 "The outliers")
At the macro level, the fall in economic growth translates into lower demand for goods and services and a virtual freeze on new projects. This also means less competition for resources such as capital, talent and raw materials, and reduces competition for financially stronger firms, who can then race ahead of their peers.
"Our balance sheet allows us to take some risks. If our bet goes right, we will have the first mover advantage once the recovery starts. Otherwise, we can afford to wait for a few more years to recover the investment," says Ashok Bhandari, chief financial officer of Shree Cement, about the company's plans for a green-field unit in Bihar.
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For a few smart consumer companies, the slowdown is a perfect time to build brands and consolidate market position. Not surprisingly, many business leaders have taken the slowdown in their stride. For them it is an opportunity to bring out the best in their organisation and play to their strengths. Take for example Y C Deveshwar, chairman of ITC. Under his leadership, the company has continued to invest in new businesses, taking advantage of its superior finances.
In the four years since the onset of the global financial crisis in late 2008, the company's revenues are up by nearly 70 per cent (on a cumulative basis), while net profit has more than doubled. This has turned the company into a safe haven for equity investors, and ITC's market valuation has tripled during this period. ITC's contrarian performance in recent years can be partly attributed to the India consumption story, but doesn't fully account for the consistency with which it has beaten its peers.
For this we have to dig dipper into the growth strategy scripted by ITC on Deveshwar's watch. He used the free cash flows from the tobacco business to turn ITC into a conglomerate with multiple growth drivers. In FY03, tobacco accounted for nearly three-fourth of ITC's revenues and over 90 per cent of its profit before tax. Now, tobacco's share in revenues is down to a little over half and it accounts for just 80 per cent of profits. More importantly, an increasing number of the company's non-tobacco divisions have become financially self-sufficient.
Agri-business has been generating free cash flows since FY09, while paper and packaging turned cash-positive a year later, and the non-tobacco FMCG business is now on the verge of break-even. In the first nine months of FY12, losses in the non-tobacco FMCG business halved to Rs 93 crore, while revenues were up 26 per cent year-on-year, to Rs 4,969 crore.
This will enable ITC to enter newer segments such as dairy and non-alcoholic beverages, or scale-up existing businesses such as hotels and ready-to-eat foods. The initial indications suggest that the company may do a bit of all the above and open up new growth drivers that will enable it to maintain its growth momentum.
If ITC gained from the resilience of its tobacco business and the timely diversification by its chairman, Bajaj Auto is flying high thanks to the contrarian strategy of its managing director, Rajiv Bajaj. When Bajaj became managing director in 2005, he had two stark choices - either copy peers or make a complete break with the past. He chose the latter, and Bajaj Auto is now the financially most successful two-wheeler maker. The company topped the BS financial sustainability index for 2012 with perhaps the best balance sheet in India Inc.
Rajiv Bajaj owes this success to his out-of-the-box thinking. In a market where two-wheelers are sold like a poor man's car - a low-cost mode of personal transport - Rajiv Bajaj positioned his motorcycles as a macho machine for youngsters. In his marketing book, you buy Bajaj Pulsar and Bajaj Discover not because they are cheaper to buy and run than smaller cars, but because it's more thrilling to ride a fast motorcycle than a car.
The positioning has helped Bajaj Auto to create a completely new segment - 150cc-plus sports-cum-performance motorcycles, which it dominates. Bajaj Auto has a 52 per cent share of the 150cc-and-above (but below-250cc) segment, where it sells Pulsar, Avenger and KTM bikes, as per December data released by the Society of Indian Automobile Manufacturers. In contrast, its volume share in the entire motorcycle market (excluding exports) is less than 30 per cent. This helps the company make more profit per unit of output than competitors. According to industry estimates, the Bajaj Pulsar range for instance has an operating margin of 20 per cent, against 15-16 per cent in the sub-125cc segment.
"The company owes its success to its differentiated product portfolio," says an auto analyst at a leading brokerage firm in Mumbai. "It has a niche business in three-wheelers which faces little competition, and in motorcycles it follows a different brand positioning than competitors. Margins also get a boost from exports, which account for a third its revenues," he adds.
Rajiv Bajaj's strong focus on branding and product differentiation has helped the company to maintain profitability even in the face of stagnant volumes. This pricing power helped Bajaj Auto to report an industry-leading operating margin of 22.6 per cent over the first nine months of FY13, despite a flat three per cent revenue growth. During the same period, Hero Motocorp reported an operating profit margin of 15.6 per cent.
This has made Bajaj Auto one of the best-performing auto stocks on Dalal Street. In the past 12 months, Bajaj Auto's stock price has appreciated by 30 per cent. It is now the second most valuable automaker behind Tata Motors, ahead of Mahindra & Mahindra and Maruti Suzuki. The next frontier for Bajaj is to convert his new financial prowess into volume leadership of the Indian two-wheeler market.
The other business leader who decided to change the rules of the game was Vineet Nayar, vice chairman of HCL Technologies, the fastest-growing Indian IT services company right now. "There are only two things that help you win - choose your battles and fight them well," Nayar once said, and that's precisely what the IT services company has done under his leadership.
