 10 13 16
Cost of Sales (5065) (6915) (8116) (7761) (6536) (7910)
Gross Margin 1553 2080 2275 2426 1923 2327
Selling, general and
administrative expense
(897) (1183) (1271) (1334) (1120) (1355)
R &D (290) (351) (368) (374) (295) (357)
Operating Income 366 546 636 718 508 615
Content and Networks 132 271 458 420 436 528
Components 216 262 111 84 (101) (122)
Consumer Products (94) (179) (160) (52) (124) (150)
Licensing 218 319 338 387 411 497
Corporate (106) (127) (111) (121) (114) (138)Interest Income (expenses)
Net
(41) (10) (29) 9 (9) (11)
Other financial expenses net (39) (67) (160) (137) (70) (85)
Other income expenses (6) (81) 8 (96) (249) (301)
Income tax (50) 1 (139) (56) (63) (76)
Appropriate amount in accordance with US GAAP
Operating Income 169 284 204 465 32 38
Net Income (Loss) 148 138 191 351 (46) (56)
Source: www.thomson.net
ANNEXURE IV
Thomson SA Financial Details
1999 2000 2001 2002 2003 2003
(US $)
(in millions except share and per-share data)
Operating income 366 546 636 718 508 615
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Content and Networks 132 271 458 420 436 528
Components 216 262 111 84 (101) (122)
Consumer Products (94) (179) (160) (52) (124) (150)
Licensing 218 319 338 387 411 497
Corporate (106) (127) (111) (121) (114) (138)
Interest income (expense), net (41) (10) (29) 9 (9) (11)
Other financial expense, net (39) (67) (160) (137) (70) (85)
Other income (expense), net (6) (81) 8 (96) (249) (301)
Income tax (50) 1 (139) (56) (63) (76)
Net income before minority interests 224 376 264 360 34 41
Minority interests 7 18 22 13 (8) (10)
Net income 231 394 286 373 26 31
Basic net income per share 1.17 1.56 1.04 1.35 0.09 0.11
Diluted net income per share 1.17 1.56 1.04 1.29 0.09 0.11
Weighted average number of shares basic outstanding 197, 526,
322
252, 039,
992
274, 181,
607
277, 240,
438
276, 796,
602
276, 796,
602
Dividend paid N/A N/A N/A N/A (62) (75)Approximate amounts in accordance with US GAAP
Operating income 169 284 204 465 32 38
Net income (loss) 148 136 191 351 (46) (56)
Basic income (loss) per share 0.77 0.54 0.72 1.26 (0.17) (0.21)
Diluted income (loss) per share 0.76 0.54 0.69 1.21 (0.17) (0.21)
Source: Thompson SA
ANNEXURE V
Balance Sheet
1999 2000 2001 2002 2003 2003
(US $)
Balance Sheet Data (amounts in accordance with
French GAAP):
(in million)
Intangible assets, net 168 196 1696 2183 1935 2342
Property, plant and equipment, net 1090 1122 1536 1622 1474 1784
Total investments and other non-current assets 245 314 417 218 185 224
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Total fixed assets 1503 1632 3649 4023 3594 4350
Inventories 1108 1477 1120 962 744 900
Other current assets 1952 2420 3489 3266 2559 3097
Cash and cash equivalents 402 1772 1532 1463 2383 2884
Total assets 4965 7301 9790 9714 9280 11231
Reserves for retirement benefits 590 633 709 705 653 790
Restructuring reserves 156 179 183 127 118 143
Other reserves 225 277 246 216 206 249
Financial debt (short-term and long-term) 361 1143 1161 1694 2128 2576
Total current liabilities 1841 2155 3492 2987 2583 3126
Minority Interests 73 54 71 38 9 11
Shareholdersequity 1719 2860 3958 3947 3583 4336
Total liabilities, shareholdersequity and minority
interests
4965 7301 9790 9714 9280 11231
Approximate amounts in accordance with US GAAP
Shareholdersequity 2794 3411 3399 3859 3433 4155
Source: Thompson SA.ANNEXURE VI
Shareholding Pattern of Electrolux
Electrolux Kelvinator Ltd. As on March 2005
Private Holdings Share 4.46%
Foreign Promoters/Collaborators share 90.21%
Mutual Funds and UTI Share 0.01%
Banks, FIs, Insurance cos Share 0
FIIs Share 0
Private Corporate Bodies Share 0.81%
Indian Public Share 4.48%
NRIs/OCBs Share 0.03%
Total Equity (Nos.) 373441865
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Source: ICFAI Research Team.
