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India's first privatisations score early goals

The best advertisement for India's reforms could well be the startling transformation at three former state-run companies that were the first to go on the auction block.

That success is crucial to wooing buyers as India gears up to raise $2.5 billion by next March through the sale of stakes in yet more state-run firms -- among them refiners, a carmaker, a shipping firm and an aluminium-maker.

Private investment brought a hefty infusion of ambition, marketing savvy and crucial overseas contacts that drove the changes at three firms that could be the poster children for the reforms programme.

Take the case of Modern Foods, which used to be a state-run bakery in the capital, New Delhi.

Three years ago it was dying. It made sliced bread that consumers rarely found on grocers' shelves. Half its workforce stayed home, confident the government would continue to pay its wages.

At the other end of Delhi was software and computer maintenance firm CMC, which chugged along content to rely on government orders while private sector rivals sold software solutions across the globe.

Tucked away in central India, Bharat Aluminium Company Ltd, languished as its competitors expanded aggressively.

Giddying changes

Then India unleashed giddying change -- giddying by the sedate pace of its public sector, that is.

The government kicked off its privatisation programme in 2000 by selling a 74 per cent stake in Modern Foods to India's top consumer goods maker, Hindustan Lever Ltd.

It then sold 51 per cent in Balco to minerals group Sterlite in February 2001, and in October, a similar stake in CMC to the Tata conglomerate, which has a 134-year pedigree and a presence in everything from salt to telecom.

Balco and Modern Foods are still making losses but new ownership has yielded tangible results for all three firms -- greater productivity, better prospects -- and much-needed testimony to the early success of privatisation.

"Privatisation has infused life into Modern, Balco and CMC, and these successes will improve valuations of state-run firms in the sell-offs ahead," P K Basu, Singapore-based chief economist for south Asia at Credit Suisse First Boston, told Reuters.

By next March, they could be thriving.

Modern's new management expects sales to rise 20 per cent this year, and that it will make a net profit within two years.

Balco's owners plan to quadruple capacity, and CMC sees margins doubling in 2002-03 as its Tata ties fetch new business.

"The three sell-offs have worked because in each case the companies were sold to conglomerates that had strong synergies with their other operations," Basu said.

Modern Foods fits into HLL's plans to expand into bread from branded flour, CMC bids jointly for projects with the Tata group's software division and Balco is key to Sterlite's aim of becoming an integrated metals player.

Early hiccups

But the road to early success was not without tribulation.

Operations at Balco's unit in Chhattisgarh were suspended for two months when workers went on strike to protest against the privatisation.

That led to the damage of some equipment, forcing Balco to make repairs even as it tried to persuade workers to return.

Bringing the plant back on line took Balco four months, and losses due to the strike totalled some Rs 2 billion, pushing the company into the red.

Undeterred, Sterlite plans to invest Rs 40 billion by 2005 to increase Balco's aluminium smelting capacity to 400,000 tonnes per year from 100,000.

"Balco is a world-class asset," Sterlite Chairman Anil Agarwal told Reuters from London.

"We've improved productivity by 10 per cent, have moved in experts in geology and smelter operation, shifted the managing director's office from Delhi to the plant site and will make net profits from 2002-03."

The aggressive Sterlite, founded in 1975 by Agarwal, was originally a copper cable maker from the mineral-rich but economically backward state of Bihar.

At the bakery, Modern Foods, workers were initially suspicious of Hindustan Lever's intentions.

"They suspected that we'd bought the company for its real estate, or that we would shut down or convert the factories," reminisces Modern Foods managing director Peter Selvarajan.

Blue chip Hindustan-Lever is a subsidiary of Anglo-Dutch giant Unilever, and has a reputation for slick management skills.

"We had to explain we were not a real estate company, that we couldn't make soap at a bread company, that we wanted to make bread."

New management gave the workers a raise and offered others a scheme to cut the workforce to 1,330 from more than 2000, and pushed Modern's bread through its own vast distribution network.

Today 90,000 outlets across India stock Modern bread, against 32,000 before the privatisation.

New markets

By contrast, the CMC takeover has been smooth, and the company's share price has risen 167 per cent since October when the Tatas took charge through their unlisted software arm, Tata Consultancy Services, India's top software exporter.

Chief Operating Officer R Ramanan told Reuters that he saw margins doubling in 2003 and sales rising 25 to 30 per cent, along with 500 new hires, by March 2003.

Even before privatisation, CMC was no pushover -- one of its achievements was computerising reservations for Indian Railways, which manages one of the world's largest networks.

"We were most impressed with the workforce we inherited from CMC," said Ramanan. "What they lacked was aggressive marketing, and we hope to remedy that with TCS's worldwide reach."

TCS had revenues of $689 million in the year to March 2001, 60 per cent from North America.

"I see strong synergies. CMC gets access to TCS' formidable marketing network and cash, and TCS gains from CMC's strong clientele in India, especially government departments," said Gurunath Mudlapur, head of research at Khandwala Securities.

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