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S. Muralidhar

Eicher: Pare exposures Eicher Motors: Pare exposures

THE proposed restructuring of Eicher and Eicher Motors (EML) is likely to increase business risks for the latter in the short-term, post-demerger. As for Eicher, the move to demerge its automotive business into EML is timely and logical.

Shareholders of both the companies can consider paring exposure to benefit from the run up in the prices of both the stocks in the ongoing bull-run.

The restructuring plan envisages the demerger of the tractors, two-wheelers and gears and engines businesses of Eicher. These businesses are to be merged with EML. Post-demerger, Eicher shareholders will be issued two shares in EML for every five held.

The decision to go through with the demerger has clearly been dictated by the potential size of the company, post-restructuring, benefits from economies of scale and to better leverage the synergies that exist between the two companies. Post-demerger, EML's gross sales will cross Rs 1,300 crore.

The demerger is also being put through to enable EML benefit from potential income tax and sales tax savings. A portion of Eicher's gears, engines and components sales constitutes inter-company sales, on which sales tax will be saved post-demerger. Further, the accumulated losses of about Rs 75 crore in Eicher may be used to set off tax liabilities for EML.

Post-demerger, Eicher will only have its investment business and its wholly owned investment subsidiary — Malbros Investments — under its wings. Further, as part of the restructuring, this finance and investment subsidiary would also be merged with Eicher. The next step under the restructuring plan includes the cancellation of equity held in Eicher by the wholly-owned subsidiary, to be followed by a 40 per cent reduction of capital in the parent — Eicher.

The reduction of capital is specifically being undertaken to make the capital of Eicher more manageable since, post-demerger, the investment business alone will not be able to service the company's capital base.

Currently, EML's exposure is limited to the commercial vehicles segment. The demerger is likely to bring with it a further increase in business risks for the company. The tractors business of Eicher has been under considerable strain for the past three years due largely to a slide in demand that has been affecting all tractor industry players. This year, with a mild revival in the monsoons in the key central and western States, the tractor industry could be poised for a reasonable turnaround.

Despite that prospect, Eicher's high gearing (outstanding borrowings of Rs 200 crore) and the expensive debt that the demerger will bring into EML will mean that the demerged company's bottomline will continue to be under pressure.

However, some other benefits may still be available to EML after the restructuring, including a better bargaining position with its components and materials vendors, resulting in a reduction in procurement and product development costs and a possible improvement in working capital management.

EML's automotive businesses have been hamstrung in the past by the lack of additional investible funds. Eicher is currently only a niche player in both the two-wheeler and tractors businesses. However, additional investments will be needed to sustain the growth in these businesses. This will only be possible after the demerger.

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