Date:12/06/2005 URL: http://www.thehindubusinessline.com/bline/iw/2005/06/12/stories/2005061201440600.htm

Back Restructuring signals

Krishnan Thiagarajan

A POWERFUL argument for segment reporting is that it helps investors understand the risk and returns from different segments, enables companies to undertake restructuring based on margin and ROCE comparisons and keeps the market for corporate control alive.

Consider, for instance, the recent decision by Eicher Motors to sell its tractors, engines and gears division to TAFE for a total consideration of Rs 310 crore. From the segmental information provided by the company, for the nine months ended December 31, 2004, the margins and ROCE of the tractors division were lower than that of the commercial vehicles division.

The ROCE of the tractors division, at 10.7 per cent, was about six percentage points lower than the commercial vehicles division, and the PBIT margin about a percentage point lower. Over the past couple of years, there have been several restructuring moves driven by the need to shed low ROCE businesses or focus on core business activities.

For instance, Larsen and Toubro's decision to spin off its cement division and sell it to Grasim; Dabur India's demerging its pharma division into a separate company, Dabur Pharma; or EID Parry's move to sell its farm inputs division to Coromandel Fertilisers last year.

All these were expected moves, if one examines the margins or ROCE of these companies relative to the other segments. Among the possible restructuring candidates in the future may be companies belonging to the B. K. Birla group such as Century Textiles, Kesoram Industries and Jay Shree Tea.

Century Textiles, in particular, with a diversified business profile spanning cement, textile and paper, may consider restructuring at some point. Or, for that matter, Grasim Industries may initiate moves to spin off its textiles segment to Indian Rayon, in line with the broad consolidation of businesses within the Aditya Birla group.

Crompton Greaves may be another candidate that may contemplate spinning off or divesting the Digital group, a business segment focussing on telecom solutions and other switching and access products, if it fails to perform over the next year or so.

Other moves may come from a low-profile company such as C.K. Birla group's Orient Paper and Industries, divesting its cement business segment, which has been a laggard among its other segments — paper and fans. Or Dalmia Cements Bharat, which may consider a review of its different segments consisting of cement, sugar, wind farms and magnesite, of which the last segment has been a laggard.