ANNEXURE IX
Trends in Capacity (Products)
Videocon International Ltd. 000 no.s 000 no.s 000 no.s 000 no.s 000 no.s
Product/s manufactured/traded Mar. 2000 Mar. 2001 Sep. 2002 Sep. 2003 Sep. 2004
Glass Shell (Funnels)for Ctv Picture Tube 3000 2500 2500 4500 6000
Glass Shell (Panels)
for Ctv Picture Tube
3000 3000 3000 7500 12000
Source: CMIE/Prowess.
ANNEXURE X
Product/s Manufactured/Sales
Videocon International Ltd.Production Qty.
000 No.s
Sales Qty. Sales Value
000 No.s
Units Units Rs. in Million
Television Sets Incl. Sub Assemblies 5814.72 5817.75 21889.80
Audio, Assemblies/Sub-Assemblies of Audio 2684.34 2687.83 9246.30
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p ( )
Air Conditioners 133538 130611 1967.90
Glass Shell (Panels) for Ctv Picture Tube 9514.39 9433.71 5559.70
Glass Shell (Funnels) for Ctv Picture Tube 4655.67 4611.15 1365.20
Source: CMIE/Prowess.
ANNEXURE XICapital History
Videocon Industries Ltd.
Issue Month Issue Type Security
Type
Face
Value
Rs.
Security
Amount
Rs. in
Million
Additional
PUC
Rs. in
Million
Increased
PUC
Rs. in
Million
Oct. 1993 OFFER Equity 10 70.90 28.40 113.50
Nov. 1994 RIGHTS PCD (Fixed
Interest Rate) 450 2553.70 0 113.50
Oct. 1996 CONV. NCDW Equity 10 50.10 50.10 163.60 Jun. 2003 POST-
AMALGAMATION
Equity10 0 147.20 328.90
Jun. 2005 EURO ISSUE Global Depository
Receipts 10 3257.60 75.00 403.80
Jul. 2005 EURO ISSUE Global Depository
Receipts 10 4095.70 94.10 497.90
Aug. 2005 POST-
AMALGAMATION
Equity
10 0 1257.50 1755.50
Sep. 2005 PPL Equity 10 999.90 232.50 1778.70
Sep. 2005 EURO ISSUE Global DepositoryReceipts
10 12600.20 286.50 2065.20
Source: CMIE/Prowess.
ANNEXURE XII
Capital History Summary
Videocon International Ltd.
Issue Security Face Value
Security
Amount
Additional
PUCIncreased
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p ( )
Month Issue Type Type Rs. Rs. in
Million
Rs. in
Million
Rs. in
Million
Feb. 1990 DEB. CONV. Equity 10 0 17.20 42.20
Feb. 1991 RIGHTS FCD (Fixed Interest Rate) 220 261.10 0 42.20
Feb. 1991 PUBLIC FCD (Fixed Interest Rate) 220 188.90 0 42.20
Mar. 1991 DEB. CONV. Equity 10 0 15.20 59.50
Mar. 1992 DEB. CONV. Equity 10 0 23.30 82.80
Sep. 1992 DEB. CONV. Equity 10 0 34.70 117.50
Oct. 1992 BONUS Equity 10 0 141.10 282.00Nov. 1992 DEB. CONV. Equity 10 0 20.10 137.60
Dec. 1992 RIGHTS Equity 10 846.10 72.30 354.30
Dec. 1992 PUBLIC Equity 10 633.50 52.80 407.10
Dec. 1992 PUBLIC NCD (Fixed Interest Rate) 40 500.00 0 407.10
Jan. 1994 EURO ISSUE Global Depository Receipts 10 2823.30 111.10 518.20
Oct. 1994 EURO ISSUE ENCB (Fixed Interest Rate) 100 34.00 0 518.20
Mar. 1998 POST-AMALGAMATION Equity 10 0 143.90 712.10
Apr. 1998 PPL Equity 10 215.00 50.00 712.10
Source: CMIE/Prowess.
