Corporate: Kirloskars' Picture Imperfect

CORPORATE: STRATEGY
Kirloskars' Picture Imperfect

Drastic re-alignments and forays into new-age industries are needed if the group's factions are to shore up sagging margins.

By Roop Karnani

It's got all the elements of a business-soap. A dead patriarch whose shadow still looms large; an uncle who's lost the confidence of his nephews; and a business group spanning 26 companies. Deadpans Atul Kirloskar, 44, Chairman & Managing Director, Kirloskar Oil Engines Ltd (KOEL): ''Vijay, and the group of companies he controls will separate from the Kirloskar Group.''

Out of the nine companies-Kirloskar Electric, Kirloskar Computer, Kirloskar Developers, Kirloskar Software, Kirloskar Power, Kirloskar Ansaldo, Kirloskar Batteries, Kirloskar Investment, and Kirloskar Malaysia-the three listed companies (Kirloskar Electric, Kirloskar Investment, and Kirloskar Computer) alone posted a turnover of Rs 488 crore and a loss of Rs 66.33 crore in 1998-99. With these out, the group's financials look a shade less green: a turnover of around Rs 2,000 crore, and loss of Rs 23.3 crore.

Family Dynamics

If the Kirloskar family spat hasn't attracted public interest the way a split in a 112-year-old, 2,500 crore group should, there are reasons for it. One, the group's interests revolve primarily around engineering and capital goods-companies like KOEL and Mysore Kirloskar Ltd that built India's industrial backbone, but somehow lost out in the liberalisation-era.

Two, the Kirloskar group's fortunes have declined: from a turnover of Rs 2,771.96 crore and a net profit of Rs 106.83 crore in 1996-97, to a turnover of about Rs 2,500 crore and a loss of Rs 89.90 crore in 1998-99. And three, a split was just what one would expect in a family where the three key people expected to inherit patriarch S.L. Kirloskar's mantle-his younger brother Ravikant, and sons Shrikant and Chandrakant-died unexpectedly in the span of five years between 1984 and 1989.

After S.L.'s death in 1994, Vijay, now 49, became the chairman, while his nephews Atul, 44, Sanjay, 43, Rahul, 37 (Chandrakant's sons), and Vikram, 42 (Shrikant's son), were put in charge of group companies. Vijay spent his first years as chairman trying to keep the family together. Ironically, that could have led him to continue to run the group's businesses in the maintenance mode.

Performance Dynamics

Performance, or the lack of it, may have been the reason for the split. A family source claims that the flashpoint was Vijay's appointment, in 1999, of a strategy-consultant to the group. His nephews didn't like this one bit: it was his companies, they pointed out, which were eroding the group's bottomline. Atul downplays the friction, but does admit that things were not working out: ''Nobody wishes to break up an institution without good reason.'' But can the group's lacklustre performance be attributed to just nine companies?

The 27 companies that will constitute the 'new' Kirloskar group comprise 10 listed companies, 5 of which made profits in 1998-99. Says an analyst: ''Looking at the group without these three (listed) companies makes its financials look better, but a closer look reveals that it still does not have any star performers.'' Kirloskar Ferrous Industries, an Atul Kirloskar managed company, posted a 1999-2000 (nine months) turnover of Rs 165 crore and a net loss of Rs 13 crore and Mysore Kirloskar, which is headed by Vikram, registered a turnover of Rs 117.80 crore, and a net loss of Rs 2.90 crore in 1998-99.

Even the companies that made profits just about made them. For the nine months ended December, 1999, Kirloskar Brothers Ltd (KBL) made net profits of Rs 5 crore on a turnover of Rs 251.70 crore. And while KOEL, registered a healthy profit of Rs 73.30 crore on a turnover of Rs 516 crore, Rs 63 crore of it came from the sale of investments (Cummins shares).

Bottomline: the net profit margins of KBL and KOEL are less than 2 per cent. Rahul Kirloskar, does not deny these facts: ''The margins are low, but we are doing everything we can to cut costs and improve profitability.'' This includes bringing down the interest costs by prepaying debt (KOEL's, for instance, will come down by Rs 20 crore); monthly financial reviews, and restructuring. And, getting rid of Vijay's nine companies.

Future Dynamics

What does the future hold for the Kirloskars? The short-term is certain to be acrimonious. KOEL, KBL, and Kirloskar Pneumatic have a stake of between 10 and 12 per cent in Kirloskar Electric, and vice-versa. The nephews have asked Vijay to exchange his shares in their companies for theirs' in his. But Vijay has been loathe to do so (he was unavailable for comment), and discussions have reached a deadlock. But cross-holdings are only the tip of the iceberg.

The right to use the Kirloskar brandname is likely to be another knotty issue. The brand, the logo, and the right to use the name, rests with a Kirloskar group company called Kirloskar Proprietary. And Atul, who as eldest, sees himself protecting the interests of the family doesn't seem inclined to share them: ''These should (continue to) be with the Kirloskar group.''

The future? Both sides will certainly look beyond manufacturing. Vijay already has a few infotech companies. And Atul plans to achieve the benefits of synergy between the group's manufacturing operations and distribution networks at one level, and leverage these strengths to tap the infotech boom.

However, both the factions of the group will have to restructure their operations before venturing into new areas. The history of business families in India seems to suggest that a split, sometimes, benefits both factions. Could that hold true for the Kirloskars?

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