Deccan: Chronicle of a flawed diversification model

The survival of debt-laden Hyderabad-based publisher Deccan Chronicle is uncertain as its founders and owners face forgery and fraud charges, and its shares have tanked to an all-time low. Speculation is rife that the company has about Rs 2,000 crore in debt, including huge borrowings from various banks and institutions.

The sorry state of affairs came to light when the Industrial Finance Corporation of India (IFCI) declared Deccan Chronicle Holdings as insolvent. It said the company had thousands of crores of rupees as debt and its net worth has been eroded significantly. It urged the Andhra Pradesh High Court to order a winding up of the company under the relevant sections of the Companies Act, 1956, as it alleged that DCHL defaulted on redemption of Rs 250 crore worth of unsecured redeemable non- convertible debentures.

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Soon after, Hyderabad-based Karvy Group filed a police complaint against the promoters of DCHL for alleged forgery and misrepresentation by its promoters. Following this, the company's managing director resigned last weekend and the company's owners, including Chairman T Venkatram Reddy, scrambled to pledge a good chunk of their shares.

But how did T Venkatram Reddy, with his opulent lifestyle and high-profile new ventures in sports and aviation, as well as political connections, get it so wrong?

According to DCHL Chairman Reddy, "The real issue is a liquidity crisis that has arisen due to significant reduction in ad spend by domestic and multinational companies in India." However, the management may also have got its strategy wrong and Reddy's over-ambitious diversifications are being blamed for the company's downfall.

Unrelated diversification and the management's loss of focus resulted in an unforeseen decline in the fortunes of the company, which also owns the Indian Premier League franchise Deccan Chargers and a chain of book stores under the Odyssey brand name. It has ventured into aviation, a Mint article said.

Clearly the acquisitions haven't been beneficial. As owner of Deccan Chargers, Reddy clearly did love his team but the team ended at the bottom of the rankings in the last season. The company's dire financial situation has reportedly forced him to put up Deccan Chargers for sale, with no clear takers for the franchise. Its book store chain Odyssey has been a drag on its balance-sheet while it has now ventured into aviation with Aviotech, a chartered flight service.

Even though the company claims that these accounts "are outside its balance-sheet and run by a firm called Aviotech, created with the clear objective of capitalising on vast, untapped niche areas in the rapidly-growing corporate aviation and defence aerospace segments in India", off the Rs 170 crore raised it from Future Capital, Rs 50 crore went to Aviotech, according to the Karvy complaint. Clearly, money raised for the media company went into other areas, said a Business Standard report earlier.

According to various analysts, the immediate solution is to sell off non-core assets and get a strategic investor into their core business if it has any hopes of survival.

But the bigger question here is what was Reddy trying to do by running cricket team, a book store and an aviation business at the same time and that too without any expansion in its core business- the newspaper.

As a Firstpost article argued earlier, just because a company has been good at one particular business doesn't mean it will be good at another totally unrelated business.

And the same holds true for Mallya, too, whose unrelated diversification into the airline business cost him dearly and has now hurt his core alcohol business as well.