 "India's slowdown warriors")
Some companies converted the downturn into an opportunity to race ahead of the pack, using branding and smart financial management. We bring you five companies that have defied the gloom, and are set to do even better once the Indian growth story resumes
When a strong balance sheet meets a successful brand, magic happens. While the brand convinces consumers to open their wallets, the financial heft provides resources to nurture the brand and take the growth story forward. No one understands this magic formula better than Himanshu Kapania (Idea Cellular), Bhaskar Bhat (Titan Company), K M Mammen (MRF), Siddhartha Lal (Eicher Motors) and Krishnakumar Natarajan (Mindtree). These CEOs have not only defied the economic slowdown, but their companies have actually come out stronger from the macroeconomic storm that India Inc has faced since late 2008.
Experts are not surprised at their resilience. "During an economic slowdown, when supply exceeds demand, consumers choose a brand rather than a product. But to take advantage of this a company should have the ability to invest in brands in good times and sustain the effort in bad times," says Sivarama Krishnan, partner and head, risk advisory services, at PricewaterhousCoopers (PwC).
Sound financials and brand salience reinforce each other. "CEOs need sound financials to build a great brand. The brand itself then becomes a source of financial strength and a virtual cycle starts," says Krishnan.
Idea Cellular, India's third largest mobile operator, is a prime example of this. Thanks to its unique positioning and differentiated branding campaigns, Idea is now one of the most recognised brands in its category. What is less known is its strong financial footing.
"Idea Cellular continues to have one of the best balance sheets in the industry and is the only company that is generating free cash flows after adjusting for expenses on capex," says Sobhit Khare, telecom analyst at Motilal Oswal Financial Services. He attributes this to the financial conservatism of Idea's top management.
"The company never went overboard in capex in new circles and was conservative while bidding for 3G spectrum in 2010. It skipped Delhi and Mumbai, focusing instead on cheaper circles. So its leverage never went to alarming levels," says Khare.
Idea's total investment in 3G spectrum was Rs 5,800 crore, less than half that of Bharti Airtel (Rs 12,300 crore) and Vodafone (Rs 11,600 crore). But Idea got bang for its buck. Data revenues now account for 9 per cent of its total mobile revenues - the same as Bharti Airtel. Starting as a regional operator, Idea expanded gradually and grabbed market share from rivals. It is now the third largest operator with Revenue Market Share (RMS) of 16.2 per cent, against 9 per cent at the time of its initial public offer in 2007. Idea is also the biggest beneficiary of mobile number portability (MNP), with nearly a quarter of all subscribers adopting MNP having chosen Idea over others.
This doesn't surprise brand and marketing experts. "You require a strong balance sheet to sustain investment in brands, new products and innovation despite the slowdown, otherwise you may drop out of consumer minds," says Arvind Singhal, chairman and managing director of Technopak, a retail and brand consultancy. In the last five years, Idea is the only operator that hasn't cut ad spend. This puts it on a stronger footing, now that the outlook for telecom operators has started looking up.
This explains why Idea Cellular is the only mobile operator whose share price touched a new all-time high in 2013, and analysts expect more gains for shareholders, going forward. "The stock will continue to gain on the back of improvement in margins, higher market share and better return ratios," says Khare. (See chart on Idea Cellular.)
The close bond between a company's balance sheet and its brand salience is even more apparent in the success of MRF, now India's largest and most profitable tyre-maker. In the last five years, MRF's revenues have grown at a compounded annual growth rate of 20.2 per cent, faster than rivals like Apollo Tyres, which grew at 17 per cent during this period on a standalone basis. MRF's net profit growth has been even faster - 29.6 per cent, against Apollo Tyres' 8.4 per cent growth.
Analysts attribute MRF's success to its diversified product portfolio, timely investment in brand and marketing, and industry's best balance sheet. "MRF has invested aggressively in marketing and brand promotion. Besides, it was one of the first to invest in branded stores to attract premium car buyers willing to pay a premium," says G Chokkalingam, an independent analyst. In the last three years, MRF has more than doubled its brand spend to Rs 120 crore in FY12 and is now the biggest advertiser in the industry. Besides, it has set up a national chain of 300 exclusive MRF T&S (tyre and sales) stores. (See chart on MRF.)
MRF's biggest competitive edge seems to be its superior balance sheet and credit rating. MRF is India's only AAA-rated tyre-maker, which translates into a lower average borrowing cost of 9.6 per cent year - far lower than that of its rivals. This gives it a head start over others, given the capital-intensive nature of the business.
At the other extreme is Titan Company (earlier known as Titan Industries), India's largest watch and jewellery maker. Under Bhaskar Bhat, managing director for nearly a decade now, it has been churning out one successful brand after another - Titan, Tanishq, Fastrack, Titan Eye+, Sonata, Xylys, Helios, Skinn and dozens of sub-brands and extensions in categories such as watches and accessories.
