Spartek Ceramic India Limited Towards the middle of 1988, krishna Prasad Tripuraneni, the Managing Director of Spartek

Ceramic India Limited (Spartek), the Madras-based ceramic tile company, was comming round to the view that he would have to take some major strategic decisions in quick time to maintain the growth pace of his three year old Company. In the next couple of months, he would be completing the major expansion programme of its ceramic tile plant from 12,000 metric tonnes per annum (TPA) to 26,000 TPA. While the demand for Spartek tiles continued to remain strong, Sparteks trail-blazing success had brought forth in its wake any number of new entrants to the industry. Krishna Prasad wondered whether the herd syndrome of Indian business had caught the ceramic tile industry too, like the mini-steel boom of the seventies and leasing explosion of the mid-eighties. He knew Spartek had distinct a advantages of being the first mover to the floor title segment and it was important that its future growth plans were launched from this strengths. His immediate concern was whether he should straightway launch the next phase of Sparteks expansion to take its installed capacity to the government-registered level of 40,000 TPA. While such a move appeared logical, Spartek had to take cognisance of the looming threat of competition from a host of new entrants. The rapidly changing conditions in the ceramic tile industry perhaps indicated diversification to be the key strategy; but this carried its own risks. In either case, there were always some potential acquisition opportunities available for the fleetfooted and the intrepid. Krishna Prasad was, non-ether-less, quite conscious of the fact that a merger or acquisition move, while innately appealing, could pose tremendous challenges in successful consummation. For a start-up venture which went into production in September, 1985, the Company had done extremely well, declaring a mined dividend (12.5%) in the very first year of operation, followed by 20% in the succeeding year. Spartek had introduced to the country a new product and a new technology - in short, a new concept. In a relatively short period, the term Spartek has become a generic name synonymous with high quality, high-tech floor tiles. Sparteks corporate motto, Innovation that pays, is, according to the Company, a phrase that has shaped out destiny, become our philosophy and has constantly inspired us to explore beyond the ordinary. Company Incorporation and Promotion Spartck was incorporated as public limited company in the State of Andhra Pradesh in March 1983 with an authorised capital of Rs. 40.0 million. The main objectives of the Company, inter alia, included manufacturing and dealing in Ceramic and Stoneware Glassed and Unglazed Wall and Floor Tiles, Ceramic Capacitors and all types of Ceramic Electronic components.., Ceramic Earthen ware and Porcelain Sanitaryware, and Glassware articles of Industrial and domestic application. The Company was promoted by Krishna Prasad Tripuraneni, a young electronics engineer in association with serveral non-resident Indians (NRLs), Krishna Prasad hailed from a largely agricultural family which had branded off into mining of ceramic raw materials and civil construction. An electrical engineer with an Ms in Computer Science, Krishna Prasad was working in the US when he conceived the ceramic title project. Product and the Market In view of his familys experience in ceramic mining and easy and plentiful a viability of ceramics in wall and floor tiles a possible project concept. He noted that in the Western countries, ceramic tiles had replaced conventional flooring materials. Over the years, ceramic tiles usage has changed from functional as well as floor-covering to decorative and artistic configuration of housing and living space due to new manufacturing methods and

changes in life styles. However, ceramic tiles usage in the Indian home was still largely confined to surfacing the kitchen and bathroom walls. And the vast Indian market, he felt, presented great opportunity for introducing ceramic tiles for flooring, as in the West. Ceramic tiles are exceptionally strong, stain and scratch-proof, abrasive-resistant and have very long life compared to mosaic tiles, the common flooring medium in India. They also provide elegance at an affordable price besides lending themselves for extensive industrial applications in chemical, dairy and pharmaceutical plants because of their superior strength and high degree of wear, acid and chemical resistance properties. In view of the fairly consistent growth expected in the construction sector, the demand for ceramic floor titles, once the concepts acceptance was achieved, was likely to grow steadily. Certain comparative features of cermic tiles and mosac tiles are given in Exhibit 1. It was expected that the construction industry, especially the housing sector, would get much greater thrust in Indias future national plans. The plan outlay for the housing sector was increased from Rs. 2.17 billion in the 4th Five Year Plan to Rs. 60 billion in the 5th Planned Rs. 15.0 billion in the 6th Plan. The private sector. This was estimated to be in the region of Rs. 180.0 billion in the 6th Plan. An indication of the trend in housing growth is given by the following data relating to housing Development Finance Corporation (HDFC) Ltd., an agency recently promoted to provide middle-income housing finance. HDFC Number of units (in terms of approvals) Gross Loan Approvals (Rs. Billion) 1984-85 27,645 1986-84 27,379 1982-83 19,472 1981-82 12,403 1980-81 10,189

1.35

1.03

0.76

0.47

0.34

To quote Sparteks Public Issue documents (January 1985), The construction industry in India is growing spectacularly all over the country .. . Despite this quantum jump, housing shortage was estimated at about 20 to 25 million units, of which about 30% to 40% were int he cities. In addition, commercial and factory constructions were also slated for sharp growth as a direct consequence of increased industrial investments. Nonetheless, residential units accounting for 70% to 80% dominated the new construction scene. According to official studies, the total demand for floor tiles in 1984 was estimated at about 300 million ft2 . This was broadly made up of 70% mosaic, 25 % cement flooring and 5% natural stones. Ceramic floor tiles would have to be positioned mainly at the upper end of the mosaic tiles and lower end of the natural stones market in the price range of Rs. 15 to Rs. 25 per ft2. They were unlikely to make any dent in the low priced ment flooring market which was extremely price sensitive (Rs. 5 to 7 per ft2). It would appear that there was considerable scope to introduce, besides the middle-income urban, hoursing, new applications for ceramic tiles; fpr examples .of less than first quality tiles could be considered for rooting in view of their high weight and very low water absorbing properties. Technology The conventional technology for the manufacture of ceramic titles, known as double-fired, is extremely emergy-intensive and slow and results in high process wastage. A new technology single firing or single fast firing (SFT) has already gained widespread acceptance in the West. SFT cuts down the process time from about 60 hours to about an hour leading to about 70% fuel saving. It also improves the inherent quality of the tiles with as much as 80% to 65% first quality tiles output compared to 60% to 65% in the

