High Resolution

Ambition and desire have never been in short supply for 53-year-old V.N. Dhoot, chairman, Videocon group. The only snag has been in achieving his objectives. A few years ago, he announced his New Year resolution to ship a million colour televisions to the US. He managed a few thousand. Last year, immediately after the Indo-Pak free trade deal, he declared that he would capture almost a third of Pakistan's market in a year's time. Dhoot's current share is nowhere close to that figure.

Cut to 2005: with two high-profile, yet seemingly low-cost acquisitions, Dhoot now believes his group has what it takes to realise his grand plans. By buying out the four colour picture tube (CPT) units owned by French giant Thomson, and purchasing the Swedish home appliances major Electrolux AB's stake in its Indian subsidiary, Electrolux Kelvinator (EKL), Videocon's turnover has nearly trebled to Rs 17,500 crore. The deals have catapulted Dhoot into the big league. "The Thomson acquisition was in line with our globalMNC strategy. We want to be No. 1 in the consumer electronics and consumer durables sectors," says Dhoot. But the question Videocon's critics are asking is: has Dhoot bitten off more than he can chew?

At first glance, the Thomson buyout seemed like a win-win one for both parties. There was no cash outgo for Dhoot. Although Thomson's businesses were valued at ,240 million, the French firm also picked up a 14 per cent stake each in Dhoot's group companies—Videocon International, the consumer durables firm, and Videocon Industries, the oil and gas arm—for a similar amount. Therefore, Dhoot didn't pay a single penny. Thomson's CPT units have pushed up Videocon's CPT capacity to 19 million pieces per year. And that makes Videocon the world's third largest CPT manufacturer—just behind LG-Philips and Samsung. The acquisition also gives Videocon a foothold in the Chinese and South American markets.

Already, Videocon is the largest Indian manufacturer of picture tube glass, a key component for CPTs, and it plans to double its capacity to 34 million units a year at a cost of nearly Rs 1,000 crore. After the Thomson acquisition, Videocon believes that it can use its huge glass capacity effectively and efficiently. "We are now among the largest integrated players with economies of scale in raw materials and finished products," says Dhoot.

Thomson has been trying to become a pure-play media and entertainment conglomerate. So, in 2003, it sold off its ctv business to TCL of China. Its latest decision to sell the CPT business was the next step. In turn, the French giant's investment in Videocon's energy business is supposedly strategic and long term. Videocon holds a 25 per cent equity in Ravva oil fields in Andhra Pradesh, operated by Cairn Energy. The project, with proven oil reserves of 250 million barrels and probable reserves of up to 450 million, provides Dhoot with a cash flow of Rs 400 crore a year. The Indian group has also signed exploration MoUs with Sudan and Jordan. In addition, Videocon will shortly undertake distribution of natural gas in Andhra Pradesh and Gujarat.

While Thomson's logic makes some sense, rival Indian CPT makers like Hotline and Samtel Color are baffled by Dhoot's decision to buy huge capacities. "I'm sure all issues would have been well thought out before a big acquisition; but there's a glut in the CPT market and prices have been crashing consistently, forcing many major global players to close down plants," says V.N. Masaldan, MD, Hotline Teletubes. In India, too, the annual CPT capacity is nearly 20 million units, but the demand (domestic and exports) is just 12 million. Moreover, the picture tube technology may be on its way out with plasma and LCD replacing it.

Dhoot disagreesvehemently. "Nearly 85 per cent of the global TV demand is met by CPTs, and it is likely to stay that way for the next 5-10 years," hecounters. Not to forget that the Thomson deal gives Videocon access to the former parent's r&d and patents in flat and slimline picture tubes. Videocon's two-pronged strategy will be to emerge as an OEM supplier to established brands like TCL, and to tap virgin markets in Africa and South America with its own low-cost products. Dhoot expects the overseas market to rake in revenues of Rs 8,700 crore by next year.

Once the dust over what Dhoot terms as the "biggest acquisition" by an Indian manufacturer settles, the biggest challenge for him will be to put the five CPT plants in order. Their combined losses are estimated at nearly $100 million, and those in Italy and Poland are more than a decade old and require significant investments. "With prices crashing, CPT margins are wafer-thin. To cut losses and become competitive, Videocon will have to reduce their workforce significantly at these plants. It will be tough given the stringent labour laws and volatile workers' sentiments in the EU and Mexico," says a rival CPT maker.

Still, Dhoot contends he has the financial muscle to tide over these problems. He plans to invest $500 million (by tapping domestic and international equity markets) in his global gamble over the next few years. "Of the Thomson units, only the Mexico plant is making losses. And it is two years old and is going through initial teething problems. But if one puts all of them together, the deal is profitable," he says.

Dhoot's takeover of Electrolux's 91.85 per cent stake in the loss-ridden EKL for Rs 415 crore will help Videocon tot up a few marketshare percentages in the domestic home appliances category. It will also add three brands in its already burgeoning kitty of nine brands. It's again a no-cash deal. The Swedish firm will subscribe to Videocon Industries' global depository shares (GDR) to the tune of $94 million, thereby picking up a five per cent stake in the latter. Dhoot expects to invest Rs 100 crore and claims the Electrolux business will add another Rs 6,000 crore to Videocon's in the next three years.

However, Videocon's recent history has been one of gradual decline. In the early 1990s, the group controlled more than a third of the domesticCTV market and had a near-monopoly in washing machines. Today, its marketshare in most categories, barringCTVs, is in single digits and falling steadily under a sustained attack from the Korean chaebols LG and Samsung. In ctvs, too, Videocon's four brands (including, Sansui, Akai, and Hyundai) together had 17 per cent share. And his new acquisition Electrolux, which was among the top three in refrigerators just three years ago, is now considered a laggard with a mere 8 per cent share.

A defiant Dhoot denies that his company has been seriously affected by the Korean onslaught. "We are known for our innovative marketing strategy and do not think we fell behind the Koreans for any reason. We will be market leaders again—not in five years but in less than two years," he contends. Meanwhile, the Koreans aren't worried. "It's one thing to have huge capacities and another to be able to sell your products. Adding capacity does not translate into added marketshare," says Girish Rao, head, sales LG. The Rs 6,500-crore LG, which is the current leader, has successfully increased its presence in the rural and semi-urban markets. "That was an area Videocon neglected. A network of that size cannot be built overnight," says an industry analyst.

The good news, as Ravinder Zutshi, director (sales), Samsung, and a former Videocon manager, puts it, is: "A lot has changed at Videocon. The management is decentralised with separate heads for eachbrands. Dhoot likes the price-cut approach in marketing, and with so much additional capacity, I expect a fresh round of price wars." That'll turn out be good news for consumers, too.