"Titan is highly innovative and is consistently expanding its product portfolio either by launching new brands or extending existing brands such as Fastrack to new categories. This way it reduces their dependence on any particular product or brand and milks their investment in branding and sales and the distribution network," says Devang Mehta, senior vice president and head, institutional equity, at Anand Rathi Financial Services. This has turned Titan into a high flier on the bourses. In the last five years, Titan's share price has gone up up nearly six times and it is now the fifth most valuable company in the Tata Group, despite being much smaller.
What is less talked about is Titan's financial transformation over the past decade. Once the sick man of the Tata Group with debt-to-equity of over one until FY06, it is now debt-free, with return on equity that rivals top-performing FMCG and IT companies. It proves Krishnan's point about high performing companies. "You can have business without a brand but you can't have a brand without sound finances."
Siddhartha Lal, managing director and CEO of Eicher Motors, has scripted a similar growth strategy for Eicher Motors, the best-performing two-wheeler and commercial vehicle maker. In a market where mass motorcycle makers are struggling to hold on to their volumes, Eicher's Royal Enfield division posted growth of over 50 per cent in sales volumes at 123,018 units for the nine months ended September 2013. EBIT (earnings before interest and tax) margins of the division increased to 16.5 per cent, from 13.1 per cent in the year-ago period. Its success has now attracted British bike maker Triumph Motorcycles to enter the mid-size segment in India.
Lal isn't too worried about competiton. "We've done our ground work and created a strong fan following for Royal Enfield. We're working on new products, platforms and on distribution to further consolidate our brand positioning and expand the category further," says Lal. Royal Enfield has revised its production estimate to 175,000 units for FY14, against 150,000 projected earlier, and hopes to achieve sales of 250,000 units by FY15.
Over the years, Eicher has been conservative in capex and minimised duplication and unnecessary diversification. "We have stuck to a single-plant environment and not added facilities in different parts of the country. We have invested capital but concentrated on one location both in commercial vehicles and motorcycles to keep fixed costs low," says Lal.
In the commercial vehicles business, it split the risk in a highly competitive market by demerging the CV business in an equal joint venture with Volvo - VE Commercial Vehicle - five years back. This gave it access to the latest technology, as well as financial muscle to compete and invest for growth.
"We knew that we would be going through an enormous investment cycle and that the market would be cyclical. Now we have one of the best balance sheets and business models in the industry and continue to fund investments despite the slowdown," says Lal. The stock market believes in Lal's strategy. Eicher has been one of the best auto stocks: its stock price climbed 80 per cent in the last 12 months, and nearly 20 times since it announced the JV with Volvo.
Though volume growth in the commercial vehicle segment continues to pose challenges for Eicher Motors (VECV's sales declined by 13 per cent in the Jan-Sep period this year) given the overall slowdown in the industry, it improved its market share to 13.8 per cent in the first nine months of 2013, from 12 per cent a year earlier.
Mid-size IT services major Mindtree, on the other hand, owes its recent success to a business transformation and swift adaptability to the changed business environment. Over the past year, its stock price has more than doubled, and the company is currently one of the fastest growing IT firms in India (see chart on Mindtree). But until two years back, the company was facing an uncertain future. Its bet on the hardware segment had gone bad and the 2008 financial crisis in the US took a severe toll of its financial performance. More than poor growth, the company lost its credibility as a serious software services player.
Over the past six quarters, Mindtree's dollar revenues have grown at a compounded quarterly growth rate of three per cent. In the quarter ended September 30, 2013, the company reported a year-on-year growth of 29 per cent in its revenue to Rs 769.6 crore, and a sequential rise of 18.8 per cent.
One reason for this turnaround is the organisational overhaul that Mindtree embarked on two years back, to become an expertise-driven partner for its clients rather than just a generic service provider. It restructured its business, identified potential leaders who will steer it to the next level, and narrowed its focus to four verticals - banking, financial services and insurance; retail; travel and high-technology.
With the pick-up in discretionary spends finally visible, and growth staging a comeback in the major markets, Mindtree's management has hinted that FY14 will be a better year than FY13. Post-slowdown, analysts have said that several mid-cap firms will find survival challenging until they find their own niche and grow in it. "Deal wins and growth coming from both services and products business gives us confidence in its future prospects," Ashish Chopra and Siddharth Vora of Motilal Oswal Securities said in their report on Mindtree.
To fuel growth, the company is also scouting for acquisitions in the US and Europe, and may buy a $30-$50 million firm to strengthen its offerings in infrastructure management and package application solutions. However, the biggest near-term challenge for Mindtree will be to ensure improvement in profit margins, which have been impacted by the heavy investment on overhaul, according to some brokerages.