conventional process - thereby contributing to better price realisation. The labour requirements in the new technology process are also significantly lower. A diagram of the manufacturing process is given in Exhibit 2. Ceramic Us, the US ceramic tile company, Ohio, USA, a leading manufacturer of ceramic tiles for over 70 years, was identified by Krishna Prasad for technology. CeramicUs is wellknown in the field of ceramic technology and is the patent-holder in the fast fire process, with several plants in the US and Canada and marketing operations in the Far and Middle East. The company enjoyed the largest independent distributors sales organisation serving the ceramic tile industry in the US. Speartck entered into a technical collaboration with CeramicUs for implementing a 12,000 TPA* tile project. CeramicUS was to supply technical data and other rights for a lump-sum consideration of US $ 250,000 (Subject to Indian taxes), payable in three equal instalments. A royalty of 5 per cent was also to be paid on the export sales for a five year period. CeramicUs also agreed to participate in the equity capital to the extent of about 8 per cent amounting to Rs. 2.20 million. The plant capacity was decided at 12,000 TPA to begin with, taking into account scale economics, system balancing of equipment, size of capital investment required and above all the need for market development. Key equipments such as Spray drier System, Glazing and Decorative System, Roller Kiln System, were to be imported from Sacmi Imola, Italy, and Heimsoth, West Germany, whose plants were successfully running in many counties the world over. The total CIF value of these major imported equipments was in the region of DM 5.1 million (exchange rate : DM1 = Rs. 3.80 to Rs. 4.00) being the cleanest fuel, LPG would also give the best colour development. As this involved a major government policy revision, this was not easy to come by. Management Sparteks Board of Director included eminent and well-known persons with rich experience in manufacturing, marketing, finance and administration. The Board was headed by Dr. Y Nayudamma, former Director General of the Council of Scientific and Industrial Research(CSIR), a leading national institution and included personalities such as Dr. S M Patil, former Chairman and Managing Director of HMT Ltd., a highly-rated public sector undertaking. Krishna Prasad Tripuranci was appointed as Sparteks Managing. (Especially, the contributions of the Founder Chairman, Dr. Nayudamma in conceiving and implementing Sparteks ceramic tile project are considered significant. Dr. Nayudamma was killed in an air-crash in June 1985 and Sparteks management gratefully acknowledge him as the sources of every Spartek success.) Spartek management recruited key technical personnel with extensive experience in the ceramic industry and had them trained at the plants of the collaborators and the machinery suppliers. The Company was expected to provide direct employment to about 200 persons with regular operation. Project Implementation Location : It was decided to locate the project at Narasingapuram village, a notified backward area, near the temple and educational town of Triupati in Andhra Pradesh. Its proximity to the promoters clay mines would ensure uninterrupted supply of the principal raw materials. It is approximately 130 kms. From Madras, a major market. The backward area location would entitle the Company to receive Central Government subsidy of Rs. 1.50 million, besides confessional power trariff for three years and interest-free sales tax loans. The financial institutions also extended concessions in interest rate and underwriting commission for backward area projects.

Government Approvals and Other Clearances : The major landmarks in terms of various government and other clearances are given below : a) b) c) d) e) f) g) h) i) Events Company incorporation Industrial licence Capital goods clearance Import licences Power supply Foreign Collaboration Institutional loans-sanction letters Institutional loans-execution documents Consent for the public issue : : : : : : : : : Approval Dates 09-03-1983 02-03-1984 10-10-1983 13-03-1984 11-03-1983 18-02-1983/07-03-1984 23-08-1983/29-09-1983/02-111983 25-02-1984/02-07-1984 11-09-1984

Project Cost : The total project cost was estimated at Rs. 90.00 million including margin money for working capita of Rs. 3.4 million. This was to be financed by a share capital of Rs. 28.5 million, institutional borrowings of Rs. 90.0 million and the Central Government subsidy. The details are given in Exhibit 3. Besides the collaborators, he Andhra Pradesh Industrial Development Corporation Ltd. (APIDC) also participated in the equity by subscribing to the extent of 15 percent. Spartek came to the capital market with a public issue of Rs. 15.0 million in January 1985 and the issue was oversubscribed. The company also raised bridge finance form an investment institution against the public issue. As of June 30,1984, the Company had incurred an expenditure of Rs. 7.90 million on the project. The project spending had increased to Rs. 68.0 million a year later. Commercial Production : The Ceramic tile plant was completed without any major cost over-run though after a delay of about 6 months. After trial runs in August 1985, commercial production was started in September 1985. Marketable production was started in September 1985. Marketable quality product was produced from the very first day. Ninety percent first trade output was achieved within days and 1005 capacity utilisation within 2 weeks of the commencement of commercial production. To quote the Directors; . The market response has been very encourage and with the product quality matching international standards, it has been well received by builders and Architects all over the country Market conditions being favourable, the Company is confident of selling is entire production in the potential market and hopes of emerge as the premier ceramic tile manufacturer in the country in the near future.. . Spartek closed the financial year to June 1986, the first year of commercial production, with an output of 9,567 tonnes and sales of 7,480 tonnes. In the following year, both production and sales jumped to about 16,200 tonnes. Marketing Ceramic floor tilling being a new concept in India, Spartek had to develop a totally new marketing strategy in terms of product positioning, distribution channels and pricing. The market for the tiles, namely the building industry could be broadly categorised as residential and non-residential. The residential type could be further segmented as :

a) Architect-designed upper income houses b) Multi-storeyed middle income and upper income apartments promoted byt he real estate
developers.

c) Government housing schemes, and d) Owner-designed and /or constructed houses.

Similarly, the non-residential side of the building industry could also be categorised as follows:

a) b) c) d)

Commercial centres and office complexes. Hotels, cinema halls and the like. Public places like hospitals. Factory and industrial buildings.

