Steel to pipes, textiles to power — will all the pieces in diversified Welspun fall in place?
Life perhaps would have been very different, maybe even a tad prosaic, if BK Goenka had stuck to his family’s legacy business of home textiles, spinning success stories, supplying to global retailers and high street brands.
| WELSPUN’S VITAL STATS Present in five verticals: Home textiles, steel pipes, steel making, energy and infrastructure. The second largest home textile company in the world. Among the top 2 large diameter pipe companies in the world. India’s largest merchant direct reduced iron (DRI) producer. Clients include Fortune 500 companies such as Walmart, K-Mart, Target and JC Penny (home textiles) and Exxon, Chevron, Saudi Aramco and TransCanada (pipes). Geographical presence in 38 countries. Facilities in India, Saudi Arabia, Dubai, Portugal, UK, Italy, US (13 locations) and Mexico. Group turnover in FY 2011: Rs 13,745 crore ($3.3 billion). Group EBIDTA in FY 2011: Rs 1,800 crore. Group cash PAT in FY 2011: Rs 1,100 crore. |
But Welspun’s gumptious chairman has largely been a product of the expansive nineties. So that makes him the quintessential risk-taking Indian entrepreneur who has a happy confidence and even a dash of swagger to take on global challenges and successfully transforming them into unique opportunities of business growth. This has also helped Goenka spread his empire into what seem unrelated and new sectors like large welded steel pipes where the entry barriers have been very high, customers picky and technology execution supreme.
Infrastructure is Welspun’s latest diversification. Two acquisitions have already been made and Rs 1,000 crore pumped in. After supplying pipes, Welspun now wants to bag engineering and construction contracts for water, road and power projects on its own. “We will concentrate more on certain sectors in infrastructure. We consider water to be a very large play in the future. The group is among the largest suppliers of pipes. So we would now be a contractor and a developer as well,” says Parvez Umrigar, managing director and CEO, Welspun Infratech, its infrastructure arm.
The acquisition of MSK and a large stake in Leighton’s India operations will help Welspun straddle the entire spectrum. If MSK, a Rs 500-crore engineering, procurement and construction company, is more of a volume play, Leighton’s technical capabilities will be used for offshore oil and gas projects or complex tunnels. “Between the two acquisitions, we have covered the middle- and high-end infrastructure projects. We are bidding for roads, forming consortium to bid for airports. That’s how we are looking to put ourselves in the larger play of infrastructure,” Umrigar adds.
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The global paradigm
But unlike most of its peers, Welspun actually has mastered the global game much before it excelled in its domestic market. Perhaps that explains why for most of us back home, the group’s growth story has been somewhat fuzzy.
Let’s put its global strength in perspective: In both large diameter welded steel pipes and home textiles, not only is Welspun the biggest Indian exporter, but also among the top 2 globally. (see box ‘Welspun’s vital stats’)
At first glance, however, the different business verticals of Welspun do seem unrelated, the group’s diversifications disparate and incongruous. There’s soft fluffy towels, bed and bath linen on the one hand; and there’s rock hard pipes that it makes for global energy giants to transport oil on the other. If Welspun’s bed and bath home textile portfolio is all about designing, branding, marketing and cost-effective manufacturing, pipes call for engineering prowess. These two are the principal pillars of the group, contributing close to 85 per cent of its $3.3 billion turnover.
Along the way came forays into steel, infrastructure, oil exploration and power — all recent efforts to capture the entire infrastructure value chain. The last 15 years have seen explosive seven times sales growth — proof that Goenka has been taking the right bets. (see box ‘Well spun evolution’)
“Whatever we do, we want to be among the top 3 players globally. More than playing with capacity, tonnage, we want to be a global enterprise,” says Goenka, the Welspun Group’s chairman, outlining his corporate vision.
Pipe dream
Welspun’s genesis and initial successes may have spun out of home textiles, but today pipes have emerged as its flagship business. That’s also what got Mintoo Bhandari and his colleagues at private equity powerhouse Apollo Global Management very excited. For them, more than the popularity of Welspun’s bed and bath products, it was the oil and gas and metals play that was better aligned to their investment thesis.
Of course, track record always helps, but buoyed by large orders from the booming global fuel market, Welspun has outdone most of its rivals in the last five years. The big orders from global giants Chevron, Kinder Morgan and Saudi Aramco have ensured economies of scale and maximum plant efficiency for Welspun and Goenka has lapped it all up, with an eye on high margin, specialised projects from across the world. In the last five years, its revenues have jumped from less than $500 million to $2 billion. The current order book of pipes and plates stands at $1.2 billion.