When a strong balance sheet meets a successful brand, magic happens. While the brand convinces consumers to open their wallets, the financial heft provides resources to nurture the brand and take the growth story forward. No one understands this magic formula better than Himanshu Kapania (Idea Cellular), Bhaskar Bhat (Titan Company), K M Mammen (MRF), Siddhartha Lal (Eicher Motors) and Krishnakumar Natarajan (Mindtree). These CEOs have not only defied the economic slowdown, but their companies have actually come out stronger from the macroeconomic storm that India Inc has faced since late 2008.
Experts are not surprised at their resilience. "During an economic slowdown, when supply exceeds demand, consumers choose a brand rather than a product. But to take advantage of this a company should have the ability to invest in brands in good times and sustain the effort in bad times," says Sivarama Krishnan, partner and head, risk advisory services, at PricewaterhousCoopers (PwC).
Sound financials and brand salience reinforce each other. "CEOs need sound financials to build a great brand. The brand itself then becomes a source of financial strength and a virtual cycle starts," says Krishnan.
Idea Cellular, India's third largest mobile operator, is a prime example of this. Thanks to its unique positioning and differentiated branding campaigns, Idea is now one of the most recognised brands in its category. What is less known is its strong financial footing.
"Idea Cellular continues to have one of the best balance sheets in the industry and is the only company that is generating free cash flows after adjusting for expenses on capex," says Sobhit Khare, telecom analyst at Motilal Oswal Financial Services. He attributes this to the financial conservatism of Idea's top management.
"The company never went overboard in capex in new circles and was conservative while bidding for 3G spectrum in 2010. It skipped Delhi and Mumbai, focusing instead on cheaper circles. So its leverage never went to alarming levels," says Khare.
Idea's total investment in 3G spectrum was Rs 5,800 crore, less than half that of Bharti Airtel (Rs 12,300 crore) and Vodafone (Rs 11,600 crore). But Idea got bang for its buck. Data revenues now account for 9 per cent of its total mobile revenues - the same as Bharti Airtel. Starting as a regional operator, Idea expanded gradually and grabbed market share from rivals. It is now the third largest operator with Revenue Market Share (RMS) of 16.2 per cent, against 9 per cent at the time of its initial public offer in 2007. Idea is also the biggest beneficiary of mobile number portability (MNP), with nearly a quarter of all subscribers adopting MNP having chosen Idea over others.
This doesn't surprise brand and marketing experts. "You require a strong balance sheet to sustain investment in brands, new products and innovation despite the slowdown, otherwise you may drop out of consumer minds," says Arvind Singhal, chairman and managing director of Technopak, a retail and brand consultancy. In the last five years, Idea is the only operator that hasn't cut ad spend. This puts it on a stronger footing, now that the outlook for telecom operators has started looking up.
This explains why Idea Cellular is the only mobile operator whose share price touched a new all-time high in 2013, and analysts expect more gains for shareholders, going forward. "The stock will continue to gain on the back of improvement in margins, higher market share and better return ratios," says Khare. (See chart on Idea Cellular.)
The close bond between a company's balance sheet and its brand salience is even more apparent in the success of MRF, now India's largest and most profitable tyre-maker. In the last five years, MRF's revenues have grown at a compounded annual growth rate of 20.2 per cent, faster than rivals like Apollo Tyres, which grew at 17 per cent during this period on a standalone basis. MRF's net profit growth has been even faster - 29.6 per cent, against Apollo Tyres' 8.4 per cent growth.
Analysts attribute MRF's success to its diversified product portfolio, timely investment in brand and marketing, and industry's best balance sheet. "MRF has invested aggressively in marketing and brand promotion. Besides, it was one of the first to invest in branded stores to attract premium car buyers willing to pay a premium," says G Chokkalingam, an independent analyst. In the last three years, MRF has more than doubled its brand spend to Rs 120 crore in FY12 and is now the biggest advertiser in the industry. Besides, it has set up a national chain of 300 exclusive MRF T&S (tyre and sales) stores. (See chart on MRF.)
MRF's biggest competitive edge seems to be its superior balance sheet and credit rating. MRF is India's only AAA-rated tyre-maker, which translates into a lower average borrowing cost of 9.6 per cent year - far lower than that of its rivals. This gives it a head start over others, given the capital-intensive nature of the business.
At the other extreme is Titan Company (earlier known as Titan Industries), India's largest watch and jewellery maker. Under Bhaskar Bhat, managing director for nearly a decade now, it has been churning out one successful brand after another - Titan, Tanishq, Fastrack, Titan Eye+, Sonata, Xylys, Helios, Skinn and dozens of sub-brands and extensions in categories such as watches and accessories.
