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Converging to conquer
Economic Times - Mumbai, Monday Jan 08 - Jan 14 2001

HINDUJA Finance is not a finance company as denoted by its name. The company is the face of Hinduja group's investments into the New Economy sector.

In fact, this company offers investors a play directly to information technology, cable television, internet service provider, movie channel, cellular telecom and broadband access. It has mastered the last mile access, which is considered valuable in the context of new economy play and enhancing its brand value through city specific channels.

For all the businesses, it has partnered with leading international players and the businesses have been organised through subsidiaries and joint ventures. The Hinduja family is swapping the stake held by it in various businesses for Hinduja Finance's equity.

This will result in the entire investment of the Hinduja group in convergence and new economy areas being held through the HF shareholders. In the diluted equity of Rs 45.70 crore in April 2001, the Hinduja family would hold nearly 80 per cent of the equity.

This bodes well for the remaining shareholders of HF as wealth creation for Hinduja would also mean wealth for minority shareholders.

The strategic focus of the company would be twofold. HF would be the operating IT company that draws on synergies arising from its key focus areas. The existing equity trading and finance activity would be hived off from the company in due course.

The consolidation of Hinduja group's media and telecom assets helps in leveraging the consumer access and content of these businesses to foster convergence process being witnessed globally.

In the parenting role, HF would provide overall strategic direction for these businesses and proactively address emerging opportunities, thereby creating significant incremental value. We take a look at what HF is all about.

IT business
THE IT initiative came through the merger of Ashok Leyland Information Technology with HF. Though revenues were small, in the region of Rs 15 crore, it was essentially because ALIT could not focus on business development till last year, due to pre-occupation with Y2K work and lack of focus pending restructuring.

HF has identified IT enabled services as a key thrust area and has focussed intensively on marketing and building client relationships during the last one year. In June 2000, the IT division entered into a large contract for IT enabled services with a Fortune 500 company.

This contract has the potential to generate revenues of upto $100 million over the next 3 years. The company is in the process of scaling up its work force and upgrading its facilities to execute the contract.

The half year's financials reflect revenues from IT operations. Global relationships of the promoters will help bring business to the group.

IndusInd Media & Comm
HF would have effective holding of 62 per cent in IMC's equity while Intel will hold 3.3 per cent stake. Intel's investment at $49.23 million has given the company a benchmark valuation of Rs 6800 crore in May 2000.

The company has built up India's largest cable television network covering 10 major cities in India including Delhi, Mumbai and Ahmedabad. It currently provides multi-channel transmission services to approximately 10 million subscribers under the brand name INCableNet.

This ranks among the 10 largest cable TV operators in the world in terms of subscribers. IMC is well advanced in its plan to develop a pay TV platform with interactive TV/internet capability. The company is gearing itself to raise money on the Nasdaq or attracting strategic /financial investments for expanding its activities.

Cable Video India
HF has an effective holding of 51.35 per cent of CVIL's equity. CVIL owns and operates the popular Hindi movie cable channel CVO. It is among the widely viewed cable channels in India with coverage of over 6 million households in 108 centres across the country.

Its primary asset is its valuable library of over 1800 Hindi movies, the largest in India. The company registered profits from its operations in the very first year, possibly the only channel in India to do so.

IndusInd Entertainment
THE television programming division of IMC was spun off into a separate company IEL. It produces television content and operates a bouquet of popular city specific cable television channels under the umbrella "IN" brand.

These channels are available in 4 cities like Mumbai, Delhi, Bangalore and Indore. The bouquet of IN channels offers a unique local flavour in programming content on a city specific basis. IN channel pioneered the concept of interactive television in India with IN Mumbai.

In addition to the coverage of local events, the IN bouquet also airs local news bulletins in various languages.

The company has rights to more than 15,000 hours of television software relating to serials, event coverages, talk shows, music programmes and hundreds of hours of news coverage.

IEL is the the nucleus around which HF proposes to build content capabilities. IEL is planning various initiatives to strengthen the IN brand in coordination with HF's plans to offer broadband connectivity.

IEL plans to acquire a horizontal portal targeted at the global Indian community to enrich its content delivery. HF has effective 100 per cent equity of IEL.

HF holds 100 per cent equity of In2Cable which has a national level ISP license and an exclusive arrangement with IMC for providing internet services over the existing cable network.

In conjunction with IMC's expansion plans, In2cable aims to roll out internet services in 49 cities and achieve a subscriber base of over 1 million by the fourth year of operations. It has already commenced offering broadband internet access over IMC's cable network in Mumbai and Bangalore.

The next generation of internet would be broadband driven. In2cable would emerge as one of the largest Indian ISPs providing digital TV, data, entertainment, games, video conferencing and telephony.

HF owns an effective stake of 22 per cent in Fascel, the Gujarat circle cellular operator. The company is looking actively at leveraging its assets in terms of its network backbone to offer long distance services and significant subscriber reach to address convergence opportunities.

Fascel is in the process of increasing its fibre optic backbone to over 1000 kilometres, forming the basis of a future broadband network.

HF's equity will grow to Rs 45.70 crore in April 2001 after effecting the merger of all investment companies holding media assets of the group. IT would also result in an approximate increase in networth to Rs 344 crore, from Rs 150 crore at the beginning of the year.

HF is contemplating private placement of its shares to raise resources for growth of media assets. It is looking forward to raise between Rs 300 crore to Rs 350 crore through an issue of 50 lakh shares, implying a price between Rs 600 to Rs 700 per share.


THE sum of parts valuation for HF is a whopping Rs 900 per share on the diluted equity of Rs 45.7 crore. The finance division is valued at Rs 104 crore, taking a conservative 40 per cent discount to HF's book value of investments as on March 31, 2000.

ALIT has been valued at Rs 500 crore, assuming 25 times multiple on a net profit base of Rs 20 crore for FY 2001. The stake in Fascel has been valued at Rs 220 crore based on Hutchinson's transaction. IMC has been valued at Rs 2976 crore.

While the Intel deal has valued IMC at $1.5 bn, this valuation has been arrived at by taking a 30 per cent discount to the valuation. The stake in CVIL has been valued at Rs 138 crore, taking the value of 1800 movies, with each movie valued at Rs 15 lakh. This brings the total valuation to Rs 4040 crore.

On the diluted equity of Rs 45.70 crore, the NAV per share works out to Rs 884. Against this, the scrip is valued at mere Rs 146. This represents a discount of over 80 per cent.

CURRENT market valuations do not reflect HF's true worth, due to two reasons. One, the convergence business as well as the strategy is not understood by the market and two, Hindujas do not enjoy a good track record for creating value for minority shareholders.

We feel the gap between present and intrinsic valuations is too high, even if the risks are discounted. Hindujas would own 75 per cent (80 per cent now) the diluted equity after the private placement. Since HF is only the face of the family's foray into the convergence areas, we believe that efforts would be made to effect better valuations.

HF's market cap would also be used to raise funds. Other group entities would also raise funds in due course. This would serve two objectives - one, benchmarking valuations and two, create better visibility for the group's convergence strategy. We recommend a BUY on declines with a one-year perspective.