It was recognised that the key segment for ceramic tiles in the residential sector was b i.e., the middle income housing with some possibilities in the other categories. In the nonresidential sector, virtually every segment offered penetration opportunities. The main influencing agents in the target segments were the building architects/engineers and real estate promoters. Long before the product launch, Spartek began participating in building material exhibitions with display of imported samples. The main focus had necessarily to be building architects/engineers and real estate promoters. It was important to ensure acceptance of the concept of ceramic floor tiles before selling the product. In these exhibition as well as other promotion efforts, the distinctly superior features of ceramic tiles over mosaic were emphasised. Technical brochures highlighting these were widely distributed in the target segment (see. Exhibit 1). The initial response was one of scepticism: while the product concept generated enthusiasm, there were widespread misgivings about Sparteks ability to replicate the same quality product from its plant. On the basis of a market survey, the product was positioned for its aesthetics the early compaign ran with the copy: The world most beautiful floors now in India. At the same time, the superior function attributes of Spartek floors-elegance, smoothness, ..ness, ease in laying and maintenance - were sufficiently highlighted. The entire emphasis was on spertk floors rather than on tiles. Also, in some of the technical literature, a comparative analysis of Sparteks technological superiority was highlighted as, for example, shown in Exhibit 4. In keeping with the perceived market segments characteristics, Spartek tiles were priced around the white mosaic tiles price range Rs. 18.0 to 25.0 per fit2. The company was a little slow in creating a wide dealer network as the major challenge was recognised to be one of establishing credibility by producing floor tiles of the quality and finish promised by it earlier. While appointing dealers, Spartek selected well-known total names with established business in the building material trade, were otherwise resourceful. Spartek ability concentrated in the Southern and Western In-can market and had a dealers others who, though not necessarily in the building material trade, were otherwise resourceful. Spartek initially concentrated in the Southern and Western Indian Marketand had a dealer network of about 150 by 1988. Dealer margin was fixed at 10% which was considered to be somewhat unusual in the context of the customary gross dealer margin of 25% to 30% in the Industry. In the latter case, the trade passed on a good portion of its margins to the customers through heavy discounts as a result of which the net margins enjoyed by the trade were only of the order of 3% to 4%. The declared low margin of Spartek acted as a psychological barrier in the trades own discount structure to the customers. As a result, what they passed on was only 4% to 5% retaining in the process a higher margin of 5% to 6%. The initial advertising efforts were through upmarket magazines that could fully capture the range of colours and the feel of texture of the tiles. In due course, intensive television advertisements were also resorted with focus on some of the other than aesthetic tiles. One

of the major goals was the nation of strong image for Spartek, identifying quality tiles with the name. Spartek also made it a points offer its tiles in a range of sizes - 8*4,12*12 and 8*8. After nearly two years of operation, Sparteks Position was summed up by its Directors : . Spurred by the overwhelming market response to the product the Company had launched any new colours, design and sizes to offer more wider choice and to cater to individual tastes. The Research and Development effort in this regard has yielded satisfying results and during the year (1986/87) as many as 30 new colours and designs were introduced in the market, some of them for the first time in the Indian market. It is hoped that the Company in due course would be more a meeting of customers specific requirements rather than just a choice between alternatives.. Sparteks sales in 1988 was somewhat concentrated with about 40% in the South, 30% in the South, 30% in the West - mainly in the Bombay city-and balance in the North and the East. Expansion in the announcement in connection with the 1985 equity issue, Sparteks management had indicated: .. The potential is so vast that we are making necessary arrangements for doubling the capacity shortly with marginal investments on balancing equipments The ceramic tile industry was declicensed in March 1985 and the Company promptly obtained Government of India registration for enhancing the plant capacity to 26,000 TPA. The expansion programme was completed at a cost of Rs. 80.0 million and the expanded capacity became operational in April 1988. The main equipments were soured from the original Italian and West German suppliers. The sharp depreciation of the rupees against the DM and the hike in customs duty from 55% to 85% led to a steep increase in the landed cost of equipments imported for the expansion. The total employee strength after expansion was expected to go up to about 350. While initiating steps to implement the first phase of expansion, Spartek management had, during 1986/87, sought and obtained government registration for future increase in capacity to 40,000 TPA. Financial Performance Following commercial production in September 1985, Spartek earned pre-tax profits of about Rs. 12 million or revenues of about Rs. 63 million. With no tax liability during the year, the Directors could declare a maiden dividend of Rs. 1.25 on its Rs.10 par equity share. In the next two years, aided by full capacity utilisation, while the revenues increased to about Rs. 141 million and Rs. 174 million respectively, per-tax earning jumped to Rs. 32 million and Rs. 34 million. In these years, despite the corporate tax commitments amounting to Rs. 5.08 million and Rs. 5.35 million respectively under the newly introduced minimum tax provisions vide Section 115 of the Income Tax Act, 1961 (See Exhibit 5 for details), the after tax income rose, sharply to post an earning of about Rs. 10 per share. This helped the directors to step up dividend to Rs. 2.00 per share for 1986/87 and further to Rs. 2.50 for the year following. The high retentions of 75% to 80% of earnings helped in the build up of networth by about three times in as many years. With the expand capacity becoming fully operational, the coming years should see Sparteks volumes rising to 26000 - 30000 TPA.

