Outlook Business

Hydro Attraction

Sat, 25 May 2013 00:00:00 GMT

The 1,500 MW Nathpa Jhakri project, owned and operated by the state-owned Satluj Jal Vidyut Nigam in Himachal Pradesh, is the country’s biggest hydropower project located close to the Sutlej river. Powered by six vertical axis turbines of 250 MW in an underground power house (pictured), the electricity generated by the plant is supplied to the northern grid. Unfortunately, the project saw frequent shutdowns when it came into operation in early 2004, owing to high siltation caused by deforestation. Huge silos were later built to counter the problem. In the just-concluded fiscal, a delayed monsoon and prolonged winter resulted in a steep decline in generation. The project generated 6,777 MU during the year against 7,610 MU in FY12. The ministry of power has reduced the generation target for FY14 to 6,875 MU and is expecting revenues of Rs 1,740 crore against likely revenues of Rs 1,707 crore in FY13.

Going Against The Herd

Sat, 25 May 2013 00:00:00 GMT

Sixty years ago, the great social psychologist, Solomon Asch, did us a big favour. Through a series of brilliantly conceived experiments, he showed that: (a) most of us suspend belief in our own judgements when confronted by the judgements of a larger group; and (b) we find it hard to disobey the orders of “authority” figures.

These takeaways can be applied to the stock market as well. In particular, given the mood prevalent in the market today, “conformist” brokerage research (which recycles news clips pertaining to beleaguered companies/sectors and negative commentary by bankers) can easily create adverse herd behaviour in the Indian market.

My colleagues and I do not agree with much of this negative ‘groupthink’. At the level of the company, the economy and the stock market, our attempt has been cut through the noise, to think rationally and, most importantly, to think for ourselves.

The ‘ctrl C, ctrl V’ club…

Just as in bull markets, when there is no shortage of brokers publishing euphoric thematics about India (complete with professional artwork, glossy covers and hard binding), in bear markets, you struggle to find rational analysis of when the market will turn. Instead, in difficult markets, brokers often choose to rest their pens and pencils, and try to avoid making too many phone calls to clients. When they do pick up their pens, it is often to rehash old news about the companies or sectors, or to narrate personal anecdotes about thinning crowds in shopping malls and the challenges of the white-collar job market.

…and how it hurts investors

Such analysis would not be of import had all of us — as investors or as market pundits — been rational creatures. Instead, as psychologists have shown graphically over the past 50 years, we let go of our senses at the slightest prompting to do so.

In a series of experiments conducted in the 1950s, Asch demonstrated our frailties. Given a simple task, such as comparing the length of four wooden sticks and pointing out if one of them was the odd one out, people almost never erred when asked to decide on their own (without seeing the judgements of others). However, when put in small groups of, say, five people, when everyone else had been told by Asch to give the incorrect answer, people erred one-third of the time. Thus, even whilst making a simple judgement, individuals were willing to suspend their belief in their own senses and go along with the verdicts of random strangers.

Now suppose the judgement at hand is more complex. For instance, will the economy recover? Will the rupee appreciate? Will the stock market rally? Suppose further that rather than random strangers prompting the answers, the prompting is coming from authority figures — senior bankers, powerful promoters, etc. What effect would that have on us? Asch conducted another set of experiments that sheds light on how our brains react when prompted by authority figures.

In an experiment (originally conducted to understand how perfectly normal people ended up helping the Nazis execute the Holocaust), Asch showed that volunteers were willing to apply fatal electric shocks to those who got quiz questions wrong, provided they were prompted by an authoritative-looking man in a white lab coat to do so.

You can now deduce what happens to most of us when an establishment figure opines in public about the fate of the economy, the current account deficit, the stockmarket, etc. It is in this context that lazy research can drive damaging groupthink on critical matters pertaining to our collective well being.

Multiple dimensions to think about

A fundamentally oriented investor has to think along at least two specific dimensions:

At the company level, after in-depth research, including primary data checks and forensic analysis where possible, investors need to determine the relative merits of a company without agonising about what the rest of the market makes of the stock.
At the economy level, investors need to take a balanced view on the economy, that is, not get swept away by the euphoria of an economic boom or be driven to despair by a downturn. Obviously, this is easier said than done and therein lies the challenge for the contemporary naysayers.
In fact, if you were to take a long hard rational look at India today, you might be able to find a three-tier positive story, much as my colleagues and I did:
In a book titled Civilization: The West and the Rest published a year ago, noted historian Niall Ferguson attributed the secular rise of the West across centuries to its ability to develop six killer concepts or ‘apps’ — “competition, science, the rule of law, medicine, consumerism and the work ethic”. At a time when India’s ability to develop on a sustainable basis is being questioned, an analysis of India’s progress on each of these parameters (or ‘killer apps’) provides a useful framework for understanding why India should revert to a high-growth path. In particular, India’s undeniable superiority on ‘Competition’, ‘Consumerism’ and ‘Work Ethic’ is likely to result in India’s eventual reversion to high growth.
Over the last three months, I have repeatedly highlighted that Indian markets are nearing a significant bottom and that the region around 5,500 on the Nifty should prove to be a strong line of defence for markets, based on our analysis of long-term trends. Following that line of thought, while the sharp run-up in the second half of April may have taken many by surprise, we think this may just be the beginning of a much larger uptrend.
Psychologists have shown that people who are ‘frustrated and angry’ are likely to choose ‘high-risk high-reward’ gambles. In that context, Indian investors’ outsized bets on gold and real estate make sense! One day, however, this anger will subside and rational thinking on investments will return. That is when the discount of small caps to large caps (a discount that has reached a 10-year high) will start falling.

These are the writer’s personal views

Saurabh Mukherjea, Head of equities, Ambit Capital

Green Signal

Sat, 25 May 2013 00:00:00 GMT

Kaveri Seeds

Sales growth (5-year CAGR %) 54
Net Profit growth (5-year CAGR %) 56
5-year average ROCE (%) 25

***

Some of us find our calling in life after we have tried our hand at a couple of different things but for GV Bhaskar Rao, it was clear almost from the start that his life would revolve around farming. Born into an agricultural family in Karim Nagar district in Andhra Pradesh, 160 km from Hyderabad, that may seem like an obvious choice. But most of his nine siblings chose to go overseas, so it would have been just as natural for Rao also to leave India. Instead, he stayed back, completed his B.Sc in agriculture and, in 1976, set up a company to develop hybrid seeds on 15 acres of land. Today, the 62-year-old founder and chairman of Hyderabad-based Kaveri Seeds has nearly 75,000 acres under seed production, with farms in Karnataka, Andhra Pradesh and across the country. More importantly, Kaveri Seeds is one of India’s fastest-growing companies.

The break came early. In 1978, GVB Rao & Co (in its earlier avatar) developed a proprietary corn hybrid through its indigenous breeding programme that proved a hit with farmers owing to its improved yields. Enthused by this first brush with success, the company got into large-scale value breeding and, in 1986, was renamed Kaveri Seeds after the river in Karnataka, where much of the early developmental work was taking place. Since then, it’s kept up the pace, growing on the back of its new products and a diversified portfolio of hybrid seeds. Over the past five years (FY08-FY13), Kaveri Seeds’ revenue and profits have grown at an average of 54% and 56%, respectively. In the first nine months of FY13, the company’s revenues and profits nearly doubled to Rs 637 crore and Rs 119 crore, respectively. What’s more, the company, which went public in 2007, is debt-free and generates an impressive return on capital of 25%. Much of its success can be attributed to its R&D focus, which has helped it come up with blockbuster brands such as Jadoo and Jackpot (varieties of cotton hybrid seeds).

Reaping rich rewards

Kaveri Seeds has one of the largest collections of germplasm in India, which Rao believes is also one of its biggest strengths. Germplasm, which could be a seed, stem or even pollen, is living tissue from which a new plant can be grown. The company has used that collection to develop a wide portfolio of seeds, reducing its dependence on any one crop. At last count, Kaveri had over 100 hybrids, including 10 varieties of cotton hybrids, 25 of corn and 13 of rice. There are two major advantages to a diversified portfolio — hybrid penetration in many crops is still growing, which means there is potential for bigger business; also, farmers often switch crops when there is a delayed or a bad monsoon, and a wide range of seed varieties helps Kaveri derisk its business in a seasonal market.

Another reason it’s done well in the past five years is a new R&D centre at Pamulpurthi village, 55-60 km from Hyderabad. Here, the company has a state-of-the-art lab testing facility where seeds undergo moisture, germination and hybrid tests. Of the 600 acres on which the company develops new hybrids, a little over 200 acres are at Pamulpurthi. This facility also houses the company’s largest processing centre, built across 350,000 sq ft for pre-cleaning, grading, cob drying (maintaining moisture content to increase the shelf life of seeds), storage and packaging. It has six other processing centres across the country, which together have a capacity of 62 metric tonnes per hour and a cold storage capacity of 8,330 metric tonnes.

