The ITC Classic Story
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Details
Themes: Merger and acquisition takeover
Period : 1991 - 1996
Organization : ITC Classic, ICICI
Pub Date : 2002
Countries : India
Industry : Financial Services
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Case Code : FINC005
Case Length : 06 Pages
Price: Rs. 200;
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Classic: The ITC Fostered Baby
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Named 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. 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.