The healthy cash generation enabled the Company to commence repayment of the institutional loans as per schedule and part-finance the expansion programme without recourse to any fresh share issue. Despite additional term borrowings of about Rs. 50 million for the expansion, Sparteks borrowings to equity ratio stood at 1.30 to 1 as of June 30, 1988 against 2.35 to 1 three years before. Working capital bank borrowings amounted to about Rs. 12 million, about 28 per cent of the net working capital, as of June 1988. Summarised financial statements are given in Exhibits 5 to 6. Share Price Movements : Sparteks share which was quoting around Rs. 17 during October-November 1985, touched a peak of Rs. 118 during August 1987 before retreating to a low of Rs. 58 in April 1988. The share price has since moved up to Rs. 80- Rs. 100 range. The highlows of the share price ar given in Exhibit 7. Industry and Competition The industrys attractiveness attested by Sparteks success and the absence any major entry barriers brought forth a number of new entrants to the ceramic tile industry-almost every one opting for the single fast firing technology. Three years after Spartek launched its tiles, the product seemed to have found acceptance as a concept in well-defined segments and was not expected as such to face any serious backlash from competing materials it had displaced. It was also unlikely that synthetic flooring materials would pose any serious competition in the foreseeable future both from the price factor and also on account of the yet to be proven functional attributes. But the imminent increase in production of Spartek-like tiles from the spate of competitors already committed to investments could change the market rules drastically. It was this scenario that loomed large before Krishna Prasad when he considered Sparteks growth alternatives. The major policy variable since Spartek first entered the field was de-licensing of the industry from the provisions of the Industrial Development and Regulations Act. Accordingly, no prior licence from the government was required to start a tile unit; only a formal registration was required with the Director General of Technical Development. Still, a green-field tile project involving fast firing technology could take anywhere between three and four years to implement. Even a major expansion of existing facilities was unlikely to be completed in less than two years at the most optimistic reckoning. The core equipments would still have to be imported. The core equipments would still have to be imported. The comprehensive procedures involved in obtaining the Capital Goods (CG) Clearance and import licence from the Government of India and the 6 to 8 months supplier lead time perhaps constituted the critical events. Lately, the CG clearances were being linked to 20% to 30% compulsory export obligations. During 1985-86, the government also announced relaxations in its policy of reservation of smaller tiles production (below 4 * 4) to the small sector. The Indian ceramic tile industry, till the advance Spartek, was only producing glazed wall tiles mostly in the organised sector. The small scale sector. The small scale sector, despite the protective umbrella of reservation in respect of the smaller glzed tiles, did not have nay significant presence. The industry consisted of two or three very strong units with historical ties with leadings oversean manufacturers. There were also a few weak units lan guishing with low volumes and poor finances. The industry output inched up from about 40,000 tonnes in 1976 to a level of 50,000 -60,000 tonnes by the early eighties. Major expansion programmes undertaken by the leading incumbents and entry of new units led eighties. Major expansion programmes undertaken by the eighties. Major expansion programmes undertaken by the leading incumbents and entry of new units lead by Spartek saw ceramic tiles production rising shrping since 1983 to touch an estimated 1,61,000 tonnes in 1987. The 1988 production was expected to be of order of 1,85,000 tonnes, with floor tiles

accounting at least half of this. The trends in capacity and production of ceramic tiles from 1976 to 1988 are given Exhibit 8. The new units were coming up largely in Southern, western and Northern state (See Exhibition for plant location details). The emerging competition could be broadly grouped into two. One-the ched group-consisted of incumbents in ceramic/building materials-related industries appearing into the fact firing technology based tiles. The emerging group-were made up of totally values promoted with the role ralson of ceramic tiles manufacture. The established names included so many Pilkingtons Ltd. and HR Johnson (India) Ltd., while some of the new entrants were Regency Ceramics Ltd., Murdeshwar Ceramics Ltd., Kajaria Ceramics Ltd., Bell Ceramics Ltd and the Like. Most of the new entrants could sign up well-known ceramic tile producers from Italy, west Germany, Spain or the UK for technical collaboration. Inspired by Spartek' experience, by an large, they also chose such proven equipments suppliers as Sacmi and Heimsoth. The higher capital costs and increasing competition did not seem to dampen their optimism about success int he market place. Thum-nail sketches of major competitors-present and prospective - are given in Exhibit 10. Key financial indicators of the competitors are also given in Exhibit 11. Surveying the overall scenario, the Board of Directors of Spartek summed up the Companys response in the following words: .. the Ceramic Tiles Industry is witnessing entry of new units and competition is geeting intensified. The Company being a pioneer in the field and with consolidated distribution network would be able to face the competition.. Given the fast-changing conditions in the ceramic tile industry, krishna Prasad was fairly convinced that another phase of expansion of Sparteks capacity, say to the DGTD registered level of 40,000 TPA, was not that straightforward a decision. This, nonetheless, remained an important strategic choice; while such a move seemed to offer many obvious benefits, the looming threat of competition also added several riders to the decision. An important issues was whether he should add capacity to an already over-crowding industry. At the same time, failure to expanded could mean tame surrender of Sparteks primacy and leadership in the Industry that was its very creation. The question was: Should Spartek give up its leadership in the industry that was its very creation. On the other hand, if the competitors managed to carve out selective niches in various regional market, another Spartek expansion was doomed to be disaster. Perhaps another option was a diversification move which provided a neat opportunity to skirt the vagaries of an increasingly fuzzy market place. But the long history of well-known firm that had diversified into disaster more than confirmed the associated risks. The two extreme positions that emerged were: Were Sparteks strength strong enough to be transplanted to another product-market? and Now that Spartek had created a strong brand image and established its credibility with the user segment and the extremely fastidious financial world, why not pursue growth in other area, on the basis of these strengths? No easy answer was forthcoming, and matters were not particularly helped by the stupendous range of options arrayed against Spartek within a diversification decision. A further confounding variable in the expansion vs. Diversification decision was the one relating to the mode of entry. While a green-field investment would have been the only option available until recently, the major changes in the environment could be throwing up acquisition opportunities as well. And both the internal growth and the merger and acquisition routes had their strong debit and credit sides. As Krishna Prasad began evaluating the various options for charting Spartcks future growth, he could not but help wondering about the irony of success driven problem crying out for urgent solution.