Now, Kaveri Seeds, which spends 7-8% of its revenue on research, is focusing not only on developing drought-resistant seeds but also innovating to make crops resistant to new diseases and the extreme climate conditions across the country. “Every hybrid has a certain shelf life — say, about 10 years,” says Rao. “So we constantly innovate and build a pipeline that meets the new requirements of farmers.” Kaveri is developing 12 new variants across corn, rice, bajra and jowar and 22 variants across vegetables that are likely to be launched in the next two or three years (see: Promising pipeline).

“R&D is the backbone of the industry,” says Mithun Chand, executive director, Kaveri Seeds. “The product is everything. It doesn’t matter how good your distribution network or processing facilities are; if the product is not successful, you cannot remain in business over the long term.” Which is not to say that distribution isn’t important — on the contrary, since there’s a small window for selling seeds (just before the sowing season), distribution plays a key role in ensuring the success of a product. Accordingly, Kaveri has been beefing up its network and now has 15,000 distributors and retailers across the country, up from 11,000 four years ago. While the company has a dominant position in the south, the expanded distribution has helped it make inroads into new markets such as Chhattisgarh, Jharkhand, West Bengal and Odisha.

Traditionally, Indian farmers have hoarded seeds from the previous season and sown those in their fields. While they’re certainly open to buying seeds now, there’s also growing competition among seed companies. Kaveri tackles that by setting up outreach centres where it talks with farmers to understand their needs and also educate them about the company’s new seed varieties, the best way to use them as well as better farming practices. There are currently 57 such centres across the country. “We encourage farmers to cultivate our seeds in their fields and see the results for themselves,” points out Rao. “Ultimately, the farmer is the best judge and he will go for his choice for hybrids. So it is more of a pull product than a push product.”

Still, the pull factor seems to be working. Kaveri gets 30% of its revenues as advance from farmers in January of every year and the balance in the first quarter when the product is delivered. In fact, the company books 60% of its revenues in the first quarter in keeping with the seasonality of the business. With most of its investments in processing facilities done, the company plans to invest about Rs 10-15 crore in capex every year, which will be met through internal accruals.

The magic continues

The illustration on the pack of Jadoo shows a brooding hen, surrounded by golden eggs. It’s a very apt metaphor for a product that’s helped Kaveri double its share in the cotton hybrid seeds market from 5% in FY12 to 10% now. Introduced in 2009, Jadoo started with a modest production of 15,000 packets. Less than four years later, it has sold nearly 5 million packets as farmers lapped up the seed that not only gave 20% better yield than other hybrids but could also withstand excessive rain and drought situations. “When we named the product Jadoo, many people mocked us, including some from Monsanto who asked us if the product would do magic. But Jadoo has been truly magical for us and the farmers,” says Rao. Jadoo now contributes nearly 30% of the company’s revenues, which have more than quadrupled since its launch (from Rs 162 crore in FY10 to Rs 637 crore in the first nine months of FY13).

Cotton hybrid seeds (including Jadoo and Jackpot) make up 60% of Kaveri Seeds’ income, with corn coming in next at 20%. Pearl millet, vegetables and paddy make up the rest. That fits in with the general market trend as well: adoption of hybrid seeds is the highest in cotton — nearly 90% — followed by corn, where hybrid adoption is around 60%. Cotton is also the money-spinner, accounting for a third of the Rs 12,000-crore seeds market. Now, with near-total hybrid adoption and acreage under cotton cultivation not likely to increase dramatically, incremental growth can only come from more seeds used per acre. Analysts expect usage to increase from 1.6 packs per acre currently, to two packs per acre in the next couple of years. That could help Kaveri further improve its marketshare, to 15%, although it may not catch up with market leader Nuziveedu’s 25%. In fact, the potential for explosive growth from cotton doesn’t exist anymore, which is why the seeds industry as well as Kaveri are looking for the next big opportunity. That would be rice, predicts Manoj Bahety, associate director, Edelweiss Securities. “The use of hybrid seeds [in rice cultivation] is expected to more than double to 4-5 million hectares in the next three or four years and that presents a huge growth opportunity for all players,” he adds. Kaveri currently has a 7% share in rice hybrids, which it hopes to increase to 15% in the next couple of years (see: Seeds of growth).

“The challenge for us is the vagaries of the climate. Continuous drought and excessive rainfall will change cropping patterns,” says Chand. “But our diversified product portfolio helps us cope with any change.” The company maintains 20% of its production as inventory to meet any sudden changes in demand and Bahety believes a slight failure in the monsoon could actually work in the industry’s favour. “In such situations, if the hybrids are able to perform better, there would be faster adoption by farmers across crops,” he points out.

But the hybrids market is an intensely competitive one and analysts believe every company needs at least one blockbuster product to stay ahead. Nuziveedu’s offering, Mallika, for instance, is the hybrid-Bt cotton market leader, while Kaveri, too, has its equivalent in Jadoo and Jackpot. Going forward, it needs to develop more such star performer seeds. “While the market is competitive, each hybrid speaks for itself. If the hybrid delivers on performance, like Jadoo did for Kaveri Seeds, then it can not only successfully create a niche for itself but also take out the competition in that segment,” says Kailash Gandhi, analyst at Wallfort Financial Services.

Kaveri, though, isn’t putting all its golden eggs in one basket. R&D for the next blockbuster seed aside, it is also looking to foray into markets outside India such as Vietnam, Africa, Pakistan and Bangladesh that have similar climatic conditions. A two-year trial period for seeds for these markets is on and the management expects the overseas business to gain momentum in the next three or four years. In 2011, Kaveri also started a 100% subsidiary called Kexveg India to produce high-value fresh exotic vegetables and herbs for the domestic and export markets. While these vegetables and herbs are being grown on over 5 million hectares in Andhra Pradesh, the company plans to increase the area under cultivation to 100 million hectares in the next three or four years. At present, Kexveg contributes about Rs 1 crore to revenues but Rao believes the potential is much higher — the company aims to earn about Rs 7-8 crore a year from this business in the next three years.

With farm land availability reducing even as population increases, farm productivity has to rise, which means acceptance of hybrid seeds will only grow. Indeed, Kaveri Seeds believes that increased adoption of hybrid seeds will drive revenue growth for the company in the coming years. “We expect revenues to grow by more than 20-25% for the next five years,” says Rao. Certainly, the market appears to believe there’s potential in hybrid seeds in general and Kaveri Seeds in particular. In the past one year, the stock price of Kaveri has climbed by 84% (as on April 12, 2013) and the consensus is that the stock is trading at 11 times its FY14 earnings. And despite the steep run-up in the stock price, analysts believe that the company will continue to outperform the industry. So, it does look as if the Jadoo will continue for now.

Too Hot To Handle?

Sat, 25 May 2013 00:00:00 GMT

Jubilant Foodworks

Sales growth (5-year CAGR, %) 43
Net Profit growth (5-year CAGR, %) 77
5-year average ROCE (%) 40

***

Three white dots in two red squares — when Tom and James Monaghan set up Domino’s Pizza in Ypsilanti, Michigan, in 1960, the brothers planned to add a dot to the logo for every new store. The Indian operations of the pizza chain must be especially grateful they dropped the idea a few years later — if not, Jubilant Foodworks would be updating the logo every three days, for that is the speed at which India’s largest and fastest-growing food service chain is growing. “We have added 110 stores in FY13. Domino’s India is the fastest growing in the Domino’s world as well,” grins Ajay Kaul, CEO, Jubilant Foodworks, the master franchisee for Domino’s Pizza and Dunkin’ Donuts in India.

By December 2012, the chain had 552 stores across 118 cities, while archrival Pizza Hut has 331 stores (181 restaurants and 130 home service units). Both companies entered India at the same time — 1996 — and in their home market, Pizza Hut is the undisputed leader. In the Rs 1,500-crore organised Indian pizza market, though, it is Domino’s that has the largest slice (55% in 2012, according to Euromonitor), while Pizza Hut has 30%.

But same store sales (SSS) growth — a key indicator in the retail and food services business — across Domino’s outlets have been falling and rival Pizza Hut, too, is focusing more intently than before on the home delivery market that has so far been Domino’s preserve. So, just how sustainable is Domino’s growth?

The right recipe

First, though, a look at how Domino’s helped convert Indians from parantha to pizza. Kaul considers the eight years before 2007 (when it started rapid expansion) the foundation-building years. “For eight years, we created a supply chain, set up commissaries all over the country, tied up with trucking companies that would work only for us, explored Indian customers’ needs, figured out the right pricing and built market prowess,” he says. It worked. Domino’s now has six commissaries and 180 suppliers, which help it deliver about 500 pizzas from each of its 500-plus stores every day.