From making big acquisitions to entering newer geographies and challenging existing players to putting in place the "employee first, customer second" policy, Nayar has been instrumental in transforming HCL Tech from a tier-II IT services company to a $4 billion global behemoth in less than a decade.
The company clocked a better-than-expected 68.5 per cent increase in net profit for the quarter ended December 31, 2012, and has been surprising the street with sterling numbers for the past four to five quarters.
However, it made its presence felt when, as the CEO, Nayar decided to launch a rival bid to acquire Britain's Axon, taking Infosys head-on. In September 2008, when Nayar decided that he wanted to acquire Axon, he was not only outdoing India's bellwether company Infosys, but at the same time charting a roadmap for the company to be among the top four players. Like its peers TCS and Cognizant, Nayar was making the most of the slowdown that hit the industry in 2008. Axon was acquired a few months after Lehman fell.
Nayar's aggression and his attitude that he would go to any extent to acquire Axon has set the pace for the company. Over the last three years, HCL has not only managed to be among the top four in the Indian IT services industry, but has grown in a difficult macro-economic environment.
The numbers tell the story. In the year ended June 2012, HCL Tech's revenues grew by 17 per cent year-on-year, compared to 14 per cent y-o-y for the Indian IT-BPO industry. On a three-year compounded annual growth rate (CAGR) basis, HCL Tech's revenues grew by 24 per cent, against 13 per cent clocked by the industry. This growth is reflected in its market capitalisation, which has quadrupled in the last five years, and it has been the performing IT sector stock on the bourses in the current fiscal.
The first bet that the company took was to focus on remote infrastructure services. In 2005, the industry was focused on application development management services, but HCL decided to focus on infrastructure services. This meant becoming an end-to-end service provider for clients and taking over their entire IT infrastructure.
The strategy paid off, especially during the slowdown, as clients started to focus on cutting cost. From $70 million in 2005, the infrastructure services business clocked $1 billion in 2012. The unit is one of the biggest revenue earners for the company. The other big focus of Nayar's strategy has been to garner market share from larger MNC players by focusing on the renewal contracts market.
In 2011, Nayar had identified the opportunity in the churn market: "…I expect the growth to be largely funded out of churn - movement from one vendor to another." He geared the company to be fleet-footed, "so that HCL can grab those (renewal contracts) as and when they emerge." The company has consistently registered around 3 per cent volume growth in 2012, better than its larger peers except TCS, especially on the back of new deal wins in the volatile market.
Though the profits and volume growth were praised, the company came in for criticism for sacrificing margins for growth. In the past the company managed to keep margins as low as 17-19 per cent. But that too seems to be changing. HCL continued to improve its margin performance during the quarter. Despite giving wage hikes, the company reported a 40-basis point quarter-on-quarter (q-o-q) expansion in its Ebitda margin at 22.6 per cent for the second quarter ended December 31, 2012.
Though Nayar is no longer managing the day-to-day activities of the company, his aggression and quest to grow the company is visible in the new CEO Anant Gupta. "Whatever strategies we have in place and have evolved over a period of time, will continue to be there...All these will continue, but just that we will become more aggressive in the market place."
Even though he has stepped down as the CEO, Nayar will continue to mentor HCL's leadership team and handle significant client relationships.
For Marcelo Villagran of Bata India, the struggle to the top of the Indian footwear market was even more eventful. When he arrived from Chile in 2005 to become CEO of Bata India, he faced a multi-headed problem. The company was not only making financial losses, but its brand equity was rapidly eroding. Bata, though the most recognised footwear brand, was looked down upon as a grandpa brand that was just not acceptable to the new generation of buyers. They wanted something new and not what their grandfathers used to wear. His turnaround strategy was two-fold - cut cost and contemporise the brand.
In 2008, the company sold Hawai, its biggest and most recognisable brand, to the Brazilian company Alparagatas. The sale of Hawai was an inflexion point for Bata, as events which preceded and followed it constitute a turnaround story. After posting losses till 2004, Bata managed a net profit of Rs 12.49 crore in the year ended December 31, 2005. As finances looked up, Villagran fixed one thing after another. He improved the product mix, changed focus to stylish and premium products, rationalised manpower costs, closed loss-making stores, opened new stores at better locations and remodelled existing stores. More importantly, the company, known for making low-cost, sturdy shoes with somewhat outdated designs, has launched premium, high-cost and designer shoes. As a result, revenue per store doubled from Rs 50 lakh in 2006 to Rs 100 lakh in 2011, according to rating agency ICRA.
In addition, major gains for Bata came from its real estate venture in Batanagar in Kolkata. Bata entered into an agreement for developing a 262-acre integrated township at Batanagar through a special purpose vehicle - Riverbank Developers - in which Bata had a 50 per cent stake, with the remainder being held by Calcutta Metropolitan Group. In April 2012, Bata restructured the agreement in such a way as to give it upfront cash of Rs 100 crore, while it retains the legal title to land. In addition, Bata was also entitled to receive 640,000 square feet of constructed space at no additional cost.
According to ICRA, Bata took twin steps to rationalise cost. First, it outsourced labour-intensive operations; second, it offered surplus employees an early retirement option. These two steps together led to a decline in employee cost from 24 per cent of sales in 2006 to 14 per cent in 2010 and further to 12 per cent in the first nine months of 2011.