Background of HTL Limited

·        The Company was wholly owned by the Government of India, and was incorporated in 1960 primarily for manufacture of electromechanical teleprinters, to cater to needs of erstwhile Post and Telegraph Department

·        Since the early 1990s  HTL diversified its product portfolio from manufacture of electromechanical teleprinters to digital telephone exchange products, transmission products, access products and data & terminal products

·        Main manufacturing facility at Guindy Industrial Estate in Chennai and a supplementary facility at the Hosur Industrial Estate near Bangalore city on Tamil Nadu - Karnataka border

·        Operates through a sales and distribution network of six regional offices and sub offices

·        HTL employs approximately 1100 people.

Historical  financial performance:

Constraints in the business of HTL

Despite being one of the largest revenue earners amongst the telecom equipment companies in India, HTL’s profit margins had been low.  HTL’s main product line, digital telephone products (manufactured with technology support from C-DoT and Siemens) contributed to the top line substantially.  These products commanded a lower margin than the other categories like transmission and access products.

The Financial year 2001 had witnessed severe price competition among both Indian and multinational telecom equipment companies in the switching equipment segment, compounded by the DoT’s criteria for procuring orders at the lowest price bid.

Some of the key constraints to the Company’s operations included:

n        Product mix skewed towards digital switching equipment

n        Large workforce

n        Low spending on technology research and development

n        Long working capital cycle:

n        Inadequate marketing and distribution network

n        Negligible export market

Comparative performance

The following table sets out the key financial performance of some of the publicly traded telecom equipment manufacturers in India.

PART – II

DISINVESTMENT PROCESS

Recommendations of the Disinvestment Commission

n        The Disinvestment Commission in its 2^nd report of April 1997 had classified HTL in the non-core category and interalia recommended for strategic sale of either 100% or 50% of shares of HTL through competitive bidding.

Decision of Government

n        The Cabinet on 16.12.1998 decided to disinvest 50% of the equity in HTL to a strategic partner. Subsequently, on 26.5.2000 Government decided to disinvest 74% of the equity in HTL as there was lukewarm response from the bidders for the earlier proposal of 50% disinvestment.

Experts appointed by the GoI

n        Global Advisors :                         KPMG India Private Limited

n        Legal Advisors:                           Amarchand & Mangaldas & Suresh A Shroff                                                                          & Co.

n        Asset Valuer:                               M/s P.T. Shanamugam

Competitive bidding process

n        The GoI selected the Global Advisor for the disinvestment process on 13 September 1999.  An Inter Ministerial Group (“IMG”) meeting was constituted.

n        As explained above, GoI initially planned to divest 51% of its share holding to a long-term strategic investor.

n        However, this mandate was then changed to a sale of 74% disinvestment of as the GoI found it to be more investor friendly.

n        The Global Advisor received the Expressions of Interest (EoIs) from the interested parties, which included Motorola India Limited, Wipro Peripherals Limited along with Huawei Technologies of China, Tamil Nadu News Prints and Papers Limited (TNPL), Alcatel Trade International AG, Himachal Futuristic Communications Limited (HFCL) and Gokina Infotech (Pvt) Limited. TNPL later tied up with United Telecom.

n        Of the above, Motorola and Alcatel dropped out due to their perception of the telecom equipment market. Wipro, HFCL and TNPL and United Telecom consortium were invited to visit the data room in Chennai.

n        Wipro dropped out after the data room citing lack of R&D facilities in HTL as their criteria for dropping out.  

n        Draft shareholders agreement and share purchase agreements were issued to TNPL & UTL and HFCL, and binding bids were invited.

n        The GoI received bids from these prospective candidates on September 27, 2001.

Valuation

n        KPMG presented the valuation report to the GoI on September 27, 2001.

n        Based on the various pricing methodologies, the indicative pricing range for 100% equity stake in HTL is summarised below:

(Rs. Million)

n        It was considered that the value as per the DCF Methodology would be the most appropriate indicator of the value that a potential strategic acquirer may be willing to pay, given that the transaction is being pursued as a strategic sale.

n        The Evaluation Committee therefore recommended that the reserve price should be Rs. 388.02 million for 74% equity value of HTL.

Outcome

n        Himachal Futuristic Communications, a leading Indian telecom equipment manufacturer won the transaction at Rs 550 million for 74% of the equity. This corresponds to Rs. 743 million for 100% of the equity.

n        The Price to earnings ratio works out to 37, as against PE ratios of Punjab Communications of about 10 and of Shyam Telecom of 5.6.

n        Given the stiff competition in the sector and the declining profits of HTL, induction of a strategic partner at this stage should help the company to grow.

n        If this amount of Rs. 550 million were invested in a fixed deposit by the Government, it would get an annual return of Rs 55 million (assuming an interest rate of 10% per annum)

n        Against this return, the annual dividend that the Government has been receiving against 74% equity is as follows:

Labour protection measures

n        Regarding employee protection adequate provisions have been made in the Shareholders agreement that both parties envision that all employees of the Company on the date hereof will continue in the employment of the Company and recognises principles for the benefit of the members of the Scheduled Caste/Scheduled Tribes, physically handicapped persons and other socially disadvantaged categories of the society

n         Shareholders agreement provides that strategic partner shall not retrench any Employees of the Company for a period of one (1) year other than any dismissal or termination of employees of the Company from their employment in accordance with the applicable staff regulations and standing orders of the Company or applicable Law; any restructuring of the labor force of the Company shall be implemented in the manner recommended by the Board and in accordance with all applicable laws; and in the event of any reduction of the strength of the Company’s employees the SP shall ensure that the Company offers its employees, an option to voluntarily retire on terms that are not, in any manner, less favorable than the voluntary retirement scheme applicable to the Company at the time of Closing

n        In the handing over ceremony held at the Sanchar Bhawan, New Delhi on 16 October 2001, the new management of HTL announced that there were no plans to retrench the workforce.

n        In fact, the new management took this opportunity to announce the grant of two increments, that were earlier assured prior to disinvestment to all employees of HTL, but had not yet been implemented.

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