It wasn’t easy, though. Even in the 1990s, pizza was still alien to most Indians and those who did take to the taste, and saw the pie as a snack, not a meal replacement. Consequently, Domino’s was growing slowly — by 2007, after over a decade in India, it had 158 stores. But already, the company was seeing the benefits of a game-changing consumer insight. “In the Indian context where there is difficult traffic on one side and all the other goodies on the other side — such as double income families, increasing household incomes, paucity of time and more working women — ordering from home will become a proposition that will keep coming into lives of people,” says Kaul. One way to cash in on this would have been to offer a discount if the delivery was late. “We chose to go all the way. We wanted noise,” Kaul recalls. Hence the deal in 2004: 30 minutes delivery or your pizza free. Outside the US, India was the only market to launch such an offer. As consumers caught on to the convenience of ordering in pizza, Domino’s grew its share of pizza home delivery — it now accounts for 70% of that market.

Meanwhile, the chain had also been working to ensure pizza didn’t end up being an urban-only phenomenon. It launched its first non-metro outlet in Chandigarh in 1997. Kaul says that armed with research that showed going to an air-conditioned restaurant was the only entertainment for many families in places like Bareilly and Jabalpur, the company tweaked its global model for small-town India. It went for larger stores with higher seating capacity and better frontage. More than half of all stores now are in non-metro areas. “Domino’s owes its fast growth to tier 1 and tier 2 cities. The money lies there and that is where it has extraordinary penetration compared with its competitors,” says Subroto Mukherjee, founder, Carnevale Hospitality International, a consultancy firm.

Domino’s also realised soon after launch that Indians don’t want an entirely Western or Indian offering. So, keeping the format American, it offered an Indianised menu, catering to local tastes and preferences. Desi toppings such as keema do pyaaza, peppy paneer and chicken chettinad tickled the tastebuds of consumers across India while some innovations have even been sent to Domino’s chains in other countries. “India is a cheesy country. We introduced the cheese burst pizza in India and that has been exported to other countries,” says Kaul.

Pricing has also been a key component in ensuring success, as the company has been hiking prices by about 6% every year. In 2008, the company launched the ‘pizza mania’ promotion, where it offered pizzas for as little as Rs 35, making them cheaper than other popular snacks such as masala dosa and chhole bhature. Recently, it’s started pushing that offer again, this time at a slightly higher price of Rs 44. “Although this category may not be the highest revenue earner, the number of such pizzas sold is very high,” says Kaul.

Fresh slices

Last year, Kaul and his team at Jubilant took two decisions that are likely to have far-reaching consequences. The first is related to brand positioning, where Domino’s moved from promising ‘khushiyon ki home delivery’ to announcing ‘yeh hai rishton ka time’ — a classic move up the advertising value chain. “After providing functional benefits such as tasty pizza, convenience and affordability, any brand wants an emotional attachment with its customers. Likewise, our ads now say, ‘you will not remember whether it was a veg or non-veg pizza, but you will remember a non-veg joke from a relative or friend’. Our pizzas are catalysts for bonding,” points out Kaul.

What is left unsaid is the other reason for leaving behind the home delivery angle. Yum! Brands, which owns Pizza Hut, is working overtime to build its delivery business (it hived off delivery as a separate business in 2010) even as Domino’s is focusing more on in-store eating. Which means the lines between the two pizza chains are getting blurred and competition, therefore, will only get fiercer. A recent report by Credit Suisse warns that “rising competition in both pizzas and other quick service restaurants (QSR) formats will put pressure on pricing”. An earlier report by JP Morgan points out that “while Jubilant does enjoy an early start in pizza delivery, its closest competitor Yum Brands aims to narrow the gap with a target of 350-plus Pizza Hut stores with the delivery format by 2015 and 700-plus by 2020”. Kaul says he welcomes competition. “This will help the QSR industry grow. Together we can all convert more people from conventional food to pizza.”

The other decision is quite unrelated to pizza. In May 2012, Jubilant Foodworks opened the first Dunkin’ Donuts store in India. Now, there are nine Dunkin’ Donuts & More outlets in Delhi and one in Chandigarh. “Research told us there is a gaping hole between the QSR format and cafés in India. And Dunkin’ International allowed us to play around in this area in India in terms of positioning,” says Kaul. The all-day cafés have expanded Dunkin’ Donuts’ traditional international menu of coffee and donuts to offer sandwiches, milkshakes as well; donuts with Indian flavours such as mango have also made it to the menu.

Jubilant is going slow with the Dunkin’ expansion — just 10 stores in nearly a year with plans of growing to 100 only in five years. Still, doubts are being raised on whether it’s bitten off more than it can chew with Dunkin’. There’s already one recognisable rival, the Singapore-based Mad Over Donuts. But donuts are still a very new concept to most Indians, so acceptance may not be easy or quick. “Unlike pizza, a donut faces competition from every other thing, including rasgulla, pastry etc. Moreover coffee is a ferocious market in India, with Café Coffee Day, Barista and now even Starbucks,” points out Carnevale’s Mukherjee. Most analysts seem to agree. “We see limited scope for Dunkin’ Donuts to break even anytime in the coming two or three years,” write analysts Arnab Mitra and Akshay Saxena in the Credit Suisse report. “Jubilant broke even only after it had over 100 Domino’s stores, and Domino’s is an inherently far more profitable business given the higher share of delivery business, larger ticket sizes and higher operating leverage.” Concurs Pritesh Chedda, senior research analyst at Emkay Global, who says, “Dunkin’ Donuts may put some strain on the company’s profits. It is a worry.”

Blowing hot, blowing cold

Indeed, there’s quite a lot of worrying news from Jubilant, its tag of being among the fastest growing companies notwithstanding. While SSS growth has been declining since FY12, the last three quarters especially have seen a drastic fall — to 16.1% in Q3FY13 compared with 30.1% in the same period the previous year (see: Weak appetite). Kaul points to the low consumer sentiment in the past six months as the cause for the falling SSS growth. “Post-Diwali, consumers have been holding their purse for discretionary buying,” he points out. But he’s not too worried. “If you have benefited from consumerism, you can’t say I want only the good part of it, not inflation or downturn. As the GDP growth revives, there will be more money in people’s hands and there will be a turnaround,” Kaul predicts. Perhaps the confidence stems from having been there, done that earlier: SSS growth plummeted during 2008-09 but climbed back rapidly the next year.

Analysts aren’t quite as sanguine. A report by IIFL expects SSS growth to moderate to 10% in FY14. Adds Emkay’s Chedda, “Their margins will be under pressure till the time their SSS growth declines. Low SSS growth today is a function of cut in discretionary buying by consumers and pizza is a discretionary buy. We will see low SSS growth for at least the next three to four quarters.”

That isn’t dampening Jubilant’s expansion plans, though. Even in Q3FY13, which had the lowest SSS growth in 13 quarters, the company added 37 stores — its highest-ever in a quarter. Also, apart from the 100 Dunkin’ outlets in the next five years, the company aims to open over 110 Domino’s outlets every year in about 80-100 more cities — and remember, Jubilant doesn’t have franchisees; all outlets are company owned and operated. Is that a good move, given that Ebitda margins, too, are declining, thanks to a combination of declining SSS growth, jump in rent and advertising expenses? Nobody’s against the idea. “There is a lot of market yet to be tapped in India,” points out Chedda. Kaul, too, sees only advantages in this strategy. “The downturn is the best time to do brand building. Besides, aspiration-led demand is still high — some of our new stores in places such as Guntur, Ambala and Rourkela have surprised us.” More importantly, the expansion has not being fuelled by leverage. As a result, the company has zero debt on its books.

The stock market, though, seems far from impressed, even as it had enthusiastically applauded Jubilant’s scrip when it was listed on the bourses in 2010 at Rs 145. Kaul pulls out his iPhone from his pocket to check the current price. “It’s Rs 1,185 today. It has fallen by Rs 40 from yesterday. But, see, we are almost eight times our listing price. It shows markets have bought our growth story,” he smiles. While that may be true, what Kaul hasn’t talked about is how the stock has been declining from its peak of Rs 1,397 in September 2012 and even fell to Rs 1,044 in February after the Q3 results were announced. Nor does he mention how he kept selling his stake as the stock hit new highs and how the promoters pared their stake from 62% in FY10 to 55% now. Like a pizza gone cold, the Domino’s story, too, needs much chewing before it’s digestible. Kaul, though, seems confident, “There are still so many cities left where Domino’s is yet to make its mark.”

