February 22, 2020
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Don't Stub It Out Just Yet

Don't Stub It Out Just Yet

ITC's biggest non-enforcement-related problem lies in its high-profile finance company ITC Classic. Once paraded as the pride of the ITC family, it is now an embarrassment, with its incredible Rs 285-crore loss in 1996-97 wiping out its net worth. CRISIL has downgraded Classic's fixed deposit programme from FA, indicating adequate safety, to FB which means inadequate safety for timely payment of principal and interest.

For years, business circles have been abuzz with rumours about something rotten at Classic's core, never mind the sterling results the company announced year after year. But no one perhaps expected the malaise to be so widespread.

ITC initially tried to sell the company to US giant GE Capital, but when that fell through, it decided to stand by Classic. ITC holds 49 per cent of Classic's equity with an investment of Rs 123 crore, which it would not like to see wiped out. It has rushed in a new five-man management team and is injecting Rs 260 crore into the company. The funds though are not a gift, but will be adjusted against sale of Classic's real estate to ITC. But analysts feel that unless there is a quick turnaround in Classic's fortunes, ITC shareholders, including the FIs and BAT, may object to ITC continuing to play nursemaid to Classic.

Although the huge loss has grievously wounded Classic's credibility, the good news is that it has also cleaned up its balancesheet by adequately providing for all its doubtful debts and depreciation in investments. This is with an eye to attracting a partner to sell all or a major part of ITC's holding in Classic. Insiders say that negotiations with GE Capital collapsed because the US company felt that a substantial part of Classic's liabilities had been swept under the carpet. The sprucing-up act possibly confirms GE's suspicions that Classic was dressing up its bal-ancesheet year after year.

A former Classic executive says that the root cause of Classic's wretched state is the run on its fixed deposits last year in the panic caused by the arrest of the ITC top brass; about Rs 80 crore was prematurely withdrawn. ITC insiders do not accept this explanation, claiming that Classic was badly run right from the beginning by top managers who were essentially tobacco men with no clue about running a multifaceted finance organisation. In its leasing business, nearly Rs 500 crore is locked up in assets of various state electricity boards and other non-performers. In fact, its cost of funds could be higher than the returns. It also made some bad equity investments, such as Rs 54 crore in the Jayaprakash Industries scrip, which is now quoting at a fraction of what the price Classic paid for it.

ITC chairman Y.C. Deveshwar has reportedly held talks with BAT to get the latter's endorsement for Classic's revival. Analysts believe that Classic's fortunes are linked to a quick and sustained revival of the share-market so its investments can appreciate and its debtors can repay their loans.

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