ANNEXURE XIII
Shareholding Pattern
Expression Videocon Industries Ltd. Videocon International Ltd.
Private Holdings Share 72.41 35.51
Foreign Promoters/Collaborators share 0 0
Mutual Funds and UTI Share 0 1.03
Banks, FIs, Insurance cos Share 0.03 6.52
FIIs Share 1.11 2.47 Private Corporate Bodies Share 4.86 15.51
Indian Public Share 2.97 38.08
NRIs/OCBs Share 0.04 0.46
Any Other Share 18.57 0.42
Total Equity 40385050 71212441
Source: CMIE/Prowess.
ANNEXURE XIV
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Videocon International
Balance Sheet
(Rs. in Million)
Mar. 2000 Mar. 2001 Sep. 2002 Sep. 2003 Sep. 2004
12 months 12 months 18 months 12 months 12 months
Sources of Funds
Total Share Capital 1411.90 1549.40 1549.40 1311.90 1489.00
Equity Share Capital 710.60 710.60 710.60 710.60 710.60
Preference Share Capital 701.30 838.80 838.80 601.30 778.40Reserves 13319.90 14394.70 14527.70 12211.30 11999.80
Revaluation Reserves 2056.70 2056.70 2056.70 9528.80 9518.50
Networth 16788.50 18000.80 18133.80 23052.00 23007.30
Secured Loans 9963.20 11968.50 17092.10 21773.10 22401.30
Unsecured Loans 5968.00 4102.60 3763.40 1901.40 2256.00
Total Debt 15931.20 16071.10 20855.50 23674.50 24657.30
Total Liabilities 32719.70 34071.90 38989.30 46726.50 47664.60
Application of Funds
Gross Block 19159.10 21640.90 29482.30 41038.40 46015.20
Less: Accum. Depreciation 5246.50 6547.90 8709.10 12735.10 16460.00Net Block 13912.60 15093.00 20773.20 28303.30 29555.20
Capital Work-in-Progress 3300.50 5033.50 5074.40 4799.50 4718.90
Investments 1989.70 2062.30 2990.50 1731.50 1708.10
Inventories 6164.80 6517.30 6465.50 7338.60 7624.00
Sundry Debtors 5801.50 6432.70 7514.90 8143.10 8565.20
Cash and Bank Balance 1986.80 2394.80 1664.60 1709.50 1266.50
Total Current Assets 13953.10 15344.80 15645.00 17191.20 17455.70
Loans and Advances 4187.40 4822.00 6396.10 6863.50 7564.40
Total CA, Loans & Advances 18140.50 20166.80 22041.10 24054.70 25020.10
Deferred Credit 224.80 430.10 120.50 1141.70 1568.20Fixed Deposits 0.00 0.00 0.00 0.00 0.00
Current Liabilities 4425.80 8169.80 11726.30 12059.70 13237.80
Provisions 197.80 113.90 163.60 102.80 99.90
Total CL & Provisions 4623.60 8283.70 11889.90 12162.50 13337.70
Net Current Assets 13516.90 11883.10 10151.20 11892.20 11682.40
Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00
Total Assets 32719.70 34071.90 38989.30 46726.50 47664.60
Source: CMIE/Prowess.