My Favourite

Sat, 25 May 2013 00:00:00 GMT

I like to play golf because it is a game where you compete with yourself. I have been playing golf since 1984, 29 years now, but my handicap is still very high, at 18.
I particularly like Indian cuisine. I think it offers a wide variety of food and regional flavours make the same dish taste very different. For me, home-cooked food is the best — my favourite dish is the mutton curry my wife prepares.
I learnt a lot from the autobiography of Steve Jobs. It taught me the behavioural traits of a successful leader who places customers at the core of his business to build a sustainable competitive advantage by innovating products and services to meet changing customer needs.
One film I can watch again and again is Top Gun and not just for entertainment. The film carries a strong message as well, saying that if objectives are pursued with passion, they will be achieved. Merely setting a goal and having the means to achieve it does not guarantee success. The movie teaches that one needs to pursue the same with passion to achieve results.
More than international travel, I like to visit places within India. The ultimate family holiday destination, to me, is Kashmir. It is one of the few places in the world that retains its beauty despite having gone through so much unrest.

To The Beat Of His Own Drum

Sat, 25 May 2013 00:00:00 GMT

Devraj Sanyal’s office space clearly reflects his musical proclivities. Seven guitars are strewn around his cabin. On the wall are posters of popular artists and performers. The rack behind him is groaning under the weight of over 1,000 CDs and DVDs, an eclectic collection ranging from David Guetta, Bob Dylan and The Beatles to Pink Floyd, Scorpions and Metallica. Music videos on VH1 play all day long on a television screen, a trifle loud for a corporate office setting.

But then, the Mumbai-based managing director of Universal Music Group, South Asia, always has music on his mind — even late into the night. As the frontman, or lead vocalist, for 20-year-old desi heavy metal band Brahma, Sanyal lives on both sides of the fence in the music business.

When he’s not signing up new faces for his music label or negotiating contracts, the 38-year-old Sanyal can be found screaming and headbanging at Mumbai’s music night clubs, at college fests or opening concerts for leading artistes across the country. “No achievement at work can be as thrilling as performing in front of 10,000 people.” says Sanyal.

It was a quieter initiation, though, into public singing for Sanyal in 1986 when he was a sixth grader at Mumbai’s St Xavier’s Boys Academy. Reciting a prayer from his school diary at a singing competition, he went on to win the top prize. Later, listening to Megadeth, Iron Maiden and Pantera stoked his interest in heavy metal. Sanyal says black was his favourite colour then, and he seldom cut his hair. In 1991, he got a few friends together to start a band called Orion. “Soon, the band’s stage presence and aggression became the talk of the town,” he remembers.

Two years later PsychoNeurosis, another just-born heavy metal band was performing its first gig at Mumbai’s Razzberry Rhinoceros and asked Sanyal to be the lead singer. It was on stage that the band members decided to stick with this composition, and renamed their new group Brahma.

The band’s big moment came in 1996 at Independence Rock, an annual rock event, where Brahma’s first album The World Beyond released to an unprecedented response, selling 25,000 cassettes during the event. Its next album Reborn (Sony Music) came a decade later. A third album, Bramha III, based on post 26/11 experiences — with a track titled ‘Kasab’ — is slated for a late 2013 release by Universal Music.

Sanyal, who has previously done stints at Percept D’Mark, Elle magazine and The Times of India, contends that having a day job has changed a lot of things. The flowing tresses are long gone and there’s little time for rehearsals now, although he still performs at a couple of gigs every month. “I have rehearsed with the band, many times, via Skype. I’d be sitting in some other city for a meeting and the band would be somewhere else. On the day of concert I would reach the venue directly.” It’s an arrangement he’s not giving up anytime soon. He says it makes him better at his day job, spotting budding talent and helping them with their lyrics. That’s the best of both worlds.

More Than Just Business

Sat, 25 May 2013 00:00:00 GMT

Richard Branson’s Screw Business As Usual is written in first person in his signature racy style, yet not as racy and peppy as his earlier books. It’s more an encouraging pat for those he believes are making a difference to Earth and its species, including humans and, for some, a clear plug.

The book explores the next big frontier where the boundaries between work and higher purpose are merging into one, where “doing good” is good for business. It begins with Capitalism 24902 and ends with a chapter on Power of Communities and is a long read. Capitalism 24902 conveys that every single person on earth is responsible for taking care of the 24902 circumference miles of our planet.

Branson relates several endeavours, some of which his Virgin Group has been involved with. Many of these are fascinating: one is about an enterprising Indian, Gyanesh Pandey, who creates eco-friendly and cheap electricity from a waste product — rice husk — for villagers in Bihar. Another is of an American of Indian origin, Jigar Shah, who created SunEdison for solar energy services. A third talks about Chris Kilham, an ethobotanist described by The New York Times as “part David Attenborough, part Indiana Jones”. Kilham went from being a hippie with a passion for yoga and yogurt to unlocking the health secrets that plants hold — one of his early trips was to India to locate exotic plants mentioned in ancient manuscripts. He met up with witch doctors, shamans and ordinary people who used these plants as medicines and herbal remedies. This resulted in ‘The Shaman’s Pharmacy’, a holistic health study course.

Of course, many of Branson’s references gave me a sense of plugging, especially of US-based Wal-Mart and GE’s efforts to control emissions. The US is one of the biggest polluters and yet is not a signatory to the UN Climate Protocols of Kyoto. The Copenhagen effort too was thwarted after being dominated and bullied by the US.

‘Gaia Rocks’ is an absorbing chapter. Gaia is the Greek goddess of Earth and is the name given by James Lovelock to his theory of Earth being alive and, therefore, a living organism that can enjoy good health or suffer disease. He relays bad news that the Earth is seriously ill and will soon lapse into a coma that will last for 100,000 years. He cries, “We are destroying our own home. With every species and habitat we destroy we are upsetting the balance of Gaia.” Branson adds, “So why worry about lemurs, sharks, tigers, elephants and parks when we have so many other issues in the world? How we treat the world is a reflection of our humanity, our intelligence, our conscience, and, ultimately, our very survival.”

Branson’s personal mantra for success has always been: have passion for what you do, believe in yourself and your product and customer, persevere, delegate, listen and have fun. To all of this he has added “do good”. You’d do good by buying this book — but you’d do even better by simply borrowing it from a library, like I have done.

An Accessory To Time

Sat, 25 May 2013 00:00:00 GMT

A decade ago, fashionistas were heralding the demise of the watch. What practical purpose did it serve anyway with time having become omnipresent, whether on the car dashboard, the mobile, the laptop or any other electronic device worth its name? The wristband seemed an encumbrance one couldn’t get rid of fast enough. The wristwatch, like the pocket watch before it, had had its day, right?

Wrong, as it turned out. True, for a bit it seemed like people had stopped wearing time on their cuffs, but that was a passing phase. The shift consolidated the pre-eminence of the watch as an accessory rather than as timekeeper. Men, who one might have assumed would be the first to succumb, switched to statement dial watches with larger faces and complicated movements almost overnight. While the boys were absorbed with their toys, women stole a lead with watchmakers wooing them not so much with timepieces as with handiworks of jewellery.

And the fad refuses to slow down. As the world becomes a glitzier place, the jewelled watch seems set to stay. Not only do people have more than one watch, many now sport them with diamonds, wearing them with an insouciance that announces their status to the less privileged almost as a matter of choice. Even men are wooing the studded case with diamonds strewn like the milky way across the frame, while women have always believed in the foreverness of diamonds.

From zircon on cheap China fakes to brilliantly cut stones, watchmakers have been pulling out all stops to make these watches a design statement. No wonder prices are rising steeply. While there’s optimum choice for newbies in the sub-Rs 1 lakh category, most such watches are more likely to cost between Rs 2 lakh and Rs 10 lakh — at least, if they are not to embarrass you at a social outing. Donatella Versace herself is said to be behind the design of the classic Medusa redone in a limited edition studded with diamonds, sapphires and emeralds for Rs 20 lakh. But whether it’s a similarly priced Rado, or a Dior or Breguet for half that price, a Damiani at a starting point of Rs 2 lakh, or a Backes & Strauss diamond engraved watch for Rs 70 lakh, they seem positively affordable when compared with some of the most expensive watches in the world. That list includes the Cartier Phoenix that looks like a soaring bird covered with 3,010 diamonds and priced at $2.7 million, the Piaget Emperador Temple watch that has two faces that open to, first, reveal the mother-of-pearl face of the watch, and next, to show off its tourbillion, both of them masked behind 1,200 diamonds that make up much of its $3.3 million cost.

But the most expensive of them all — and really, this is only relative, since bespoke designs could match or beat these prices based on the quality and quantity of gemstones — is the 201-carat Chopard that features 87 diamonds in a variety of shapes, sizes and colours and, when created in 2000, was priced at a whopping $25 million. That it is mostly gemstones with the watch face pretty nearly hidden behind them only accentuates the needlessness of time when it comes to watches these days.