Exhibit 1: Comparison of Ceramic Floor Vs mosaic Floor Ceramic Tiles Flooring Very high breaking strength of 350-400 kg/Cm2 Light weight(about 14kg/sq.mtr.) Stain-free, acid and alkali resistant Does not require any polishing over its long life Any custom made design can be printed on the tile by screen printing. Has high acoustic damping factor which muffles echos Has very good thermal insulation capacity which improves air-conditioning efficiency significantly Mosaic Flooring Breaking Strength seldom exceed 100-150 kg/cm2 Heavy weight (about 45Kg/Sq.Mtr) Prone to heavy staining an corrosion Requires heavy polishing at the time of laying and at periodic intervals Choice limited to natural colours and colour of the chips. Very poor acoustic damping features god heat conductor leading to poor room heating and airconditioning efficiencies.

Exhibit 2 : Ceramic Tile Manufacturing Process

Ceramic Tile Manufacturing Process Ceramic tiles are formed by pressing the required grades of clay after blending them with flint, feldspar and a significant amount of tale, especially in the case of wall tiles. Wall are glazed units with considerable porosity. The glaze protects the unit against water absorption after it is installed and the porosity promoter has a good bond with the mortar so that the tile can be held on a vertical surface. Floor tiles are vitrified to prevent water absorption and are set in cement. The wall tiles are traditionally manufactured in the double firing process followed by the older units. Single fast firing process is more suitable for floor tiles with mat finish. Though almost all the modern units are adopting the single firing process for floor tiles, some of them have successfully applied the single firing process to produce wall tiles as well with glossy finish which is generally difficult to obtain in the single firing process.

Exhibit 3 : Project Cost and Scheme of Financing A. 1. 2. 3. Cost of Project Land and site development Buildings Plant and machinery Imported 1. CIF 2. Imported duty 3. Cloaring forwarding, etc. Indigenous Foundation and Installation 4. 5. 6. 7. 8. 9. Technical know-how fees Miscellaneous fixed assets Preliminary and capital issue expenses Pre-operative expenses including interest During construction Contingencies Margin money for working capital Rs. In Million 0.90 11.50 18.60 10.50 0.50 29.60 17.00 1.60 48.20 4.00 5.40 1.30 8.30 7.00 3.40 90.00

B. 1.

Scheme of Financing Share capital Promoters, directors associates APIDS Foreign Collaborators Public Loans Foreign currency loans IDBI IFCI ICICI Rupee loans IDBI IFCI ICICI

and

their

7.03 4.27 2.20 15.00

28.50

2.

7.00 6.50 10.00 17.50 10.00 9.00

23.50

36.50

60.00 1.50 90.00

3.

Central cash subsidy

Exhibit 4 : Spartek - The Technological Superiority Spartek Technology Single firing of less than one hour. This improves the inherent quality of tiles and results in 70% fuel saving. The fuel consumption is about 500 Kcal/Kg. LPG Fuel used for the first time in India. LPG is the cleanest fuel and given the best colour development of all. Existing Technology Double firing of about 70 hours duration. Needs heavy kiln furniture and requires more than 2000 Kcal / Kg.

Oil or coal used as fuels. Both have serious disadvantages of either sulphur, ash smoke or moisture which affects the quality of tiles and life of machinery, These contaminations restrict the full development of colour. Pressing by very low capacity friction presses (40-60 tonnes). Low strength and slow firing cycles. This gives a low percentage of first quality products(60%) and very high second quality products and rejections. Glazing done mostly by conventional methods. Range of surface finish that can be obtained is very limited.

Pressing by high capacity hydraulic presses (680 tonnes). Hydraulic pressing leads to uniform surface and high strength. This result in fast cycles and very high first quality products (about 95%) Glazing is possible by all the different methods of glazing known till date to achieve very special effects, surface and shades.

Decorations are permanent as they are beneath the glaze decoration and are fired at a high temperature of around 12000 C.

Only over-glaze decoration is possible, and they are fired at 8500 Cor less. Due to these, they tend to wear away fast.

Exhibit 5 : Summarised Income Statement Rs. In Million 1986 9567 7480 63.10 6.98 13.88 6.66 2.13 1.98 2.60 0.40 7.20 2.31 44.14 18.96 7.43 11.53 0 11.53 3.25 8.28 12.50% -5.75 0.11 0.05 0.00 0.06 0.22

a) b) c) 1 2

Production (MT) Sales(MT) Income Statement Sales and other Income Operating expenses I. Raw materials and stores (incl. tools) II. Excise Duty III. Power and fuel IV. Personnel cost V. Repairs and maintenance VI. Advertisement VII.Commission, freight, cash disc, sales tax VIII.Depreciation / amortisation IX. Others Earnings before interest Interest Earning before taxes Taxes Profit after taxes Dividend Retained earnings Dividend % Increase / decrease in stock Other income consists of : Service charges Interest on deposits, etc. Excise refund of earlier years Misc. Income

1988 18730 19374 173.71 25.13 58.37 13.87 4.72 5.43 5.15 1.23 12.09 4.67 130.67 43.05 9.11 33.94 5.35 28.59 7.11 21.48 25.00% 1.09 0.35 0.15 0.00 0.42 0.92

Year to June 1987 16146 16284 140.73 21.89 37.75 11.47 3.31 5.27 5.65 0.63 10.75 3.78 100.50 40.23 8.02 32.21 5.08 27.13 5.69 21.44 20.00% 1.08 0.24 0.10 0.00 0.50 0.84

3 4 5 6 7 8 9

Taxation : Taxation is based on the provisions of Section 115J of the Income Tax Act, 1961, excerpts of which are given below : Notwithstanding anything contained in any of the provisions of this Act(Income Tax Act, 1961) where in the case of an assess being a company, the total income as computed under this act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1998 (hereinafter in this section referred to as the relevant previous year) is less than thirty percent of its book profit, the total income of such assess chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.. Book Profit : Profit before tax and dividend as per the published profit and loss account. Corporate Tax Rate : 50% + Surcharge on Income Tax @ 5%.

It may be noted that since the minimum tax under section 115 J is payable on the accounting profit, its impact can avoided / reduced for a company like Spartek through, say, change-over to written down value method of deprecation as permitted in the Companies Act, 1956. However, the lower reported profit under such a change-over have their own implication for the company concerned.