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ANNEXURE XV
Videocon International Profit & Loss
(Rs. in Million)
IncomeMar-00 Mar-01 Sep-02 Sep-03 Sep-04
12 months 12 months 18 months 12 months 12 months
Sales Turnover 30030.00 32440.50 49739.30 36015.30 40031.00
Excise Duty 1778.30 1675.60 319.70 2414.90 2771.10
Net Sales 28251.70 30764.90 46542.30 33600.40 37259.90
Other Income 55.10 88.60 184.50 133.20 213.60
Stock Adjustments 455.00 315.20 423.10 235.20 77.30
Total Income 28761.80 31168.70 46303.70 33968.80 37396.20
Expenditure
Raw Materials 20040.90 22244.30 32952.40 24261.00 26690.00
Power & Fuel Cost 191.80 207.70 407.50 263.90 282.10
Employee Cost 447.40 433.10 625.40 525.30 579.00
Other Manufacturing Expenses 446.60 443.40 506.30 47.70 52.90
Selling and Admin Expenses 2240.50 241.00 3148.80 2334.90 2668.60
Miscellaneous Expenses 1043.40 903.30 1198.80 573.60 472.40Total Expenses 24410.60 26641.80 38839.20 28006.40 30745.00
Operating Profit 4296.10 4438.30 72.80 5829.20 6437.60
PBDIT 4351.20 4526.90 7464.50 5962.40 6651.20
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Interest 1970.90 1925.10 3068.40 2285.70 2393.20
PBDT 2380.30 2601.80 4396.10 3676.70 4258.00
Depreciation 847.00 944.80 2007.20 1975.10 2252.40
Profit Before Tax 1533.30 165.70 2388.90 1701.60 2005.60
Extra-ordinary items 41.50 01.80 12.30 23.30 82.60
PBT (Post Extra-ord Items) 1574.80 1658.80 2376.60 1678.30 192.30
Tax 123.00 110.00 680.90 652.20 672.70
Net Profit 1410.30 1547.00 1708.00 1049.40 1332.90
Total Value Addition 4369.70 4397.50 5886.80 3745.40 405.50
Preference Dividend 08.80 20.80 0.90 06.90 02.90
Equity Dividend 142.40 71.20 71.20 71.20 71.20
Corporate Dividend Tax 33.30 09.40 0 10.00 09.70
Per share data (Annualized) 0
Shares in issue (lakh) 710.60 710.60 710.60 710.60 710.60
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Earning Per Share (Rs.) 19.25 21.35 15.94 14.53 18.58
Equity Dividend (%) 20 10 6.67 10 10
Book Value (Rs.) 197.45 212.57 214.44 181.84 178.87
Source: CMIE.
ANNEXURE XVI
Videocon Industries
Balance Sheet
(Rs. in million)
Mar-00 Mar-01 Jun-02 Jun-03 Jun-04
18 months 12 months 15 months 12 months 12 months
Sources of Funds
Total Share Capital 181.60 181.60 181.60 328.90 328.90
Equity Share Capital 181.60 181.60 181.60 328.90 328.90
Preference Share Capital 0 0 0 0 0
Reserves 03.90 06.30 -203.70 -394.80 -412.20
Networth 185.50 187.90 -22.10 -65.90 -83.30
Secured Loans 0 0 0 0 0
Unsecured Loans 2430.20 2418.70 2629.70 999.60 900.70Total Debt 2430.20 2418.70 2629.70 999.60 900.70
Total Liabilities 2615.70 2606.60 2607.60 933.70 817.40
Application of Funds
Gross Block 641.70 1797.80 1138.30 1143.70 1166.20
Less: Accum. Depreciation 562.00 551.20 25.10 44.00 66.90
Net Block 79.70 1246.60 1113.20 1099.70 1099.30
Capital Work in Progress 1225.20 0 0 0 0
Investments 1005.30 801.40 799.80 88.40 82.90
Inventories 24.30 06.30 2.70 0 0Sundry Debtors 79.00 81.70 88.10 0 06.80
Cash and Bank Balance 08.30 02.90 01.80 01.60 02.80
Advances Given By Banks 0 0 0 0 0
Other Assets for Banks 0 0 0 0 0
Total Current Assets 111.60 90.90 92.60 01.60 09.60
Loans and Advances 1513.30 1346.70 1923.90 1701.30 1049.60
Total CA, Loans & Advances 1624.90 1437.60 2016.50 1702.90 1059.20
Deferred Credit 0 0 0 0 0
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Suggested Answers
Integrated Case Studies III (MSF3S3): January 2008
1. The characteristics of a successful diversification strategy are:
PLATFORM OF EXISTING CAPABILITIES
Any diversification strategy should be built on the foundation of existing competencies. This facilitates entryinto new markets. A company can have multiple capabilities, but a capability qualifies as a core competence if it
fulfills the following criteria:
It should be applicable across all the product categories.
