Energising Murugappa

 

Energising Murugappa

The south-based conglomerate is leveraging the strengths of group companies to speed up growth

Sayantani Kar / Mumbai December 20, 2010, 0:19 IST

 

In September, Chennai-headquartered Murugappa Group, the 110-year-old business house managed by a band of cousins, unveiled a new identity and called it Energy Unbound. The group comprises seven companies and their numerous subsidies, and a clutch of joint ventures. It owns brands such as BSA, Hercules and Cholamandalam. The new identity signifies the changes the group has made in the last few years: It did course-correction in some businesses, de-risked a few others, rationalised the workforce, leveraged synergies and inducted the fourth generation.

 

The makeover has been spearheaded by the group’s executive chairman, A Vellayan. He is no stranger to change. He has in the past turned around sick companies acquired by the group, put in place backward linkages for the fertiliser business, de-risked sugar with co-generation and distillation, and sold the confectionery and sanitaryware businesses.

In recent times, the first surgery took place in the group’s financial services business. Its non-banking finance company, Cholamandalam DBS Finance, was in severe pain in 2008. Like other NBFCs, it had a huge portfolio of retail loans when delinquencies started to happen. Then DBS decided to exit. It has now been renamed Cholamandalam Investment & Finance Company, the losses were provisioned for across quarters and, three months ago, Vellayan Subbiah, from the fourth generation of the family, took control.

Redefining strategy
Subbiah is aware that financial services have become a buyer’s market. His first priority is to strengthen core systems, which includes sprucing up the 210 branches and building a central database for relevant customer information. “Because of what we have been through in 2008, we had not spent much on core processes. Also, the aggressive push in personal loans meant most of the resources were deployed there,” says he. The NBFC also plans to sell directly to consumers to avoid the pitfalls of defection when selling through agents.

To de-risk, Cholamandalam Investment & Finance Company wants to concentrate on secured loans, more so on loans for production because it ensures greater earnestness of the customer. Its forte, finance for commercial vehicles, which had been there even before DBS had come on board, will remain its primary product. Line extensions could include tractors or even home loans, apart from the current home equity loans that it disburses at present.

Next year could see it launch a new product, one of the three it has in mind. In infrastructure, it wants to tap second-tier sub-contractors who work for large constructions. “They would not have clout with a bank for finance, while their profile would match the customers we have serviced for years for commercial vehicles,” Subbiah says. Financing gold is another option because the South and the West, the group’s stronghold, are large markets. But it comes with the uncertainty of consumption-led lending. Working capital for farmers, irrigation and farm equipment in rural markets is the third product line on its list. “Our strength in Tier III and Tier IV towns where commercial vehicles are sold more will determine the route we take to diversify,” he adds.(The Murugappa family in business)

The other part of financial services is general insurance; Cholamandalam MS General Insurance has rationalised to bolster profits. The Insurance Regulatory & Development Authority has done away with tariff controls in the sector; consequently, all the players have been hit hard by the discounted tariffs. With an exercise called War on Waste, Cholamandalam MS General Insurance unlocked Rs 9 crore in 2009, according to Managing Director SS Gopala Rathnam. With profits of Rs 2 crore on revenue of Rs 785 crore, the savings helped it remain in the black. From Rs 60 lakh collected on an average by each employee three years ago, it has jumped to Rs 1.5 crore now, claims Gopala Rathnam. The initiative included economy in processes and increases in the productivity of its people. Taking paperwork online alone saved it Rs 1 crore. It launched an e-policy for its intermediaries and customers to cut down the policy issuance time. It shut down 17 branches and has 96 of them now, renegotiated rentals and relocated some. Branch productivity has seen a 50 per cent increase in the average premium collected.

Kicking-in efficiency
While the strategy for financial services has been redrawn, at least one other business has been given a booster dose of efficiency. Tube Investments, which manufactures bicycles, tubes and metal products for industries such as automobile components, has revamped its supply chain and moved up the value chain.