Exhibit 6 : Summarised Sheet Rs.in Million A. 1. Assets Fixed Assets Gross Block Less : Depreciation Net block Net Current Assets Inventories Receivables Cash and bank balances Sub-total Less : Current Liabilities Net current assets Miscellaneous expenses Total Financing Shareholders funds Share capital Reserves and surplus Sub-Total Loan funds Long-term Foreign currency Sub-total Short-term from bank, etc. Sub-total Total 1988 175.07 28.37 146.70 27.70 34.96 6.65 69.31 31.10 38.21 0.54 185.45 As of June 30 1987 1986 102.24 16.28 85.96 20.82 20.68 14.31 55.81 25.67 30.14 0.00 116.10 88.03 6.97 81.06 13.83 8.42 8.51 30.76 16.02 14.74 1.43 97.23 1985 75.01 0.11 74.90 0.49 0.26 11.34 12.09 5.17 6.92 1.71 83.53

2.

3. 4. B 1.

28.46 52.67 81.13 43.23 49.91 93.14 11.18 104.32 185.45

28.46 31.19 59.65 34.20 22.02 56.22 0.23 56.45 116.10

28.44 8.28 36.72 37.63 21.45 59.08 1.43 60.51 97.23

23.55 0.00 23.55 33.80 21.17 54.97 5.01 59.98 83.53

2.

3.

Notes : (e) Capital consists of equity shares of Rs. 10/- each (f) Reserves include central subsidy (g) Fixed assets include preoperative expenses, since capitalised (h) Composition of inventories Raw materials Work-in-progress /Finished goods Stores, spares and tools e) Receivables include trade debts f) Short-term loans include bridge finished goods. g) Additional liability in respect of outstanding instalments of foreign currency loans arising from exchange rate changes between drawl date(s) and year end(s) and

1.50 0.00

1.50 0.00

1.50 12.08

0.00 9.59

10.80 4.57 12.33 27.70 26.92 0.00 14.96

10.12 5.66 5.04 20.82 15.85 0.00 10.04

5.37 6.74 1.72 13.83 5.85 1.35 9.25

0.36 0.00 0.13 0.49 0.00 5.00 0.77

year end(s)

h) Financial Institution have the option to convert part of their terms loans not

exceeding Rs. 7.3 million to equity shares par, at any time between 01-01-1980 to 31.12.1991.

Exhibit 7 Share Price movements (Rs. Per share) 1988 110 58 1987 118 45 1986 50 23 1985 28 17

High Low

Exhibit Ceramic Tiles Industry : Trend in Capacity and Production (In tonnes) Year 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Number of Units 5 5 5 5 6 6 7 10 14 15 17 18 22 Installed Capacity 42020 53200 65200 65200 77000 77000 83400 102200 119200 128000 192000 219300 283800 Productio n 39375 40844 41778 44173 51900 56980 61976 52917 93000 99253 130560 161100 *185000 Capacity Utilisation 94% 77% 64% 68% 67% 74% 74% 52% 78% 78% 68% 73% 65% Exports 2740 4700 1498 889 1244 4900 6500 800 1000 1000 1000 1000 *2100 Apparent Consumptio n. 36635 36144 40280 43284 50656 52080 55476 52117 92000 98253 129560 160100 *182900

* Estimate. Includes only part operations in respect of 4 new units that went into commercial production during the year. 1983 output was affected by a prolonged closure of HR Johnsons Bombay plant.

Exhibit 9 : State-wise location of Ceramic Tile Capacity in the Organised Sector AP Existing Units HR Johnson Somany Pilkington Spartek Regency Bell Ceramic Kajaria Anant Raj Murudeshwar Kera Sinter Eastern Ceramics Orient Ceramics Neyer Madhusudan Metlex Decera Ceramics Parsuram Pottery Western India Ceramic India Universal Tiles Orissa Tiles Total (A) Expansion Regency Kajaria Bell Ceramics Murudeshwar Madhusudan 702 00 150 00 150 00 900 580 0 456 00 285 00 220 00 340 00 32500 10000 600 0 100 0 100 0 100 00 500 0 600 0 132 00 180 00 125 00 100 00 120 00 216 00 GUJ HAR KAR 160 00 MP 220 00 MAH 240 00 UP/RAJ PONDI ORI Total 6200 0 3360 0 2600 0 2500 0 2000 0 1200 0 1800 0 1250 0 1320 0 1000 0 1300 0 1000 0 5000 6000 1000 0 5000 6000 7500 7500 6000 1000 3018 00 1500 0 1400 0 1500 0 1200 0 9000

260 00 250 00

200 00 12000

13000 10000

500 0 600 0

14000

125 00

Somany Orient Total (B) New Units HR Johnson Somany 150 00

0 900 0 330 00

940 0 940 0 125 00 120 00 7000 21000

1840 0 7000 9090 0 1200 0 1200 0 2400 0 4167 00

120 00 Total ( C ) 120 120 00 00 Total (A)to(B) 852 910 670 530 220 340 00 00 00 00 00 00 Note : These capacities include both current and planned.