While these jewelled watches may be a bet against inflation — or at least can be cashed in for money in a hurry — in India, we haven’t done so well yet beyond the mandatory Tanishq. A few jewellers have tried their hand at creating wristbands, and Tarun Tahiliani has created a range for Timex that, at Rs 10,000-25,000, might be more affordable but can hardly be labelled elegant. Fortunately, whatever your choice, you can be sure that there’s one that fits your wrist — and wallet!

The author is a Delhi-based writer and curator

“Celebrate Small Successes As Well As The Big Ones”

Sat, 25 May 2013 00:00:00 GMT

Skill-building programmes: Periodic skill-building programmes will inculcate and maintain within employees the zeal to learn. These also help in building positive perception and feelings about the organisation.
Offer flexibility: Organisations should acknowledge the feelings of insecurity and anxiety that build up among employees during times of recession. Flexible timings will help them meet personal and family needs without interfering with work.
Clear and continuous communication: Organisations must communicate constantly with employees through e-mail, webinars, conference calls, newsletters and the intranet. Senior management should be visible, approachable and accessible so employees can voice their questions and concerns. This is crucial for alleviating stress and anxiety, and will prevent harmful speculation.
Show appreciation: Celebrate small successes as well as the big ones. Give praise and thanks for achievements at all times, not just at formal reviews. A pat on the back or a thank you by the coffee machine can make a person feel valued. In addition, perks and incentives for good work will encourage employees to give their best during difficult times.
Define goals and responsibilities: Senior management should focus on long-term goals of the organisation, while clearly defining the roles and responsibilities of the employees in achieving those goals. Aligning the workforce behind a strategic vision will ensure employees feel part of a team and contribute their best.

Jaipur Leather Fest

Sat, 25 May 2013 00:00:00 GMT

Mayur Uniquoters

Sales growth (5-year CAGR, %) 32
Net Profit growth (5-year CAGR, %) 52
5-year average ROCE (%) 51

***

What are these guys staring at? Why has work stopped?” Suresh Kumar Poddar asks as a bunch of curious workers gather to watch him gingerly position himself amidst some 30-odd, five foot-high rolls of synthetic leather for a photo shoot. The shopfloor supervisor assures him that the machines have not gone silent. The few remaining onlookers promptly return to work. Only then does Poddar get his smile back and submit to the requests from our lensman.

It’s apparent that the 65-year-old chairman of Mayur Uniquoters — India’s largest manufacturer of synthetic leather — is a man in a hurry. At least, that’s how he has grown his business. Operating in a largely unorganised industry, his business is poised to grow from Rs 90 crore in revenues in FY08 to Rs 375 crore in FY13, of which it had already clocked Rs 275 crore in the first nine months. That’s twice the rate at which India’s synthetic leather industry has managed to grow in the same period.

Synthetic leather, also known as artificial leather, is made by coating polyvinyl chloride (PVC) on fabric and is four-five times cheaper than natural leather. It’s used to make footwear, accessories such as bags and purses, furnishings and car upholstery. Starting with the first production unit in Jaitpura near Jaipur in 1992, Mayur now has four operational lines with a total capacity of 1.9 million linear metres every month. Today, 90% of its revenues come from organised players. Importantly, it has all marquee clients in the two segments that it operates in — Maruti, Hero Motocorp, Tata, Mahindra & Mahindra, Nissan and Hyundai in auto, and Bata, Paragon, Relaxo and Liberty in footwear. But the big kicker to revenues has come from exports. More so, after it bagged clients in the US — Ford Motors and Chrysler — in the face of Chinese dominance in artificial leather.

Small steps

Poddar entered the leather trade and distribution business in 1968, when he was 22 years old. “I started as a commission agent for a company then. By 1976, we got distributorship for eastern India. We used to supply to Bata and Hindustan Motors then,” he recalls. In the early 1980s he began toying with the idea of manufacturing. Maruti-Suzuki was importing car door pads from Japan, and Poddar began making them in India for the carmaker. In 1987, he started another business, making industrial shoes — worn by shopfloor workers — for a German company. Both these ventures were later transferred to relatives in the family. At the time, Poddar travelled extensively to Italy and Germany, to pick up new trends and developments in synthetic leather. “I realised that synthetic leather is widely used in footwear, ladies’ bags and car upholstery. But more importantly, the difference in product quality between India and Europe was huge,” he says.

Harbouring ambitions of becoming a big player in this business, Poddar made the right moves. He hired a technician with 20 years of experience, who had worked with C-Blakes, a UK-based leather products company. And he decided that Mayur Uniquoters would be a public limited company from day one. “We raised Rs 5 crore by issuing 5 million shares and Rs 1 crore as loan from RIICO [Rajasthan State Industrial Development and Investment Corporation] in 1992,” recalls Poddar, adding that all machines for Mayur Uniquoters were imported from Italy.

The first five years were tough. By 1998, things began to look up as Indians were exposed to global quality footwear, and manufacturers here began to adopt better materials and practices. The big spurt in demand for synthetic leather in the country, however, came after 2008 as the organised footwear industry grew at a CAGR of 18% between FY08 and FY12. Today, footwear contributes 54% of revenues largely on the back of the big clients. “High sales in the footwear industry was cashed by constant capacity creation by Mayur,” points out Deepak Agrawal, head of equity research at Impetus Advisors.

Around this time, many footwear manufacturers grew in stature, especially in the south. “The entire southern market was dominated by companies from the north. But after the late 1990s, many companies emerged here and ended northern domination,” says Manoj P Bastian, director of the Calicut, Kerala-based VKC Sandals and Shoes (India), which was among those companies. Capitalising on this opportunity has helped Mayur Uniquoters grow its business with southern customers such as VKC and the Kottayam, Kerala-based Paragon to 550,000 metres a month now.

On overdrive

Diversifying into the automotive segment was an important move. Riding on buoyant car sales at that time, Mayur Uniquoters signed up some of India’s leading OEMs as customers for its synthetic leather to be used in seat covers. The automotive business now brings in 35% of revenues but Poddar says he’s cutting down dependence on domestic OEMs, mainly due to squeezed margins. The contribution of business from domestic carmakers is down to just 8% of automotive sector revenues, down from 21% in FY08. “Five years ago we used to supply 150,000 metre a month to Maruti; it’s down to only 35,000-40,000 metre per month now,” points out Poddar. Agrawal of Impetus Advisors agrees with him, “Big OEMs squeeze their suppliers, and margins are really low. So, the company has been de-focusing on Indian OEMs since the past three-four years and chasing OEM exports instead.”

Fortunately, there’s a much bigger and profitable chunk waiting outside, and the company has managed to acquire customers such as Ford and Chrysler Corporation of the US in the past three years. This gives it a valuable foothold in the global market estimated at $40 billion. The big five-six OEMs buy synthetic leather in excess of Rs 500 crore every year, translating into an addressable market of Rs 4,000 crore. “It can help reduce our dependence on footwear as well,” says Poddar. Developed markets such as the US and Europe are hard to crack but more rewarding eventually — against average margins of Rs 207 per metre in India currently, export margins could be as high as Rs 350 per metre. Currently, 18% of Mayur Uniquoters’ revenues come from OEM exports (see: On a roll).

The company has also insulated itself from recent recessionary pressures by spreading itself across segments. The recent lacklustre demand for cars, for instance, could have been serious cause for worry. “But there is a positive side to it. If a buyer is not going for a new car, he is likely to replace his car seat covers in his existing car. This adds to our replacement business,” says Poddar, who feels there is greater opportunity in the replacement market now than in supplying to OEMs. Rajan Gandhi, director, RP Autostyles, a Noida-manufacturer of covers for car seats, gear knobs and steering wheels for OEMs and the replacement market, has been sourcing synthetic leather from Mayur Uniquoters since 1998. “Starting with 500 metre per month, we now buy 150,000 metre per month from them. They can reproduce material of European standards in India,” says Gandhi, who feels that aftermarket is very competitive and affected by the slowdown in demand. “Seat covers are mostly bought with new cars. Also, once a car becomes old and is sold, it mostly goes to a buyer whose purchasing power is lower.”

Donning a new look

Inside the factory, Manav Poddar, Suresh Poddar’s son and executive director in the company, shows us around the facilities. He points to the two distinct layers of knitted fabric and PVC being fused in a machine. “Knitted fabric is the base on which PVC sits,” he says. It’s also the foundation on which the firm plans to take its business to the next level — through backward linkages. First up is an investment of Rs 25 crore in a unit for producing knitted fabric. Impetus’ Agrawal suggests this could help bring down raw material costs by 5-10%. “It will also lead to significantly lower rejections by clients [on account of fabric quality],” he adds. Poddar says there’s another major benefit to controlling fabric production — product development can be brought down drastically, from two-three months to three-four weeks.

