The ITC Classic Story
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CLASSIC: THE ITC FOSTERED BABYNamed after ITC's
premium cigarette brand ‘Classic,'Classic was incorporated in 1986. Classic
was a non-banking finance company (NBFC) predominantly engaged in hire
purchase and leasing operations. Besides, the company undertook investment
operations on a substantial scale. The company did very well in the initial
years and developed a strong network to mobilize retail deposits. Its
fund-based activities such as corporate leasing, bill discounting and
equities trading also grew substantially over the years.
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At a compounded annual growth rate of 78% during
1991-96, Classic's annual turnover increased from Rs 17.3 crore to over
Rs 310 crore and net profits from Rs 2.3 crore to Rs 31 crore in the
same period. By June 1996, the company had a deposit portfolio of Rs 800
crore consisting mainly of retail deposits. The capital market boom of
the early 1990s was responsible to a large extent for Classic's
impressive financials. Around 50% of Classic's assets had to be kept in
financing and a further 25% was to be held in liquid funds or cash to
handle cash outflows. However, Classic was free to invest the remaining
25% as it deemed fit - which happened to be in the ‘boom stocks.'When
the markets crashed in 1992, Classic had to face heavy losses. |
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Like most other finance companies, Classic too saw the
1995-96 stock market downturn taking a toll on its performance. A sharp
increase in cost of funds, weak capital market conditions and the general
liquidity crunch marked the beginning of the company's poor financials.
Almost all the 145 scrips in the stock-in-trade list in the company's
balance sheet had lost nearly half their value during 1995-96. While
Classic's quoted investments stood at Rs 231.06 crore as on March 31, 1996,
the market value as on that day was just Rs 57.40 core. In 1996, ITC had to
infuse Rs 60 crore in Classic by buying up group company shares held by it.
Soon after this, troubles began at ITC's headquarters with the Enforcement
Directorate (ED) initiating large-scale investigations against ITC top brass
in connection with various issues of unethical practices. Almost half of the
ITC board was arrested and the intensive negative media coverage
significantly harmed the ITC brand equity.
Amidst all this, it seemed as if ITC had given up all hopes of ever being
able to find a suitable partner for Classic.
THE CLASSIC POST-MORTEM
THE MERGER
THE MERGER POST-MORTEM
TABLE I GAINERS AND LOSERS
QUESTIONS FOR DISCUSSION
ADDITIONAL READINGS & REFERENCES
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