“We don’t help people in finding oil, but only in its transportation. As we go deeper or higher or further from the demand centres to hunt for conventional energy, last mile connectivity through pipelines is increasingly becoming critical,” explains Akhil Jindal, director, Welspun Group, and one of Goenka’s most trusted lieutenants.
So when Goenka met Apollo’s fund managers for the first time in 2010 to raise money for his steel operations, Mintoo Bhandari’s team liked what they saw but wanted more skin in the game. Rather than a piecemeal investment, Apollo was keener on a comprehensive group exposure.
After months of negotiations, Apollo has agreed to write a $500 million cheque to mitigate the entire group’s immediate funding needs. Two-thirds of the funds will get routed to support the ambitious growth plans of its pipe company Welspun Corp (WCL), where Apollo will make a series of structured investments of convertible debt and equity.
Interestingly, the transaction will also consolidate the group’s steel unit, Max Steel, with Welspun Corp. Apollo will buy out 12.5 per cent of the promoters’ stake, while the balance 87.5 per cent held by the promoters will be bought out by WCL. It doesn’t end here. Simultaneously, Apollo has also been negotiating with Goenka to invest up to Rs 675 crore in Welspun Infratech — the group’s infrastructure arm, in the form of equity, debt or a combination of the two.
Why is Apollo so bullish on Welspun?
“Our investment is consistent with our approach of investing in sectors about which we have significant knowledge and experience and in companies in which we believe we can add significant value,” explains Sanjay Patel, head of international private equity and senior partner of Apollo Management International LLP.
Complementing its macro bet on hydrocarbons and metals, Apollo has always been an active investor in this space with investments like in Parallel Petroleum, an upstream company in the US to China’s Shengli Pipes.
Despite the cyclicality of the business, Apollo is confident of the visibility of pipeline orders in the next few years.
“This is the largest investment we have made in India. Welspun has a strong history of growth and profitability in global oil and gas pipeline industry and is at the cusp of becoming a leading, global integrated pipe manufacturer,” said Bhandari, the managing director of Apollo Global Management (India) Advisors while announcing the headline PE deal of the year.
For Goenka, his new financial sponsor brings immense value to the table. “Apollo is clear cut about oil and gas and mining and metals. And we deal in both. Iron ore and steel are the raw materials for our pipes. Oil and gas are our outputs as we supply to energy companies. Apollo will help us integrate our business from ore to pipes and will also help in getting into newer geographies.”
The partnership has already begun to integrate the pipe manufacturing process. Welspun’s steel mill currently produces a million tonne of sponge iron annually. But there are two big gaps in the entire chain. It does not have its own iron ore or steel slab plant. While ore is essential for sponge iron, slabs are the basic raw material for making steel plates and coils that are turned into different pipes.
Buying slabs and ore from the market means staying exposed to price fluctuations and supply shocks. A key task now is to tie up the loose ends. Apollo’s global portfolio of mining assets will come handy now for Welspun to tie up its raw material sourcing and offset the rising costs.
With ore in place, the sponge iron plant will gradually add capacity to 1.7 million tonnes per annum by 2013. The prospects of the 1.5 million tonne per annum slab plant will also brighten up. More importantly, the entire value chain will get captured by Welspun itself. “Unless you own your raw material, there is always a risk of getting into the wrong end of the cycle and taking a hit on margins,” points out Goenka.
There is little doubt that over time, Apollo’s involvement will clearly become more strategic and will help overcome short-term challenges like the one Welspun is facing currently over its fuel linkage from RIL’s KG Basin. On a bigger scale, it will help Goenka manoeuvre a sector which is increasingly becoming protectionist and territorial.
Going ‘glocal’
To give it due credit, the company actually foresaw the spectre of increasing nationalisation of oil and gas assets around the world. Accordingly, since 2009, it has been tweaking its business plans to focus more on internationalising its manufacturing presence.
In the US, right in the middle of recession, sprung Welspun’s greenfield project in 2008-09. A year later came the opportunistic acquisition of a majority stake in Aziz Pipe in Saudi Arabia, even when the slowdown overhang persisted in the Gulf.
The decision to globalise was not easy. The costs are higher in the US. As transportation becomes more expensive, it makes more sense to be close to the consumption centre. The geopolitics of energy also makes local presence imperative. “We want to be a local insider in every market that we are active in. Expansions — acquisitions or greenfield — will be to get a local presence abroad,” outlines Goenka.
Makes sense, when analysts predict orders worth over $30 billion will be up for grabs in the next three years from places as diverse as Alaska to Saudi Arabia and even India.