Tube Investments is not a bit player in bicycles — its share is slightly above 28 per cent. But it has to play second fiddle to Hero Cycles which lords it over 50 per cent of the market. In tune with current wisdom, Tube Investments sources all bicycle parts from vendors. Only assembly, tests and paints are done in-house. “We are closer to the market, with a quicker response time to demand and planning new models,” says Tube Investments Managing Director L Ramkumar. It has plants in Ambattur (Tamil Nadu), Nashik (Maharashtra) and Noida (near Delhi). With vendors close by, it has kept the logistics cost down. Thanks to rising incomes, the 14 million per annum bicycle market is growing at a slow pace — below 5 per cent — experts reckon. Prices therefore are rigid. Higher commodity prices are difficult to pass on to buyers. The efficient players alone will be able to hold on to their market shares profitably.

That perhaps is the reason why Tube Investments has trained its sights on the higher end of the market. While 45 per cent of the market is economy bicycles, these comprise only 30 per cent of Tube Investments’ volumes; as much as 70 per cent comes from sports and high-end models which fetch better profit margins. So, Tube Investments has cranked up its 500 retail outlets, launched in various formats such as BSA Go and Hercules Express, to up sales. The directive to each regional sale head is to host two or three cycling events per month. It has partnered with Canondale and Bianchi to bring in brands such as Schwinn that cost anything from Rs 20,000 to Rs 300,000. The challenge is to service these high-end bicycles, which Ramkumar says can be done through its spruced-up supply chain. Fitness equipment and e-scooters are two other areas the company has entered to tap the urban lifestyle.

Tube Investments’ B2B strategy is even more significant. It wants to cut its dependence on the automotive industry — it accounts for 80 per cent of the business. The company is not alone to do this course-correction. Car makers worldwide are on a spree to reduce prices. This means squeezing the last paisa out of the vendor’s profits. Large players like Bharat Forge have thus begun to expand in sectors like aviation and infrastructure. Tube Investments too wants to chase business from infrastructure including the railways. Its stainless steel tubes could be at home in chemical processing plants to carry fluids or used in hydraulic cylinders for excavation, Ramkumar claims. With the acquisition of Sedis in France, Tube Investments has also got a toehold in industrial chains used in cement, steel and other industries. Metal-formed sections from its plant in Uttarkhand help it put together 30 per cent of a wagon for the railways.

But, in its bid to diversify, Tube Investments has not neglected its primary business. The three automobile component factories will see capacity increases of 10 to 15 per cent through efficiency improvements. Equipment from a closed factory in China has boosted production. A new plant in Punjab will add to the output in the next three years.

Expansions, linkages
In sugar, the group’s strategy is to grow scale. Conventional wisdom suggests that large scale of production brings down the cost and helps survive a downturn. No other commodity in the country happens to be as cyclical as sugar. Most of the large sugar producers in the country — Bajaj Hindusthan, Balrampur Chini Mills, Shree Renuka Sugars and others — have expanded rapidly in the last few years for precisely such a reason. EID Parry is no different. It acquired GMR Industries last year. “By 2013, we aim crushing 47,500 tonnes of sugarcane daily. We are already doing 32,500 tonnes, which means we have covered almost 70 per cent of the way,” says EID Parry Managing Director K Raghunandan.

ICICI Securities Research Analyst Sanjay Manyal finds another strategic advantage in EID Parry’s growth plans: “The southern states and Maharashtra have the added advantage of being near ports to enable sugar refineries. In times of deficit, when domestic raw sugar prices shoot up, a presence near a port makes it easier to import raw sugar at lower prices and refine it.” This has meant that mills in Maharashtra and the southern states have gained more than the mills in Uttar Pradesh. Larger production capacity will also help it unlock new revenue streams like spirits and power.

However, analysts are not so sure of EID Parry’s foray into branded sugar. Sugar has remained more of a commodity and refused to fly off the shelves in packages. Buyers see no value addition in branded sugar. That’s why many large mills, including Bajaj Hindusthan, the largest, have stayed away. In the south, there is the added challenge of pricing. Despite all this, EID Parry wants to stay at it to pave the way for other food products in retail channels. While Parry Confectionery had to be sold off because multinational rivals had large war chests, Murugappa has not let go of the idea of food products under Parry. With a streamlined group, Raghunandan says the company could look at more products.