53500

10000

100 0

Exhibit 10 : Competitors Profiles*

a) Somany Pilkingtons Ltd (SPL)

SPl was established in the early seventies by the HL Somany group in technical and financial collaboration with Pilkingtons Tiles Ltd., UK, for the manufacture of glazed wall tiles. Commercial production commenced in 1972 / 73 at the factory situated at kassar in Haryana. Production and sales increased steadily despite facing a series of labour unrests in the early eighties, Since 1984/85, SPL has been undertaking modernisation of the Kassar unit and also augmented captive power back-up to overcome erratic power supplies. SPL undertook to set up a new unit at Kadi, Gujarat, with a licensed capacity of 6,000 TPA and production was started in June 1983. Consequent to the expansion-cum-modernisation programmes undertaken by the company production capacity at Kassar would stand increased to 31,000 TPA and at Kadi to 12,000 TPA from 1987/88. These schemes covered installation of more modern automatic presses in replacement of the mechanical ones, upgradation of glazing lines, introduction of tiles decorating machines and modernisation of sorting and packing sections. In the four years to June 1987, SPL incurred a capital expenditure of about Rs. 160.0 million. As a natural extension of its current product range, SPL is believed to be entering into the floor tiles segment as well. The total tiles production which was 23,813 tonnes during 1984/85 increased to 25,665 tonnes in the following year, but declined to 19,742 tonnes during 1986/87 due to a three month long strike. A few earlier, SPL, had diversified into leasing business; the value of leases written amounted to Rs. 32.5 million in 1983/84, Rs. 33.3 million in 1984/85, Rs. 200 million in 1985 / 86 and Rs. 18.0 million in 1986/87. SPL earned profits after tax of Rs. 20.1 million on nor sale of Rs. 227.1 million for the year to June 1987 compared to Rs. 22.6 million on sales of Rs. 23.7 million for the preceding year. SPL also took control of Orient Ceramics Limited (OCL), which became sick when its 5,000 TPA glazed tiles plant at Sikandrabad in UP ran into rough Weather. SPL quickly turned it around and is reportedly planning to increase OCLs capacity to 20,000 TPA in two phases.

It may be noted that the Somany Group has a significant presence in the sanitaryware sector through its control of Hindustan Sanitaryware Ltd. a Rs. 300 million turnover company. The Rs.10 paid-up share of SPL was quoted around Rs.100 in some May-1988 transactions. B) HR Johnson (India) Ltd. (HRJ) HRJ, a closely-held company, it the largest tile producer in the country and reported has the second largest production is the world. It was established with the assistance of H & R Johnson of UK, a leading presence in the ceramic industry in the world. HRJ has manufacturing facilities in Maharashtra Madhya Pradesh and Karnataka, Essentially a producer of wall tiles, HRJ is reputed to have a strong all-India distributors work and excellent brand image. They have recently entered the floor tiles segment. Their initial batches of floor tiles were slow in gaining consumer acceptance. HRJ is believed to creating large production facility for floor tiles in Karnataka. C ) Neveli Ceramics and Refractories Ltd.(Neycer) Neycer was incorporated in1960 with the main objective of manufacturing sanitaryware, ceramic-ware, stoneware pipes, etc. Its sanitary ware plant is located at Vadalur, about a couple of hours drive from Madras. The Neycer brand image is fairly strong and has an excellent retail level visibility in the southern states. Neycers sanitary-ware output was stagnant about 4,000 TPA in the late seventies. Aided by a phased expansion - cummodernisation programme, the output steadily increased to touch 8,143 tonnes during 1987. Neycer diversified into glazed ceramic tiles manufacturing by setting up a10,000 TPA plant in the Union Territory of Fondicherry. The project, based on single fast firing technology was partially completed at an estimated cost of Rs. 185.0 million after large cost and time over-runs. The plant which was commissioned in December 1986 experienced major teaching troubles and started producing acceptable quality floor tiles from the middle of 1987. During 1987, production of tiles amounted to 4,158 tonnes while sales was 2,804 tonnes Neycer incurred a loss of Rs. 18.9 million for 1987 (mainly on account of the new project-related depreciation and interest expenses) against a pre-tax profit of Rs.17.4 million for the 18 months to December 1986. This loss and the heavy burden of borrowings to finance the cost over-runs seriously eroded Neycer financial position. The Rs. 10 share of Neycer was quoting around par in May-June 1988. D) Regency Ceramics Ltd. (RCL) RCL was originally promoted in 1983 by one G.N. Naidu and his associates. The Andhra Pradesh Industrial Development Corporation LTd.(APIDC) and the Pondicherry Industrial Promotion Development and Investment Corporation Ltd. (PIPDC) also participated in the equity capital of the Company to the extent of 7.5% each. RCL undertook to set up a project for manufacturing 25,000 TPA of ceramic flooring and wall tiles at Yanam (Part of the Union Territory of Pondicherry but inside Andhra Pradesh.) At this was envisaged as a 100% Export Oriented Unit (EOU), RCL could avail of various concessions such as duty-free import of capital goods, etc. The project commenced commercial production in May 1986. RCL had entered into a technical collaboration with Welko Industrials SPA of Italy for the supply of know-how, engineering and plant and machinery.

In view of the reported downturn in the export market especially from the slowdown in construction in Middle-East and intense competition parting down margins, RCL sought government approval to opt out of the 100% EOU scheme. This was granted with a number of conditions such assured export obligation of 30% (For a 5-year period), and re-imposition of duties with penalty on the imported equipment / inputs. The project cost was estimated to have gone up by about Es. 42.0 million to Rs. 166 million due to these factors. RCL recommenced production in Janufary 1987 under the new status. For the 6 months to October 1987, RCL incurred a loss of Rs. 10.7 million on revenue of Rs. 51.7 million. The Regency share was quoted in the Rs. 18-23 range during May-June 1988.) E) Murudeshwar Ceramics Ltd. (MCL) MCL was promoted by R.N. Shetty, a leading builder in Karnataka, in association with Karnataka State Industrial Development Corporation Ltd. (KSIDC). MCLs floor tiles paltn, with a capacity of 12,500 TPA, is located at Hubli, Karnataka. The estimated project of Rs. 134.5 million was being financed by equity capital of Rs. 45.0 million, institutional loans of Rs. 83.0 million and balance in interest-free development loan (Rs. 5.0 million) and subsidy. MCL has technical-cum-financial collaboration agreement with Klingenberg Dekoramic CmbH of Federal Republic of Germany. Plant and machinery are being procured from Sacmi of Italy. Commercial production was expected to start by the middle of 1988. MCL is reported to have an export obligation to the extent of 10 % of its production for the first 5 years. F) Kera Sinter Ltd. (KSL) KSL was promoted in September 1983 in the joint sector by APIDC, Kerabedar GmbH, West Germany (KBG) - since gone into liquidation - and Ks Reddy and his associates. The project for the manufacture of 13,200 TPA of ceramic floor and wall tiles is located at Gudur village in the Nalgonda District of Andhra Pradesh. Technical knowhow was provided by KBG. The project cost initially estimated at Rs. 69.0 million went up to Rs. 85.0 million due to certain modifications required on account of major equipment failure. The equity capital of Rs. 23.2 million to part-finance the over-run. However, APDIC which had about 26% holdings expressed its inability to take up the Rs. 1.69 million worth shares offered to it in the additional issue. The financing was finally completed with the Unit Trust of India taking up this amount in the form of convertible debentures. Trial production was started in early 1985, but production could not be stabilised due to the technical problems encountered during the trail run and later due to power custs.

