Havells has turned around its loss-making global subsidiary, Sylvania, into a profitable business. Here’s how
Till recently, it was a different picture. Havells had acquired Sylvania in April 2007 for ¤227 million from a clutch of financial investors. It had ended the year with EBIDTA of ¤25 million on a turnover of ¤490 million. Though it closed 2008 with EBIDTA of ¤22 million on a turnover of ¤480 million, the tide had begun to turn. The West had slipped into recession. (Indeed, in 2009, its turnover fell to ¤400 million and it suffered a net loss of about ¤30 million.) Disheartened, the Havells brass had even contemplated to let Sylvania go. At the time of the acquisition, Havells’ share price was around Rs300 and its market capitalisation was to the tune of Rs1,800 crore. By January 2009, weighed down by the losses in Sylvania and the downturn in India, it had slid to a third.
There was pressure from the bankers to infuse capital into Sylvania to resurrect it; this would have bled Havells further. The company had moved to a new office on the swank highway from Delhi to Greater Noida, which was spread over 3.5 acres, in August 2008. By December, people had begun to wonder if it was unlucky for the company which had grown in size rapidly from Rs150 crore in 2000 to Rs1,600 crore in 2007.
To fund the acquisition, Havells had taken a loan of ¤200 million from a consortium of banks: ¤80 million on the Havells balance sheet and ¤120 million on Sylvania’s. Havells repaid the ¤80 million when it placed 11 per cent equity with Warburg Pincus. The problem was with the 120 million recourse loan. As the projected profitability of Sylvania had gone for a toss with the onset of the slowdown, there was every possibility that the consortium could recall the loan. Instead, the banks insisted that Havells invest ¤30 to 40 million in Sylvania. This was not a small amount. Several well wishers of the company were of the opinion that Havells should sell Sylvania to the banks in order to save Havells.
Taking control
One day in December 2008, Qimat Rai Gupta, the chairman & managing director of Havells, called his son Anil, who is the joint managing director of the company, and his nephew Amit, director, to his office. Sylvania’s performance, he told the two in no uncertain terms, was a blow to Havells’ reputation. If they cannot turn it around, they would never again be able to do any acquisition. No banker would ever support them again. It was a challenge, but also an opportunity to prove their mettle. They had, Gupta reminded them, not managed Sylvania hands on, and had been happy to play the role of a financial investor. By now, Sylvania was losing ¤2.5 million a month.
“We decided then and there that we had to take control of the situation,” says Anil. Almost three-fourths of Sylvania’s business came from Europe and one-fourth from South America. Asia contributed around 4 per cent. Each of the three regions had a president who looked after all the operations in the region. Then there was a core C-suits management team — the chief executive officer, chief financial officer, chief supply chain officer and chief legal officer — that operated out of New York. “When we acquired Sylvania, we had decided to retain this team. Havells was half the size of Sylvania. We thought we didn’t have the bandwidth to manage operations at such a large scale. At hindsight, it was a wrong premise,” says Anil. “We thought we would bring the Havells growth culture to Sylvania and thus told them to ramp up growth from 2 to 3 per cent per annum to 15 to 20 per cent. But mindset change alone can bring integration. There were people in between who were not in line with our culture.”
After the fateful meeting in December 2008, it was decided to move the nerve centre from New York to Noida. In early January, 20 top Sylvania executives were called to the Havell’s headquarters and the news was broken to them. The closure of the New York office saved Sylvania close to ¤3 million in annual expenses. An elaborate plan for the rest of the company was also worked out.
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Things had taken a turn for the worse for Havells in India too. Sales were down a quarter because the real estate sector took a beating and retailers destocked because they expected the company to roll back prices due to the fall in commodity prices. Cable and wire stock with the company was revalued down by 40 per cent, thanks to the sharp dip in commodity prices. Havells responded by downsizing its 6,000-strong workforce by 700. Sales and general administration expenses were brought down from Rs23 crore a month to Rs15 crore a month. So, it knew how to tighten the belts. The time had come to do the same at Sylvania.
South America, amongst the three geographies of Sylvania, had gone into the red the last — around November 2008. So it was tackled first. Sylvania had four factories in South America: Two in Costa Rica and one each in Colombia and Brazil. Two of these, one in Costa Rica and the other in Brazil, were the loss leaders. Calculation showed that even if these were shut, there would be no loss in sales, but it would help reduce the headcount from 1,200 to 600. This was done by April 2009. By this time, the president in charge of the continent had left. In its place, Havells sent an executive from India to Costa Rica to co-ordinate the business there. He happens to be the only Indian implant there till date. Anil hopes to do business worth ¤150 million in South America this year.
Operation Phoenix
A bigger challenge was Europe. The plan to restructure there was called Operation Phoenix. The import was clear: The operations had to be rebuilt from ashes. Sylvania had five factories in Europe: Two in the United Kingdom and one each in Germany, France and Belgium. It was decided to shut one factory in the United Kingdom because this was the easiest to do. The creditors were told that expenditure of ¤13 millionwas required to downsize from 2,400 to 1,750 in Europe (this included a small but low-cost factory in Tunisia), which would help save up to ¤18 million a year. The creditors agreed and the plan was set rolling.
By April 2009, the first indications started to come in that Sylvania could be turned around in Europe. Four people were sent from India to take care of finance, sale & marketing, production and information technology. In May, Gupta once again summoned his son and nephew and told them that Sylvania was theirs and therefore everything that is required ought to be put in. The bankers were approached one more time with the request that ¤22 million were required to lay off another 500 people but that would save ¤22 million. It was codenamed Operation Parakram. “The bankers realised that we were serious,” says Anil.
In the downsizing, care was taken not to lay off people from sale & marketing; the axe fell on people from production and back office. In November 2009, 380 sales & marketing people of Sylvania congregated at Frankfurt for three days to brainstorm the strategy ahead. The team from England came with a cricket bat that had the target written on it and carried the signatures of all employees. The American team (the brand Sylvania there is with Osram; so it sells under SLI) presented a similar rugby ball. The real intent, says Anil, was to build confidence in the people who were left in the company. By June this year, he discloses, Europe had come out of the red.
At the same time, production has been migrated to low-cost factories in India and China. The Havells factory at Neemrana in Rajasthan, for instance, feeds CFL lights to Sylvania across the globe. Havells has stationed 100 people in China for research as well as outsourcing. Most of the suppliers there are dedicated to Havells. “In April 2007, Sylvania produced 60 per cent in-house and outsourced 40 per cent of production to China; now, only 48 per cent production is in house and the rest is outsourced to China and India,” says Anil. This has helped in restoring Sylvania’s fortunes: Gross (selling) margin, claims Anil, has improved from 20 per cent in 2009 to 30 per cent in 2010. He says the Sylvania EBIDTA could touch ¤40 million in 2011.
Way back in October 2007, Warburg Pincus had agreed to pick up the Havells stake at Rs650 apiece. The investment was supposed to come in two tranches; in February 2009, when it was time for the second tranche of ¤30 million, the share price had slumped to around Rs100. Most observers had expected Warburg Pincus to wriggle out of the deal. The prospects for Sylvania, after all, looked bleak. But it kept its word and invested the remainder amount. The Havells stock price has since then bounced back to Rs850. (A 1:1 stock split has brought it down to Rs420.) Meanwhile, Warburg Pincus has raised its stake in Havells to 14.9 per cent.