Fortunately for Welspun, the more specialised the pipes get, the sparser the competition becomes. There’s Europipe from Germany, Tenaris in South America, the Argentinian seamless pipe giant whose success Goenka aspires to achieve, the Japanese and Chinese players in Australia, and TMK — with whom Welspun almost signed up for a JV in 2007 — in Russia. It’s a fragmented market globally, where even a top player like Welspun, has only a little over 10 per cent share.
Building a global organisation is therefore the biggest challenge for the Welspun top brass. It’s yet to get there, say analysts, but the ongoing decentralisation of responsibilities, spreading the management bandwidth and creating empowered regional or local hubs and heads are all part of that evolution. “For the US plant in Arkansas, we hired locally. The locals had no prior exposure to pipe making; so we got 80 of them to Anjar, Gujarat, and trained them for three weeks before sending them back. In Saudi too, we trained the motley crew,” says Rajesh R Mandawewala, managing director, Welspun Group.
What should help is the group’s relentless emphasis on value addition, the investments in technology and scale, and its focused approach. In both the key verticals of textiles and pipes, Welspun will only work on exclusive projects, offering 360 degree solutions.
Welspun makes it a point to take care of the entire supply chain and distribution by actually delivering the finished products at the client’s store or project site, wherever in the world it may be. This involves a complete umbrella of services, including building storage yards for pipes and shipping them only when needed. “All our global clients do exhaustive diligence. So every textile or pipe order is tailormade,” says Jindal.
The textile acquisitions too — Christy in the UK, Sorema in Portugal or the JV with Italy’s Vincenzo Zucchi — typify this business blueprint. They have all given Welspun bigger brands, access to newer geographies and customers and even front-end exposures in markets of the US and Europe, which are otherwise difficult to crack.
The management will admit that the retail rollout of home decor stores, Welhome, in India has been patchy. But even then, it’s the largest home décor store chain with over 220 stores in 120 cities. “We will capture popular imagination with our brand promise. We took about five years to find our feet. Now we are getting to a point where we can dominate the market with our multi-channel pursuit,” feels Mandawewala.
New frontiers
There is a lot on Goenka’s plate. As Welspun eyes newer frontiers of growth, many feel the play is getting bigger and riskier. For example, associations with large, global hydrocarbon operators has given Goenka an extra confidence to take limited exposure in oil and gas exploration himself. But to mitigate risks, he has roped in JV partners like Adani that have deep pockets for such high-risk pursuits.
Welspun’s story has largely been under appreciated in India. Most are unaware of its global presence. The comparative reference points also get skewed as peers tend to have a contrarian India centric business focus. Few, therefore, can fathom all the pieces together. Analysts continue to pan Welspun’s $450 million investment in a plate plant that is yet to break even and running at half the capacity. And finally, the recent Sebi order banning the company and its promoters from the bourses, alleging unfair trading practices, has also had an impact on retail investor sentiments.
Goenka and his team are willing to confront these perception battles; they are even fighting the regulator Sebi in court. Parallely, Goenka has realigned and restructured his complex group holdings into simpler structures. And with his new partner Apollo, he is willing to combat even bigger hurdles that may lie ahead.
| WELL SPUN EVOLUTION 1985: Welspun is born as a textile company. 1985-1998: Greenfield facilities in Maharashtra and Gujarat for polyester texturising yarn, terry towels and cotton yarn. 1997-1998: Diversification into SAW (submerged arc welded) pipes at Dahej, Gujarat. 1999: Bathrobes facility at Vapi, Gujarat, in a joint venture with Vincenzo Zucchi of Italy. 2000: Welspun creates international facility (in New York). 2001: Pipe coating at Dahej, Gujarat, in a joint venture with Eupec Coatings GmbH, Germany. 2005: Home textiles and pipes expansion projects in Anjar, Gujarat, to emerge as the top 3 global player. 2006: Acquired Christy, UK’s leading towel brand and exclusive supplier to the Wimbledon Tennis Championships. * Oil and natural gas exploration in a joint venture with the Adani group. 2007: Acquisition of Portuge company Sorema, expansion into bath rugs. 2009: First greenfield pipe facility overseas (at Little Rock, Arkansas, US). * Forays into steel by acquiring Vikram Ispat, the sponge iron business of Grasim Industries. Rechristened it Welspun Maxsteel. 2010: Welspun Energy is born with solar energy foray. * Entry into infrastructure. * Welspun Infratech Ltd — acquisition of MSK Projects India Ltd — rechristened Welspun Projects Ltd. * Change of name of Welspun Gujarat Stahl Rohren Ltd to Welspun Corp Ltd. * Majority stake acquisition of spiral pipe and coating facility of Aziz Pipes in Saudi Arabia. 2011: Acquired 35 per cent stake in Leighton Contractors (India) Pvt Ltd. * Apollo investment commitment of $500 million in the Welspun Group. |