Murugappa steps on the gas

Chennai conglomerate looks at finance to fuel growth after consolidation in core areas

The Murugappa Group, a Chennai-based conglomerate driven predominantly by its agriculture business, is set to embark on its next phase of growth fuelled by finance. While the Rs 340 billion group plans to expand by forming a housing finance firm and focusing on health insurance, its consolidation in core areas of expertise has helped it to grow its market capitalisation to $11 billion currently, from $1 billion only eight years ago.

Executive Chairman A Vellayan, who has steered the growth in this phase, says the group focused on its strength and avoided cash burn. “It’s a simple strategy, though difficult to implement in the competitive environment,” he says. In this period, unlike earlier, the group firms also made a few acquisitions that have yielded results.

Vellayan says more than revenue the group looks at value creation. The jump in market cap had direct impact not only on the turnover, but also on profitability.

“The strategy was growing our core business and also to look at adjacencies. For example, in fertilisers we grew the basic DAP (di-ammonium phosphate) volume plus speciality nutrients, retail, pesticide, organic etc., which are around the core,” he adds. Similarly, E.I.D. Parry grew ethanol, refinery and retail segments around the core business of sugar.

Vellayan calls the focus on adjacencies as synergistic growth. “The group focused on improving operations and our increase in value is a combination of what we did right and we did not do.”

Murugappa Group, which includes Cholamandalam MS General Insurance, didn’t enter life insurance despite sensing an opportunity. It also pulled out of a gold loan and payment bank, which was due to set off through Cholamandalam Investment and Finance Company, the group’s NBFC arm. Also it decided against foraying into urea despite its strong presence in fertilisers.

“We would have had a difficult run had we got into it. We have seen companies having difficulty in taking off. We would have burnt around Rs 40-50 billion in capital, and that would have dropped our return and market cap,” says Vellayan.

The Murugappa Group, which began its journey in 1898, has 28 businesses including nine listed companies with interests in agriculture, engineering and finance mainly. Its revenue has reached around Rs 340 billion, thanks to increase in capacity utilisation to around 90 per cent, mainly in engineering and agriculture, fertiliser and pesticide plants from around 70-75 per cent a year ago.

The finance business — insurance and NBFC — grew by nearly 30 per cent. One of the firms, Tube Investments India, has been restructured to cover financial services while the manufacturing business was put under another company. The group has set a target of around Rs 500 billion by 2020.

The capacity utilisation in businesses such as fertilisers, chains and tubes, has gone up by around 85-90 per cent — a target set for this March. Going ahead, the group plans to expand fertiliser capacity by around 15 per cent, while tubes and chain businesses will increase capacity by 10-15 per cent. While ruling out acquisitions to increase fertiliser capacity, Vellayan says the focus will remain on phosphatic fertiliser.

The other major expansion would be in finance — NBFC and insurance. The vacuum created by banks affected by the non-performing assets problem and structural weakness offers opportunity for NBFCs to meet credit demand especially in auto, housing, micro, small and medium enterprises and others. The group’s plan to launch a housing finance firm targeting a book size of Rs 30 billion in the next three years — it is Rs 7.5 billion at present, and a part of Cholamandalam Finance — is borne out of this. “In terms of profit finance has already surpassed other businesses. But it requires capital and we have enough for the next two years,” says Vellayan, who believes around 50 per cent of the growth will come from finance by 2020.

Chola’s differentiators are segmentation and operation and its net credit loss are much lower than the industry, says Vellayan. The combination of reduction in net credit loss and in cost of funds and operations are reflecting in the bottom line.

Other businesses, like in the past, may look at inorganic growth.

Acquisitions were done with the idea of getting synergy benefits. The group firms have been able to buy assets at reasonable value, and it helped eliminate competition to an extent and enter new markets. “The other view (on acquisitions) is that in each of our markets we have to be a certain size to command the ability to price, to attract people to work for us, and withstand some pressure and leverage the our brand across the larger market space,” says Vellayan.

He agrees it is important to address technology and skill to stay relevant, besides benefitting from the Make in India programme.

“We have to go through each of our businesses, and see the government moves to facilitate Make in India. If we are dependent on some import and we go for Make in India, our supplier will end up raising price and we will get hurt,” says Vellayan.

Given the disruptions in technology and business models, the group has to ensure each business is on guard. Vellayan concedes that the group has to be on top with R&D and keep track of trends. To facilitate this, the group firms are also looking at partnering start-ups.

For instance, Coromandel Fertilisers is working with Hyderabad-based technology Cyient Ltd to use drones on the farm sector to map soil and give advice to farmers linked to Murugappa’s retail centres. In finance, Cholamandalam Finance has invested in White Data Systems on data mining on loads. In the agri space, the company is engaging various people on apps to help farmers to check their credit worthiness and improving return on investments, et al.