Manav Poddar, 34, has been leading transformation and modernisation at the company since he joined the business over a decade ago. “When I came in, there were few professional systems and processes in place. Buyers such as Maruti and Honda would take us to task after their audits,” he recalls. In 2002, with the help of an external consultant the Poddars came up with a three-year roadmap for process improvement and structural changes. “We actually copied the culture and processes of Japanese auto majors,” reveals Manav. The effects are visible — from the blue uniforms that workers wear to the safety and productivity slogans displayed across the plant. “Our speed of execution and professionalism has improved in a big way. This transformation is also a major factor behind the high growth rate we have achieved,” he says.

The Indian market is still minuscule compared with others — the Chinese market, for instance, is 15 times bigger. Analysts feel Mayur Uniquoters is well placed to capture more business through exports over the next three-four years, as synthetic leather is a more cost-effective alternative to natural leather (see: Overseas calling). “Global automakers are effecting cost control measures in a big way,” concurs Agrawal. Analysts expect the company’s share of high-margin exports to increase from the current 20% of sales to 28% by FY15. Poddar says he’s already in discussions with Mercedes, BMW, and General Motors globally for supplies from India. Another lucrative opportunity is selling to dealers in the aftermarket segment in the US. Poddar isn’t willing to reveal numbers here but a report by Centrum Broking states that overseas aftermarket sales clubbed under ‘general exports’, contribute almost 4% to the company’s revenues.

Warding off Chinese dominance in the export market continues to be a challenge but Poddar says with labour and input costs going up in China, this should be less of a threat going forward. Agrawal cautions, though, “Some Chinese players have products that are superior to what Mayur makes. If market shifts towards premium quality, they will be affected.”

There are other global trends that augur well for the company. Production of natural leather has been stagnant for some years and this is linked to changing attitudes towards meat consumption, says Gandhi of RP Autostyles. “Meat eating is declining overseas. And leather is a byproduct of meat there. So synthetic leather has a good future.” And while inferior technology was holding back acceptance of synthetic leather, that’s changing quickly, says Ajay Shethiya, analyst at Centrum Broking, “With technological advancements and better raw material mix, the synthetic leather produced now is much smoother and is similar to [natural] leather in look and feel. The fabric is versatile and is fast replacing natural leather in a number of industries.”

But, then, there are some who believe that natural leather will always be a preferred choice of material by end users. “Synthetic leather can match natural leather in looks but never in properties. So, it can never fully replace natural leather,” says Sudip Dutta, senior purchase manager at Bata India. Bata continues to use more natural leather than the synthetic variety in its footwear. Besides, rising input costs is also a challenge, says Poddar. The chemicals used in synthetic leather account for 60-65% of raw material cost for the company. And though any increase in input costs is passed on to end consumers, this benefit comes with a lag of two-three months.

Well-tanned

For now, Mayur Uniquoters is priming itself for the next wave of growth. Capacity is being ramped up to keep pace with rising demand. A fifth coating line with a capacity of 600,000 metre per month is likely to become operational from September 2013. Post this addition, the total capacity will go up to 2.5 million metre per month. “We want to make at least Rs 200 crore in revenues from exports [OEMs and replacement] in four years, and this capacity will come handy,” Poddar explains. The expansion has been funded largely through internal accruals, making the company virtually debt free. “More importantly, along with capacity addition, the company has consciously chosen to concentrate on segments that need value addition, thus ensuring better margins,” says Shethiya of Centrum. The company is looking to shore up non-automotive exports and is exploring global opportunities in segments such as furnishings and marine upholstery.

Back home, an important focus area now is furnishings and accessories such as ladies bags and purses, which currently contribute 9% of the company’s revenues. Its first exclusive showroom for furnishings is coming up at Kirti Nagar in West Delhi, the capital’s home furniture and furnishings hub. If Poddar is brimming with confidence, he’s got plenty of reason to. “Who thought that an Indian synthetic leather maker will sell in the US? But we tried and succeeded,” he says. He’s right. And if Poddar’s export ambition is anything to go by, expect plenty of action from this company.

Trial By Fire

Sat, 25 May 2013 00:00:00 GMT

Technofab Engineering

Sales growth (5-year CAGR, %) 36
Net Profit growth (5-year CAGR, %) 37
5-year average ROCE (%) 44

***

Avinash Gupta isn’t really a risk taker. He’s conservative and cautious. But back in the 1950s, he took the first of two, life-changing bold decisions — on graduation, the young Gupta opted out of joining his family’s air-conditioning services business in Ludhiana and instead, moved to Bombay to work for infra major Gannon Dunkerley. “I was clear I wanted to work for a few years in a company before starting my own business,” recalls Gupta, now a sprightly 72 years.

More than a decade later, in 1971, Gupta took his second bold decision — he quit, borrowed Rs 20,000 from his father-in-law and started Technofab Engineering, operating out of his father-in-law’s home in south Delhi. “I don’t remember if I ever returned the money,” he laughs. If he had offered a stake in the company in lieu of the loan, Gupta’s father-in-law would have been a happy man, indeed. In the past five years, Technofab has grown at an average 36%, from Rs 81 crore in FY08 to Rs 377 crore in FY12 (and Rs 287 crore in the first nine months of FY13). Profits, too, have grown more than six times in the same period, from Rs 5.3 crore in FY08 to Rs 34 crore in FY12 and Rs 19 crore in April-December 2012. All of which has led Technofab to become one of the fastest-growing companies in India.

Getting started

When Gupta set up Technofab, he was very clear (thanks to his experience with Gannon) what his field of specialisation would be: mechanical construction, which involves building systems and machines at industrial plants. “Those were heady days of public sector and Planning Commission-driven projects. Many new industrial projects were coming up, requiring both civil and mechanical contractors,” he says. There weren’t too many of the latter around and, as a result, Technofab was a profitable company from the start.

But given the field, the company ended up only doing the hard labour part of any job — most material for construction was imported and customers wanted contractors to merely supply labour. By 1979, Technofab switched from being a labour contractor to an engineering, procurement and construction (EPC) contractor, serving the power, industrial and infrastructure sectors by taking up turnkey contracts.

The earliest clients were state electricity boards (SEBs)and National Thermal Power Corporation (NTPC), India’s largest state-owned electric utilities company. To these, Technofab started offering electro-mechanical solutions in the balance of plant (BOP) space — boilers and turbines make up 50% of a power plant project, while the rest is referred to as BOP. It was usual practice for NTPC to break up the mechanical BOP work into several discrete projects (such as water treatment plants, low pressure piping, fire protection systems etc.), which made them small enough to be managed by a small company such as Technofab. “We have been a part of almost every NTPC project even if it involved laying just one pipe,” says Gupta proudly.

Through the 1980s, Technofab grew steadily but lost its momentum, soon after. “As a small company, we had growth constraints such as management bandwidth and access to capital,” Gupta says, explaining the stagnancy of the 1990s and early 2000s. It didn’t help that most business came from NTPC and SEBs, and receivables from the latter kept adding up. So, Technofab did what most companies in its position would do — it hunkered down and prepared for better times ahead.

Those weren’t too far away. In 2005, Gupta’s sons, Arjun and Nakul, joined the company’s board, having worked their way through the ranks over the previous seven-eight years. The infusion of fresh blood worked to the company’s advantage — the new directors pointed out that the skill sets Technofab had developed through its work in the thermal power sector could be easily and profitably extended to other sectors. The company started looking out for newer business areas such as nuclear power, water, electrical distribution and rural electrification, as well as newer geographies.

Opening new vistas

The diversification has helped Technofab reduce its dependence on the power sector, which traditionally contributed a staggering 90% of its revenues. “When we examine our revenue break-up in the past six years or so, we see that except for the thermal power sector, which has consistently contributed 30% to revenue, the rest have been continuously churning,” says Gupta. In fact now, water projects are the largest contributor (40%) to the company’s topline. They also account for the largest share of the company’s order book.

The company currently has an order-book of around Rs 1,050 crore. Water projects make up 42% of this, followed by thermal power, electrical distribution, oil and gas, industrial and infrastructure and nuclear power (see: Casting the net wide). During the Q3FY13 results conference call with analysts, Gupta mentioned that the company has not got any new business from the power sector in the past one year. “I don’t see us securing business from the power sector for another year,” he added.

There’s been another significant change in the past few years — now Technofab accepts comprehensive BOP work instead of just small, niche projects. “We have moved up the value chain,” confirms Gupta. Crisil analyst Chetan Majithia says this strategy will increase the average ticket size of projects. “Traditionally, Technofab has been executing smaller projects with an average ticket size of Rs 8-9 crore in the BOP space, which requires relatively lower technical skills,” Majithia explains. “With the company now offering a comprehensive BOP package, which involves much larger and more complex projects, the average ticket size of its projects has increased significantly to as much as Rs 45 crore,” he states.

Overseas ahoy!