It should not be open to duplication by competitors.
It should result in significant value addition to the consumer.
CHOICE OF NEW MARKETS
The markets earmarked for expansion should be growth markets with low gestation periods. A small company
cannot afford to operate in markets where the gestation period is high. The telecom sector, for instance, was
opened up in the year 1994. The private operators in most circles are yet to make profits. On the other hand, thesoftware boom saw many companies diversify into the InfoTech arena with substantial rewards; The new .
markets should also offer room for companies to operate in a niche.
NEW CAPABILITIES
Though the strategy is based on existing capabilities, companies should acquire new ones to augment the
existing strengths. They could make an effort to acquire new technologies, distribution channels or adding
marketing muscle.
MANAGEMENT SKILLS AND LEADERSHIP
Implementation of the strategy will require strong and aggressive management. The owner/manager may have
to take swift, decisive measures during the diversification effort. These could be decisions related to investment
or downsizing. These decisions may be risky and face resistance from employees. Strong and visionary
leadership is required to ensure successful implementation.
EMPLOYEE SKILLS AND PRODUCTIVITY
A skilled and autonomous workforce is a must for the diversification strategy to succeed. Employees are more
productive if given autonomy.
LEAN AND TENACIOUS
Companies that can maintain a lean management structure can avoid high overhead margins. The success of the
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diversification ultimately hinges upon the tenacity of the personnel to see it through.
Diversifying to new markets can be a risky proposition. The risk can be minimized if companies can identify
their strengths and evaluate market opportunities accordingly. The key for small companies is to identify
markets where their capabilities can be profitably leveraged to create customer value.
The changing environments and the new forms of competition have created new opportunities and threats for
business firms. Firms must adjust to new forces of competition from all directions. They have been forced to
adopt many forms of restructuring activity. M&As will be considered first, but it should be understood that they
represent only one set of the many adjustment and restructuring responses.
2. Videocon took Swedish giant AB Electrolux's (ABE) 91.85 per cent stake in the latter's Indian subsidiary
Electrolux Kelvinator (EKL) and got the rights to license the Electrolux brand in India for five years and the
Kelvinator brand for an unlimited period . The agreement would allow other brands Allwyn, another EKL
brand, in Videocon's fold.
Importantly, Videocon would get EKL's three manufacturing facilities in India - in Shahjahanpur in Rajasthan,
and Warora and Butibori in Maharashtra.
Videocon might have inked its deal all at once. All these deals are a part of Videocon's strategy of going global.
Over the last six years, the group has been widening its presence in East Asia, Europe and the Middle East. In
China, it now has two units - one that can make 2 million CPTs a year and another that can make 3 million
compressors. In Italy, it has a CPT unit from Thomson (the Agnani plant acquired around five months ago) that
can make 6 million units a year and a compressor plant at Necci that can make 0.6 million units. In Poland, the
glass shell plant acquired from Thomson has a capacity of 5 million. The Thomson acquisition has also given ita foothold in Mexico, with a CPT capacity of 3 million. With these, Videocon can now service some of the
largest markets from close quarters. The China plant can feed the Asian markets, Mexico the Americas, while
Poland can take care of Europe.
The interesting thing is the way they are choosing to go global: through the OEM (original equipment
manufacturer) route. Dictating the shift were new business realities - the march of the Korean chaebols in the
global branded durables game and Videocon's own eroding market share at home. Since building a brand abroad
was tough, Videocon decided to go in for intermediaries.
