Calcutta, Nov 14: Woolworth (India) Ltd, the flagship of Ajai Prakash Lohia's Uniworth group, will hive off its Nagpur unit to a separate company.
At present, the company, rechristened Uniworth Ltd, manufactures nearly 9 million kg of worsted yarn at its two plants in Raipur and Nagpur.
The company has suffered heavy losses in the 1998-99 financial year due to adverse market conditions and an unfavourable rupee exchange rate vis-a-vis competitors in Europe and South East Asia.
The losses have wiped out more than half its peak net worth of the last four years.
Instead of making a reference to the Board of Industrial and Financial Reconstruction, mandatory for such companies within 60 days of the publication of the audited accounts, the management and other stakeholders are making a determined bid to restructure the company and make it viable.
The restructuring proposal, worked out by one of the leading financial institutions, seeks to reduce long-term debts to a sustainable level and strengthen themarketing network through a strategic alliance with an international major in the worsted yarn industry.
The company is now banking on price improvements in the international markets. Besides, domestic inflation rates have touched record lows, giving the company an opportunity to "restore profit margins to reasonable levels."
The company is also in talks with financial institutions and banks for a major recast of its debts to lower the interest burden. This is planned by issue of fresh equity and preference shares and debentures.
The sharp deterioration in Uniworth's fortunes was brought about by a severe recession in the global market where excess supplies were chasing weak demand. The strength of the rupee vis-a-vis other South Asian currencies also contributed to its major competitive disadvantage.
Explaining the erosion in its net worth, company sources pointed out that in the last four years unit sales realisation dropped by an average of over 12 per cent. In the last one year, the decline hasbeen the steepest at 25 per cent.
With input costs falling proportionately less than yarn prices, conversion margins were constricted. According to the sources, the "continuous fall in global wool prices - against which worsted yarn prices are benchmarked - has resulted in a situation where there has been market resistance to price maintenance or increase."
Significantly, the company has been priced out in the international market by its South East Asian counterparts, with exchange rate adjustments following the currency crisis of 1997-98 going against Indian exporters as the rupee lagged behind the domestic inflation rate.
According to a company study, Indian exports in 1998-99 were priced out by Thailand by 20.4 per cent, Indonesia by 110.5 per cent, Germany by 16 per cent, Japan by 25.6 per cent and Korea by 23 per cent. As a result, the company's devaluation earnings fell short of cost of inflation.
Compared with 1997-98, when Woolworth was operating at 90 per cent capacity use, production droppedto around 50 per cent of capacity. The company was also forced to liquidate bulging inventories and write down its value as a measure of prudent accounting. Besides, its investments in group concerns had to be written down to reflect their current worth.
Saddled with long-term debts of over Rs 450 crore, the interest component in the existing cost structure has made debt servicing unmanageable without drastic business restructuring.
Company sources said the hiving-off is just the first in a series of steps that will be taken in the coming months. They promised further developments.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.