Technofab’s segment diversification was accompanied by geographical expansion. It wasn’t a new strategy, though: in the 1990s, the company had taken on projects in Kenya and Zambia but had put its international ambitions on the backburner, given its problems at home. “That was the time receivables from SEBs were piling up, so we were busy sorting that out,” says Gupta. In 2006, though, the company began pursuing overseas projects with renewed vigour, focusing on Africa, in particular, identifying and going after projects funded by the World Bank and other multilateral agencies.

In 2007, Technofab bagged a contract each in Ghana and Ethiopia; at around Rs 50-70 crore each, these were significantly larger than its average domestic order size of Rs 10 crore. Subsequently, it also ventured into Fiji, Bangladesh, Kenya and Tanzania. Interestingly, Gupta says it’s easier to do business abroad. “Admittedly, there are huge logistics problems but there are no unpleasant surprises as there are in India,” says Gupta. As a case in point, he cites two virtually identical contracts the company won in 2007, one in West Bengal and one in Ghana. The projects were of the same value, had the same schedules and began almost at the same time. But where the Ghana project was completed ahead of time, the project in West Bengal got stuck because of a “right of way” issue. “It took our client two years to resolve the problem. Though this is an extreme example, such surprises keep coming up in India,” he adds.

Next on the international agenda is venturing into CIS countries and, possibly, Iraq, Iran and South Asia. West Asia, though, isn’t on the list, a deliberate omission. “Projects in the Gulf are high-magnitude ones of $500 million or more. We are not comfortable with any single project of over $100 million,” says Gupta. So much so that the company backed out of a possible joint venture in Saudi Arabia. This cautious approach hasn’t hampered Technofab, so far. Today, overseas projects still account for 55% of the overall order-book.

Growth pangs

A Nagaraju, an analyst with brokerage firm Firstcall Research, says the company has been able to maintain growth despite a domestic slowdown because of its presence in overseas markets and diversification into new segments (see: Beyond the shores). “In the December-ended quarter of FY13, 60% of the company’s revenues came from the overseas market and if you look at the order-book, much of it is now from the water segment,” he points out. “This has helped Technofab counter the domestic slowdown.”

However, Crisil’s Majithia feels that while overseas business shields the company from a domestic slowdown, it does pose some risks. “Risks of timely execution and receivables cannot be ruled out as most of the countries where the company is currently involved have witnessed political instability in the past; any similar event now could impact revenues or receivables,” he says. Still, much of the credit risk is mitigated by the fact that most projects are backed by international agencies; moreover, the company has insured its overseas receivables with the Export Credit Guarantee Corporation.

In the past 42 years, Technofab has executed 140 projects and received repeat orders from marquee clients such as NTPC, Bharat Heavy Electricals, Nuclear Power Corporation, Steel Authority of India, Hindalco, Lanco and others. However, John Perinchery, senior analyst (equity research), Asian Markets Securities, points out that about half of the current order-book comprises fixed-price contracts. “Hence, the company is exposed to sharp spikes in commodity prices. Any unexpected spike in commodity prices would adversely impact Technofab’s margins.”

However, Gupta says a quarter of the company’s orders have provided for revision on account of cost escalation. “Technofab’s philosophy is simple. We estimate all our costs and on top of that, depending upon the competitive position and our appetite, we add our margins, and we usually achieve our margins.” So far, the company has managed to keep its profit after tax (PAT) margins healthy, from 7.82% in FY09 to a little over 9% by FY12.

The next few years, however, will be the real test. Gupta admits that the growth seen in the past five years won’t be possible again in the near term. “Our internal target is to have a plus 20% growth every year but we don’t think we have enough business to sustain the growth rates.” Indeed, Firstcall expects the company to show 12-14% growth in topline in FY14 while Perinchery of Asian Markets Securities says the existing order book is likely to be exhausted in the next 12-15 months. “The company needs to report Rs 200-250 crore of order inflows every quarter over the next two to three quarters if it is to maintain the current turnover and profitability. Also in the water segment, which anyway is a low-margin (5%) business, it will have to compete with several other players.”

For a company that has a market cap of Rs 120 crore, Technofab has a significant cash pile (including investments in MFs) of Rs 100 crore. Analysts point out that the company is not leveraging on this to acquire suitable smaller companies. “If they are unable to find a suitable target, the company should go for a high divided payout ratio. Currently, that is a paltry 7-10%, which needs to be increased to over 40-50%,” says Perinchery.

Technofab is determinedly sticking to its conservative approach. The aborted JV in West Asia is a case in point; similarly, the company is also staying away from BOT projects fearing it will be out of its depth. “We were worried we would end up in losses. Whenever you learn something new, you pay a price for it. And that price could have been more than we could handle,” explains Gupta. Being prudent has helped in other ways, too: the company has just Rs 51 crore debt on its books.

But challenges remain. Net working capital days has gone up from 80 in March 2012 to 90 as of December 2012. Then, receivables of around Rs 66 crore are a concern, especially as in some cases, the overdue is more than 12 months — Lanco Infratech, for instance, is yet to pay the company Rs 4.5 crore.

That, combined with the company’s conservative approach, is reflecting on the stock. Analysts say the company could have been trading at seven or eight times its current valuation (4X TTM) had it shown more aggression in the marketplace. Gupta, however, doesn’t seem too worried. “We have a very modest fire in the belly,” he says. “We are a company that is not looking for topline growth. We are interested only in profitable growth and if we don’t get that we don’t mind not growing.”

Pet Theory

Sat, 25 May 2013 00:00:00 GMT

Manjushree Technopack

Sales growth (5-year CAGR, %) 32
Net Profit growth (5-year CAGR, %) 40
5-year average ROCE (%) 18

***

The Bangalore-Mysore Expressway is popularly called the NICE (Nandini Infrastructure Corridor Enterprises) Road and for most of the 111-km stretch, the name does seem befitting. If it was good enough for Lewis Hamilton to race his Formula One racing car in 2011, it was good enough for us too. On a Monday morning we made our way on the expressway to the industrial area of Bidadi, which houses manufacturing facilities of Toyota and Bosch, to see the spanking new manufacturing facility of Manjushree Technopack. If you haven’t heard about the company, you’ll surely know its key customers — Coca-Cola, Pepsi, Nestlé, Unilever, Cadbury and Tata Tea — for whom it makes PET bottles and preforms.

In a business held to ransom by raw material fluctuations and intense competition, Manjushree has managed to not only grow its revenues but do so at a healthy 32% every year — from Rs 85 crore in FY08 to Rs 310 crore in FY12. Profits went up five-fold from Rs 4 crore to Rs 21 crore during the same period. Much of this growth was supported by timely capacity expansion, in line with emerging demand — from 9,120 MT (metric tonne) in FY08 to 85,000 MT currently. “We work with every multinational in the country so we can read market trends and predict consumption growth quite accurately. We then plan our capacity addition according to these estimates,” says 58-year-old Vimal Kedia, managing director, Manjushree Technopack. This growth and capacity addition has not come at the cost of profitability. Manjushree has managed to maintain its operating margins at around 20% in the past four years, and that too in a highly competitive industry where manufacturers get squeezed by both vendors and customers.

Coming of age

Kedia came to Bangalore in 1994 looking for better opportunities when his hometown, Tinsukia, in Assam had little to offer. He first got into manufacturing umbrellas in Assam in 1977 and, since that business was seasonal, he started a flexible packaging business as well in 1983. An existing flexible packaging unit was up for sale in Bangalore and Kedia felt it would be better to buy it out. However, the deal fell through as both parties couldn’t agree on the price. But the salubrious Bangalore weather and a significant unmet demand for PET bottles from packaged drinking water companies in the South was enough to convince him to stay back and stick to the business. The company’s first facility in Bangalore came up in 1996 followed by a second one in 2001.

But the big traction came in later years. In 2008, Manjushree started manufacturing PET preforms for leading players in the carbonated drinks, packaged drinking water and juices segments. PET preforms are semi-finished bottles, which look like small plastic test tubes. Beverage manufacturers use preform blow-up machines to expand these to full-size bottles before filling them up, thereby avoiding contamination. Around 1/10th the size of PET bottles, they also save packaging companies and their clients a lot on storage and transportation costs. Coca-Cola, Pepsi and Bisleri are some of the key clients in this segment, which contributes around 56% to Manjushree’s revenues.

The company works on a conversion price model with Coca-Cola and Pepsi. Under this arrangement, the client provides the raw material and is billed only for conversion into the final product, thereby insulating the packaging company from fluctuations in input prices. Analysts suggest that with this new business model, packaging companies have the option of improving their margins significantly. So, it is not surprising then, Manjushree’s margins have increased from 16.45% in FY08 to 22.45% in FY13 for the nine months ended December 2012.