The new acquisitions will help Videocon with its global strategy. Take CPTs. The Thomson deal - for which
Videocon beat down 16 bids, including one from Philips and several from Chinese manufacturers - will catapult
Videocon into the No. 3 slot in the global pecking order for CPTs. With an existing capacity of 19 million,which is planned to be ramped up to 25 million by December, Videocon would be getting closer to players like
LG. Philips (35 million) and Samsung (32 million), and race ahead of Sony (13 million). In glass shells,
Videocon will add a capacity of 5 million units from the acquisition of Thomson's Poland factory to its existing
12 million units in Bharuch, taking the total up to 17 million units. In the next three months, it is talking of
ramping up capacity to 25 million units, making it the fifth largest global player in this segment. Although it is
going in for measures such as electrical boosting at its glass plants, a procedure that will increase capacities by
nearly 50 per cent, it will still be a tall order to catch up with leaders NEG and Asahi, which have capacities of
60 million units each.
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The Thomson acquisition will give Videocon a global footprint. The challenge is that it will have to compete
with the Chinese and the Koreans in the space.
3. Videocon has the largest distributed manufacturing base across India - 12 facilities. Compared to this, LG has
two, Samsung has one, and Onida has two. Videocon's distributed capacity has ensured that it has gained ample
experience in managing a complex supply chain - a fact that will come to its aid in its spread out ventures
abroad.
Videocon has capacities to manufacture 4 million CTVs, 250,000 washing machines, 1 million DVD players,
4.8 million refrigerators, 140,000 air-conditioners and 180,000 microwave ovens. These will be bolstered by
EKL's three plants. Videocon has been using its Bangalore and Aurangabad plants for exports. It supplies CTVs
to Toshiba, Roadstar, TCL, Philips and Thomson.
Videocon's other advantage will be its backward integration. The company not only makes components like
compressors and printed circuit boards (PCBs), but also the most critical component that goes into a CTV: the
shells for the picture tubes. These account for as much as 50 per cent of the latter's cost. According to group
managing director Rajkumar Dhoot, Videocon's glass shell factory at Bharuch also has the highest yield in the
world (per unit of investment) at 91 per cent. Asahi, the largest maker of glass shells in the world, has a lower
yield at around 85 per cent.
Moreover, the EMS business in India has typically hinged on tax exemptions. Videocon, like many of its peers
in India, grew its manufacturing business by taking advantage of policy-friendly locations. Aurangabad, for
instance, is classified under Zone 'D' under the Special Industrial Development Zones Scheme and according to
experts the tax exemptions will help Videocon save around Rs.200 crore in taxes every year.
< TOP >
4. The shrinking market share due to more new players in the market has pushed the Videocon to take acquisition
route to have a global foot print. The Thomson acquisition will give Videocon a global footprint. The challenge
is that it will have to compete with the Chinese and the Koreans in the space. The competition will be tougher as
it is a shrinking market. The Dhoots seem to have their eyes on a broad global trend and seems to have taken the
acquisition route.
Videocon's big bet is on the broad technology and business trends, Currently, CTVs account for the majority of
sales, even in the West. That's the market Videocon's products will ultimately be selling in.
However, a sharp drop in plasma and LCD (liquid crystal display) prices could hit this plan hard, especially in
the global markets, where it may be left saddled with huge capacities and high operating costs.
But Videocon is betting on the fact that at a time when the larger global manufacturers are graduating to newer
technologies like LCD, PDP and organic light-emitting diode, the demand for plain-old cathode-ray tubes
(CRTs) will be filled up by the emerging markets, where volume growth is likely to be high.
The other big challenge Videocon will face is from the r ising input costs. Besides, there is the issue of breaking
new ground in terms of geographies and product segments.. Which brand will Videocon sell to? That's a big
question.
As Videocon is considering closure of Electrolux Kelvinators refrigerator manufacturing plant at Shahjanpur in
Rajasthan as also the washing machine plant at Butibori in Maharashtra due to its low capacity utilization. If this
happens Videocon has to churn out the Electrolux brands from its plants, while the Electrolux plants lie idle.