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"Titan is highly innovative and is consistently expanding its product portfolio either by launching new brands or extending existing brands such as Fastrack to new categories. This way it reduces their dependence on any particular product or brand and milks their investment in branding and sales and the distribution network," says Devang Mehta, senior vice president and head, institutional equity, at Anand Rathi Financial Services. This has turned Titan into a high flier on the bourses. In the last five years, Titan's share price has gone up up nearly six times and it is now the fifth most valuable company in the Tata Group, despite being much smaller.
What is less talked about is Titan's financial transformation over the past decade. Once the sick man of the Tata Group with debt-to-equity of over one until FY06, it is now debt-free, with return on equity that rivals top-performing FMCG and IT companies. It proves Krishnan's point about high performing companies. "You can have business without a brand but you can't have a brand without sound finances."
Siddhartha Lal, managing director and CEO of Eicher Motors, has scripted a similar growth strategy for Eicher Motors, the best-performing two-wheeler and commercial vehicle maker. In a market where mass motorcycle makers are struggling to hold on to their volumes, Eicher's Royal Enfield division posted growth of over 50 per cent in sales volumes at 123,018 units for the nine months ended September 2013. EBIT (earnings before interest and tax) margins of the division increased to 16.5 per cent, from 13.1 per cent in the year-ago period. Its success has now attracted British bike maker Triumph Motorcycles to enter the mid-size segment in India.
Lal isn't too worried about competiton. "We've done our ground work and created a strong fan following for Royal Enfield. We're working on new products, platforms and on distribution to further consolidate our brand positioning and expand the category further," says Lal. Royal Enfield has revised its production estimate to 175,000 units for FY14, against 150,000 projected earlier, and hopes to achieve sales of 250,000 units by FY15.
Over the years, Eicher has been conservative in capex and minimised duplication and unnecessary diversification. "We have stuck to a single-plant environment and not added facilities in different parts of the country. We have invested capital but concentrated on one location both in commercial vehicles and motorcycles to keep fixed costs low," says Lal.
In the commercial vehicles business, it split the risk in a highly competitive market by demerging the CV business in an equal joint venture with Volvo - VE Commercial Vehicle - five years back. This gave it access to the latest technology, as well as financial muscle to compete and invest for growth.
"We knew that we would be going through an enormous investment cycle and that the market would be cyclical. Now we have one of the best balance sheets and business models in the industry and continue to fund investments despite the slowdown," says Lal. The stock market believes in Lal's strategy. Eicher has been one of the best auto stocks: its stock price climbed 80 per cent in the last 12 months, and nearly 20 times since it announced the JV with Volvo.
Though volume growth in the commercial vehicle segment continues to pose challenges for Eicher Motors (VECV's sales declined by 13 per cent in the Jan-Sep period this year) given the overall slowdown in the industry, it improved its market share to 13.8 per cent in the first nine months of 2013, from 12 per cent a year earlier.
Mid-size IT services major Mindtree, on the other hand, owes its recent success to a business transformation and swift adaptability to the changed business environment. Over the past year, its stock price has more than doubled, and the company is currently one of the fastest growing IT firms in India (see chart on Mindtree). But until two years back, the company was facing an uncertain future. Its bet on the hardware segment had gone bad and the 2008 financial crisis in the US took a severe toll of its financial performance. More than poor growth, the company lost its credibility as a serious software services player.
Over the past six quarters, Mindtree's dollar revenues have grown at a compounded quarterly growth rate of three per cent. In the quarter ended September 30, 2013, the company reported a year-on-year growth of 29 per cent in its revenue to Rs 769.6 crore, and a sequential rise of 18.8 per cent.
One reason for this turnaround is the organisational overhaul that Mindtree embarked on two years back, to become an expertise-driven partner for its clients rather than just a generic service provider. It restructured its business, identified potential leaders who will steer it to the next level, and narrowed its focus to four verticals - banking, financial services and insurance; retail; travel and high-technology.
With the pick-up in discretionary spends finally visible, and growth staging a comeback in the major markets, Mindtree's management has hinted that FY14 will be a better year than FY13. Post-slowdown, analysts have said that several mid-cap firms will find survival challenging until they find their own niche and grow in it. "Deal wins and growth coming from both services and products business gives us confidence in its future prospects," Ashish Chopra and Siddharth Vora of Motilal Oswal Securities said in their report on Mindtree.
To fuel growth, the company is also scouting for acquisitions in the US and Europe, and may buy a $30-$50 million firm to strengthen its offerings in infrastructure management and package application solutions. However, the biggest near-term challenge for Mindtree will be to ensure improvement in profit margins, which have been impacted by the heavy investment on overhaul, according to some brokerages.
Additional reporting with Shivani Shinde Nadhe & Itika Sharma Punit