G) Kajaria Ceramics Ltd(KCL)

KCL, promoted by A K Kajaria Exports, (a recognised Export House), was setting up a plant to produce 12,000 TPA of floor and wall tiles at Sikandrabad in the district of Bulandshahar in Uttar Pradesh, through the single fast fire technology route. KCL has entered into a technical collaboration agreement with Todagres S A Spain, a well-known ceramic tile manufacturer. The project, with an estimated cost of about Rs. 150 million, and an equity content of about Rs. 55 million was scheduled to be commissioned in the third quarter of 1988. KCL is understood to be working on expanding its capacity to 26,000 TPA. KCL is required to export 25% of its output during the initial 5 year period. H) Bell Ceramics Ltd (Bell) Bell, a Baroda based company, was implementing a 20,000 laboration with Society Impianti (SITI SpA), Italy. Bell has been promoted by two non-resident Indians (NRls),RK jatia and

RGN Swamy. The former was one of the promoters of the Asian hotels Ltd. which owns Hyatt Regency hotel, new Delhi. The project cost of Rs. 147.8 million an dRs. 90.2 million of institutional loans. Bells products would be in the market by mid-1988. Bell was reportedly installing, for the first time in Inida, single fast firing double deck roller hearth kiln, which would facilitate simultaneous production of two main products. Bell was also planning to use cheaper natural gas as fuel; this was a major factor in the location of plant in Bharuch. In view of the highly automated facilities, the manpower strength would be kept at about 100. Bell also has an export obligation of 25% of annual production for a period of 5 years. Bell has already indicated that it hasplans to expand its plant capacity to 35,000 TPA, later. I) Metlex Ceramics Ltd.(Metlex) Metlex was promoted in 1986 by Jamna Datwani, an NRL and Vikram Chopra, a chemical engineer. It was set up in Curgaon, Haryana, for manufacturing 12,000 TPA of glazed wall and floor tiles in technical collaboration with Sacmi, Italy. It would appear that in the first phase, the plant capacity was limited to 6,000 TPA. The project cost was estimatd at about Rs. 60 million with an equity financing of Rs. 26.3 million. Reportedly, the project has not been appraised by the financial institutions. The plant was likely to be put on stream in the third / fourth quarter of 1988. J) Others In addition to the foregoing units, a few more were reportedly planning to enter the fray. These include (I) Anant Raj Group of New Delhi (already in the construction industry) with a 18,000 to 20,000 TPA plant in Haryana. In addition, several existing ceramic companies were also expected to implement tiles projects as part of their expansion / diversification programmes.

Exhibit 11 : Selected Competitors - Summarised Financial Data Rs. In Million 1984/85

1)

Somany Pilkingtons Ltd. i. Income Summary Output (MT) Sales EBDIT Depreciation Interest EBT Taxes EAT Dividends Retained Earnings ii. Balance Sheet Summary Gross block Depreciation Net block Investments Net current assets Total Share capital Reserves Net worth Long term borrowings Short-term borrowings Total iii Share Price Behaviour (Rs) High

1986/87

1985/86 (JulyJune) 25655 237.55 67.91 32.23 4.15 31.53 8.90 22.63 2.70 19.93 213.91 153.06 60.85 5.28 45.01 111.14 9.00 65.38 74.38 12.61 24.15 111.14 1986 80.00 51.00

19742 227.15 61.61 33.95 2.49 25.17 4.60 20.57 3.60 16.97 241.64 186.74 54.90 5.28 56.23 116.41 9.00 82.35 91.35 10.34 14.72 116.41 1987 125.00 79.00

23813 207.18 58.94 47.21 2.32 9.41 4.30 5.11 2.08 3.03 185.03 123.41 61.62 5.28 33.42 100.32 9.00 45.45 54.45 17.76 28.11 100.32 1985 59.50 40.00

2)

Low Neyveli Ceramic Refractories Ltd.

and 1987 1985/86 (July/Dec) 10968 1 170.54 23.65 2.83 3.42 17.40 .00 17.40 1.22 16.18 1984/85 (July/June) 7881 0 97.75 10.20 3.09 2.05 5.06 2.60 2.46 .64 1.82

i. Income Summary Output-Vitreous sanitary ware MT Ceramic tiles Do Sales EBDIT Depreciation Interest EBT Taxes EAT Dividends Retained Earnings ii. Balance Sheet Summary

8143 4158 136.34 7.58 9.90 16.62 -18.94 .00 -18.94 .00 -18.94

Gross block Depreciation Net block Investments Net current assets Total Share capital Reserves Net worth Long term borrowings Short-term borrowings Total (** 18 months to December 1986 (Rs) iii Share Price Behaviour (Rs) High Low

224.22 28.30 195.92 .17 9.82 205.91 21.25 9.96 31.21 129.66 45.04 205.91 1987 11.50 11.50

170.83 18.40 152.43 .17 -14.22 138.38 21.25 26.39 47.64 82.03 8.71 138.38 1986 24.00 13.85

35.24 15.71 19.53 .16 10.98 30.67 4.35 14.42 18.77 8.78 3.12 30.67 1985 40.00 23.00

Notes: EBDIT - Earnings before depreciation, interest and tax. EBT-Earnings before taxes. EAT - Earnings after taxes.