Carborundum Universal, another Murugappa company, manufactures abrasives (for industries such as automobiles, steel and capital goods) and ceramics (refractories and so on). With a market share of nearly 40 per cent, according to Crisil, Carborundum has a lead over Grindwell Norton (30 per cent). It had acquired a majority stake in another competitor early this decade (Wendt India). In addition, it has bought companies such as Russia-based Volzhsky Abrasive Works and South Africa-based Foskor Zirconia in electro-minerals. These provide it with raw materials like silicon carbide for abrasives and ceramics. The company wants to focus on the value-end of the market such as bonded abrasives and super-abrasives supplied by its subsidiaries like Sterling Abrasives and Wendt India. A distribution footprint in Europe, South Africa and China not only fetches 45 per cent of its revenues but also cushions it from a slump in the US.

Backward linkages are strong also for Coromandel International. The second-largest player in phosphatic fertilisers in the country, it has 17 per cent market share, according to Crisil. It rules over Andhra Pradesh which is said to be the largest complex-fertiliser market (as opposed to fertilisers with a single nutrient and mixed with others for effect, complex fertilisers have multiple nutrients in each granule and cost more). Some of its plants manufacture phosphoric acid, the raw material, from rock phosphate, making Coromandel one of the lowest-cost domestic producers. Driving up its profitability will be the government’s plan for nutrient-based subsidy. It will compensate producers for every kilo of nitrogen, potassium, or phosphorus in the product; with complex fertilisers, the returns will multiply. Multiple ingredients also let the company alter its product mix and price its range to supply different needs.

Coromandel also wants to produce more pesticides, micronutrients, compost and gypsum, which are not subsidised and therefore offer better profit margins. After Tube Investments, it is the only manufacturing company in the group to establish direct contact with the end consumer. Its 425 Mana Gromor Centres (rural retail outlets) in Andhra Pradesh sell everything from clothes, consumer products, insurance and farm equipment to seeds and fertilisers. In exchange for farming knowhow for a fee have through these centres, Coromandel found that the farmer was willing to even wait for its higher-priced products rather than pick another readily-available rival. Karnataka is next on the map.

Leveraging each other
Murugappa Companies are making a concerted effort to use each other’s resources. Subbiah says: “Earlier the focus would be only on our own businesses. We are now asking ourselves how we can help our businesses even more by leveraging others in the group.” Vellayan points out the synergy between the sugar business of EID Parry and fertilisers of Coromandel. “We’ve been able to grow the sugar business in Andhra Pradesh and Karnataka, the heart of our fertiliser territory, in the last six months. The staff in our fertiliser division helped us consolidate the sugar business there.” To get into farm and drip irrigation equipments that Coromandel plans to produce, it is expected to fall back on Murugappa’s engineering businesses for knowhow.

Cross-selling too has been ramped up. Cholamandalam MS General Insurance has been getting Rs 5 crore in premium from Cholamandalam Investment & Finance customers every month. It has set up counters for crop insurance, among others, at the Mana Gromor Centres, which account for Rs 60-70 lakh in premium per month for the company. With high costs of reaching rural markets, the insurance company can be selective and yet reach a large audience at the same time because of the existing network. Cross-selling to the 150,000 or so sugarcane farmers who interact with EID Parry has added Rs 15-20 lakh more premium per month. Tube Investments lets Cholamandalam MS sell health insurance and theft and personal accident covers from its retail outlets.

Internationally too the group’s presence is being cross-leveraged. “Coromandel set shop in South Africa first, so tapping into the goodwill it had established, Carborundum could thus aggressively get business for Zirconia. In Russia, where Carborundum is present, Coromandel is tapping into its experience to explore business options,” points out Vellayan.

Furthermore, the group has integrated common services like information technology to drive scale and hence efficiency and savings.

With a budget of Rs 10 crore for the new campaign, the group wants to reinforce the linkages of the various units and their parentage. A study by Nielsen commissioned across eight cities in 2008 led to the new branding. While ethics were a key strength of the brand, the study revealed the need to reach the target audience with more information about the group. Only the front-end businesses of bicycles, finance and insurance were top of the mind.
 

GROUP COMPANIES, BY THE NUMBERS                                                                                       (Rs  crore)
Year-on-year (March)	Net sales		Operating profit		Net profit
	2008-2009	2009-2010	2008-2009	2009-2010	2008-2009	2009-2010
Carborundum Universal	1,094	1,199	228	243	104	101
Coromandel Engineering	100	89	13	11	5	2
Coromandel International	9,419	6,453	1,017	846	559	468
EID Parry	10,317