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With component and raw material prices rapidly going down there could be more drop in prices of CTVs and
added to this the Government of India reduces the custom duty from 25 percent to 20 percent, the market is
expecting huge drop in the price of CTV. The Indian Government in its Budget 2005 reduced the customs duty
on raw materials like plastics, metals, glass shell from a peak duty of 25 percent to 20 percent. Analysts argue
that with the reduction in customs duty domestic prices of major raw materials that go into making a television
will be coming down forcing domestic vendors becoming more competitive and customer-friendly under
pressure to reduce costs and this could have an effect on Videocon, as the domestic players like Samtel and
Hotline Teletube the domestic manufacturers of color picture tube are having reasonable market share. Industrial
analysts also argue that with global markets already moving from normal CRT TVs to Plasma and LCD
technology, it could decrease the sales of CRT based CTVs.
5. Videocon chose to go global through the OEM (original equipment manufacturer) route. Dictating the shift were
new business realities - the march of the Korean chaebols in the global branded durables game and Videocon's
own eroding market share at home. According to reports the worldwide market for OEM, alternatively known as
electronics manufacturing services (EMS), worth $131 billion and is projected to grow to $163 billion in 2008.
The revenue generated by EMS firms in India is expected to touch $2.03 billion in 2009, rising at a CAGR of 21
per cent from $774 million in 2004. Videocon's big competition in the space is, however, going to be from big
branded players like LG and Haier. Ironically, many of these brands started out as OEM players - first in their
domestic markets, and then abroad. This strategy helped them strengthen their manufacturing and gain
economies of scale. Some like LG, despite being a branded player of global stature.
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6. Mr. Dhoot before going for global acquisition merged his cash cow Petrocon with Videocon Industries inDecember 2004. The board of directors approved the deal and the company informed BSE about the
amalgamation scheme and proposed five shares of the company for every two shares of Petrocon India Limited
held. Soon after the amalgamation, the share price of Videocon Industries that was looming below Rs.30 a year
ago jumped to Rs.240 per share. And soon after the merger with Thomson SA, Dhoot merged Videocon
International with Videocon Industries on July 7, 2005.
Moreover analysts also argue that Videocon group could face problems in raising capital in future. Videocon
group, which has raised capital by going into the capital market either through public issue or GDRs or
debentures or bonds, was banned by SEBI for three years from entering into the market in 2001, for
manipulating their scrips in 1998. Securities Appellate Tribunal (SAT), though later repealed the ban in June
2002, the ban had nevertheless hit the business profile and dented its image. Videocon is likely to face problems
from Petrocon India, the flag ship of Videocon Group engaged in Oil and Petroleum business. Petrocon ran into
trouble, when the Government of India found fault with Videocon Petroleum for wrongfully pledging the assets
of Ravva oil field with IDBI and UTI for raising a loan of over Rs.990 crore and warned that the contract would
be cancelled, which Videocon refuted. Later in 2003, the Ministry of Petroleum and Natural Gas and
Directorate-General of Hydrocarbons issued show cause notices for the Rs.800 crore dues owed to the
government and warned that it would terminate the production-sharing contract. Videocon and its partners in the
joint venture owed money to the government on account of the wrong methodology of calculation of post tax
rate of return and Videocon has not paid to Indian government the profit for petroleum as per the provision of
Production Sharing Contract (PSC).
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Its GDR issue also may face problems because it is placed under non-promoter holdings. The Securities
Appellate Tribunal (SAT) has now directed SEBI to clarify whether the issue of Global Depository Receipts
(GDRs) amounted to public issue of shares and whether GDRs should be considered as non-promoter holdings.
If Sebi rules the GDRs issue on negative note Videocon will have further to decrease in its promoter share in
order to increase the non-promoter share to 25%. This issue propped up due to Videocon challenging NSEs
refusal to accept GDRs under the public holding criteria.