In the past one year, the company has increased its overall PET preform capacity to 85,000 MT from 50,000 MT by setting up its third plant in Bidadi with a total investment of Rs 150 crore, making it the largest player in this segment. Of this, Rs 90 crore was funded by bank loans and the rest came from internal accruals. The investment will also be used to set up its fourth facility at Harohalli in Karnataka. The facility, which is expected to be completed by the end of 2013, will take the company’s overall capacity to over 100,000 MT by FY14 (see: Fast and furious).

In the fully made PET bottles segment, Manjushree supplies to clients in the confectionery, tea and food supplements segments such as Tata Tea, Mondelēz India (Cadbury Bournvita), GSK Healthcare (Horlicks), Perfetti and P&G, among others. It also makes multi-layered packaging, used to store food items longer by keeping moisture out. Multi-layered packaging finds use mainly for sauces and ketchups, dairy products and juices. The company supplies to Unilever (Kissan), Del Monte and Heinz in this segment.

Future: well packaged

Manjushree gets 80% of its sales from the FMCG sector, which has been riding on a burgeoning middle-class population. Estimated to be around 300 million people, Indian middle class consumer market adds around 90 million to its ranks each year. “The FMCG market is recession-proof. There will be significant change in consumption trends as income levels increase, which will drive the demand for packaging much higher,” says Kedia. Typically, packaging makes up 8-10% of the total cost for FMCG companies, and they’re looking to their vendors to help bring this figure down. That’s a constant challenge for players like Manjushree. “Packaging companies need to be innovative in developing cost-effective quality packaging solutions. Their ability to innovate will not only help companies differentiate but demand for newer products will ensure that the growth momentum in the packaging industry will sustain,” points out Ankur Bisen, vice-president, retail, at Technopak Advisors.

Processed food packaging generates nearly half the revenues for the packaging industry, followed by personal care at 27% and pharma with 6%. Where the alcoholic beverages business currently contributes very little to Manjushree’s business, demand has been growing at 15-20% annually. The company is stepping up efforts here by signing up Barcardi, United Spirits and Diageo, which have been pushing for sales of smaller unit sizes — 60 ml and 90 ml bottles — in India.

Such moves are important if the company wants to retain its leadership position. According to the Indian Institute of Packaging the packaging industry in India, pegged at around Rs 149,000 crore, is the sixth-largest in the world, and is expected to grow by 12% over the next four-five years. With unorganised players making up 85% of the industry, it is highly fragmented and localised. But there’s plenty of room to grow in a country where per capita consumption of packaging is $15 (around Rs 810) compared with a global average of $100 (around Rs 5,400).

In the segments that Manjushree operates — PET bottles and preforms — it competes with domestic players such as Pearl Polymers, Sunrise Containers and Chemco Group and international names such as Amcor and Rexam. But the advantage Manjushree has over its peers is the fact that its large capacity is now nearly double that of the 50,000 MT capacity of its immediate competitor, Sunrise Containers. This gives it a significant advantage in the form of a sizeable market share in a highly fragmented industry. According to Kedia, the PET packaging segment is worth Rs 5,000 crore, with PET bottles growing at 25% and preform tubes at 10-12%. After the Bidadi expansion, the company hopes to increase its market share from 7% to 10%, this year. Kedia is confident of growing by an average of 15-20% over the next couple of years, riding on the capacity expansion and revenue growth plans of some of its biggest clients.

For instance, Coca-Cola, along with its partners, plans to invest around $5 billion in India — among its top five markets — to increase its bottling plants and back-end supply chain infrastructure by 2020. The Indian cola market is estimated to be around Rs 6,000 crore and growing at 11-12% per annum. With a per capita consumption of 11 litres compared with a global average of 30 litres, cola majors have been pumping in resources to capitalise on the growth potential. As cola consumption goes up, demand for PET bottles and preforms is bound to increase.

Bottled water offers another high growth opportunity. The market, currently estimated at Rs 8,000 crore, is expected to grow at 19% to touch Rs 36,000 crore by 2020. Market leader Bisleri, which controls over a third of the market, sources part of its bottle requirement from the company. “Manjushree has been one of our trusted suppliers who’ve been able to deliver consistently on quality over the years,” says Ramesh Chauhan, chairman, of the Bisleri International. The company works on a conversion price for Bisleri as well but unlike Coca-Cola or Pepsi, Bisleri does not supply the raw material. “The company uses best-in-class machinery, imported from Canada so that quality is not compromised and they also ensure they are competitive in their pricing,” says Mohan Pillai, head of sourcing, Bisleri, which sells about one million bottles of packaged drinking water daily.

It works to Manjushree’s advantage that South India makes up 60% of the beverages market and nearly half of India’s bottled water manufacturers are located here. For packaging companies, business is viable only if they’re close to their clients to save on high freight costs. Given its capacity and proximity to manufacturers, Manjushree pretty much controls the southern market. In fact, despite not having any long-term supply contracts, its relationship with most of its clients has been sticky. “Food safety is a major concern for every multinational in the country. Vendors need to follow good manufacturing practices and ensure that hygiene is maintained in the storage of goods so that there is no contamination. They look for long-term partners they can trust, and the trust develops over the years. So they don’t usually change vendors in a hurry,” Kedia explains.

Changing consumer tastes, thanks to a growing and richer middle-class will ensure that the growth in the packaging industry will sustain during the next few years. “Only companies with significant scale will be able to leverage the growth opportunities,” says Technopak’s Bisen. While the company’s capacity addition has come with rising debt levels from Rs 13.25 crore in FY08 to Rs 130.86 crore in FY12, even with a ten-fold increase in debt, Manjushree’s debt-equity ratio is at a comfortable 1.3 times with interest coverage ratio at 3.65 times. More importantly, the capacity being created will continue to be utilised fully. That there’s enough latent demand is evident when Kedia says, “What we manufacture throughout the year just about meets the peak season requirement [March to June] of beverage players.” That being the case, Manjushree Technopack should have no cause for worry.

Fastest Growing Companies

Sat, 25 May 2013 00:00:00 GMT

What a difference a year can make! The second edition of Outlook Business’ special annual issue, profiling the country’s fastest growing companies, aptly mirrors the turbulence that India Inc went through in the fiscal just gone by.

To begin with, unlike the maiden issue (May 26, 2012) that featured 40 fastest growing companies, this year’s list has shrunk to 30 — this despite extending our universe beyond the BSE and NSE 500. Here’s how the exercise began. Initially, we stuck to our universe of 586 companies, obtained by combining the BSE and NSE 500 stocks. Banks and financial companies were eliminated. So were companies that had debt twice their equity since that impairs their ability to invest and grow, and those that had incurred a loss in any of the years under consideration. The companies that made the cut were subject to a growth filter of 25% compounded for sales and profits for the past five years (FY08 to FY13), and should have also delivered return on capital employed of over 15% in every year over the same period. The result: just 19 companies made the grade. Of which, 11 companies from last year’s list managed to retain their place. But, curiosity got the better of us and we ran the same filters on the entire listed universe to see what the list would look like. Voila, we found 17 more names! The final list was then drawn up by a composite rank created by combining their sales and profit ranks.

The objective part done, we did get a bit subjective. Of the 36 companies, we knocked off pure-play jewellery companies (barring Titan), since a large part of their growth was a function of rising gold prices, and two other companies for business and management issues.

So, what we have here is an interesting mix of companies — split equally between the BSE-NSE 500 and small cap universe — from sectors as diverse as leather, medical, chemicals to infra and consumer. And, like last year, there are more consumer companies, albeit with a big difference. In a clear affirmation that India’s much-touted consumption engine is losing steam, the number of consumer companies has halved from last year’s count of 16 (see: Too hard to consume). Surprisingly, the number of infra companies stayed constant at six. Of the 30 companies, seven managed to clock more than 40% topline growth over the past five years, while 11 managed to grow profits at the same pace (see: Slowdown showing). At the top of the league table is the Bengaluru-based Kaveri Seeds, followed by the pizza major Jubilant Foodworks and auto ancillary supplier Minda Corporation.

While CAGR numbers are impressive, for a majority of the companies, Mr Slowdown is knocking on their doors. As of 9MFY13, five companies, including Ramky Infra and J Kumar, have shown single digit year-on-year growth, and one company (Liberty Phosphate) has seen revenue growth turn negative. The rest 24 managed to grow anywhere from 13% to as high as 93%. Of the lot, we have an interesting company, sanitaryware player Cera, which clocked revenue growth of 53% coupled with an impressive 44% growth in profits. As far as bottomline matters, eight companies have posted a decline in profit growth for the same period, while 17 managed to grow profits between 10% and 96%.

Just like the disclaimer goes that past performance is no guarantee for the future, we too aren’t sure how many companies from the list will continue to grow like they did in the past. But where there’s an interesting story to tell, we sure have dug deep. So, turn over to see what the fastest are all about.