7. Videocon purchased the global CRT business from French consumer electronics maker Thomson, and
announced intentions to use the CRT manufacturing facilities in Anagni, Italy as a hub for manufacturing other
appliances in Europe. Soon after in 2005, Videocon acquired a 91.25-percent equity stake in Electrolux's Indian
subsidiary, Electrolux Kelvinator Ltd (EKL). The agreement also has Electrolux sourcing components fromVideocon, and Videocon said it wanted to make itself into a major supplier for Electrolux. The acquisition of
Thomson''s manufacturing units has been made through an offshore entity of Videocon group in which other
group companies like Videocon Communication, Videocon Appliances and Videocon International hold 19 per
cent equity each, totaling 57 per cent. Videocon Industries has a 25-per cent interest in the oil exploration from
the Ravva field, which yields a net cash flow of more than Rs 400 crore ($90 million). Thomsons facilities
include full-fledged R&D facilities at various places located in Europe and China along with access to a large
resource of the patents and IPRs relating to the most basic technologies.
Thomson will receive 240 million for the picture tube business from Videocon. At the same time, Thomson
will invest the same amount in two listed Videocon companies - 225 million or about Rs1,200 crore in
Videocon Industries, which is mainly active in the energy sector, at $10 per share and 15 million or Rs80 crore
in Videocon International.
After integration of the colour picture tube business from Thomson SA with its Indian business, the total
turnover of the Videocon Group is expected to be Rs17,500 crore ($4 billion) with more than Rs.8,700 crore ($2
billion) coming from global operations. The aggregate investments envisaged for all these would be over $500
million, in one or more tranches. The Group plans to fund this by accessing domestic / international debt / equity
markets.
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8. Finance professionals call various options like debt, equity and many other tools of finance as structures of
business finance, and the right structure can mean the difference between building a monumental company and
sinking it in the quicksand of debt.
Whenever a company needs to raise capital there are only two ways; one is through debt, which is borrowed,and the other is equity, which is traded for ownership of the company. The first step to raising the right kind of
money is to decide between debt and equity. Usually, the choice depends on personal preference. Controlling
the company ownership tightly means it never has to answer to anyone. It also means the company has taken on
a significant amount of debt using its assets as collateral.
Raising money through equity offers several advantages to businesses. By issuing equity, the company generally
improves its creditworthiness. Equity financing can come from individual angel investors, traditional venture
capital or mezzanine lenders (most common for growing businesses) who combine equity and debt to purchase a
business or to fund large growth opportunities. And one key to achieving maximum growth for a company is
using equity and debt together. Equity provides an asset base that can facilitate bank borrowing and with equity,
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the company can leverage.
Long-term borrowing could be a wrong solution for a fast growing business when it needs cash to purchase
office supplies and needs cash to meet its payroll; and taking it out from a mortgage doesnt make any sense.
According to financial experts the golden rule is short-term loans for meeting short-term needs, and long-term
loans or equity for longer-term needs.
< TOP OF THE DOCUMENT >
*The above case is prepared only for the purpose of examination and not to illustrate either effective or ineffective performance of the fund. The casecontains real information adapted and combined with other information to generate discussion or analysis on the desired topics.
[1]
www.magindia.com
[2]
www.domain-b.com
[3]
Videocon: Tuning Into The Big Picture Financial Express, August 23, 2003.
[4]
Reinventing Videocon Business World, July 19, 2005.
[5]
Will Videocon Rise to the Occasion Financial Express July 16, 2005.
[6]
The Great GambleBusiness Today July 31, 2005.
[7]
The Great GambleBusiness Today July 31, 2005.
[8]
High ResolutionBusiness World August 1st, 2005.
[9]
High ResolutionBusiness World August 1st, 2005.
[10]
www.thomson.net.
[11]
Reinventing the Videocon, Business World, July 19, 2005.
[12]
The Great Gambler
Business Today July 31 2005.[13]
According to SEBI guidelines, on capital market regulatory. The public holding to at minimum of 25 percent.
[14]
The Great Gambler Business Today July 31, 2005.
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