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COVER STORY Surviving The Slowdown
A Season For Number-Crunching Your numbers are your own and you can choose to re-engineer them when you deem fit, but there's enough logic to do it now. By Dilip Maitra If some quant-jocks are walking around wearing oversized grins on their faces, that's because they've realised there's no time like the present for tinkering with spreadsheets, profitably. It isn't an auspicious conjunction of the stars that makes the middle of the year 2001 the perfect time to play around with the innards of a company's financials; it is the slowdown. That's right, you didn't read it wrong the first time, it is the downturn in the economy, the recession-in-the-making, the great depression of 2001. Some companies reengineer their finances during a slowdown to merely survive. But almost all, and this includes profitable companies, can do the same thing to improve their financial efficiency. It's all about debt: the equity market may be paralysed but never has debt been as attractive a corporate financing option as it is today. Companies in the red can restructure their debt-by either retiring it, or by replacing older costlier debt, with newer cheaper one-to improve their health; those in the black can do so to improve their profitability. Better still, it is a great time to borrow-for the chief executive's new jet (ok, we're joking), that long-delayed expansion plan, or that attractive acquisition. Companies in trouble have realised the benefits of re-engineering their finances at this point in time. Tata Engineering posted its highest loss ever in 50 years of existence, Rs 500 crore, last year (2000-01). Stung by the magnitude of that loss, the company has embarked on a debt restructuring exercise. ''We are aiming to knock off Rs 500 crore of debt over two years,'' says Pravin Kadle, Senior Vice-President, Tata Engineering. That, the company proposes to do by selling investments (shares and bonds) on its books, real estate, and by hiving off some of its manufacturing divisions into separate companies. Sometime this fiscal, Tata Engineering will also go in for a rights issue of convertible and non-convertible bonds. The proceeds of this exercise-between Rs 1,200 crore and Rs 1,400 crore-will be used to retire high cost rupee and forex debt.
The Ahmedabad-based Arvind Mills Ltd is another company restructuring debt for its very survival. By March 2001, the company's accumulated losses were a staggering Rs 913 crore. Reeling under a debt burden of Rs 2,700 crore, Arvind has submitted a restructuring plan to the Ahmedabad High Court that envisages buying back debt from its lenders at a discount of 55 per cent, or rescheduling payments, at a reduced rate of interest, over the next 5 to10 years. If accepted, the initiative could halve Arvind's interest burden of Rs 320 crore with retrospective effect from April 1, 2000. Simultaneously, Arvind plans to raise Rs 100 crore through a rights issue and an additional undisclosed amount through the sale of certain assets, and use the proceeds to retire debt. Indeed, retiring debt seems to be corporate India's flavour of the month. Beer-major UB doesn't just have to suffer the low margins characteristic of the business, it has to live with high-cost debt. With the stockmarket in shambles the equity route is out for it. Now, it proposes to split the company into two; sell a strategic stake in the part that owns the beer manufacturing facilities to a partner; use the proceeds to retire debt; and improve profitability. The smarter companies follow up debt restructuring with efforts targeted at improving their management of working capital. These range from inventory management to a more efficient receivables collection process. Together, these should keep the smile on the typical quant-jock's face for some time to come. Companies are realising that there is more to be gained from smart supply chain management than just cost benefits. By Suveen K. Sinha If several companies in the automotive sector are suddenly speaking about Milk Runs, that's not because they are considering diversifying into the dairy business, but because they are thinking of adopting the supply chain management system of the same name introduced into India by Toyota Kirloskar Motors in the late 1990s. This requires a company to establish depots in regions where its vendors are concentrated. These depots give out information about the manufacturing plant's requirement in advance, say a week before the components are needed.
Subsequently, the company's vans go to each vendor's facility and collect the parts. These are then dispatched to the manufacturing facility by road. The reverse approach works too, as proved by two wheeler major Hero Honda. Vendors deliver the parts, when they are needed, on an hourly basis, even, at the company's plant at Daruhera in Punjab. It helps that the company has played a part in developing vendors in near-by regions. It also helps that almost 70 per cent of its requirements come from 16 dedicated vendors. "They should bring it in when we want it. We don't want an inventory pile-up," says Brij Mohan Lall Munjal, CEO, Hero Honda. The supply chain is the first target of companies caught in a slowdown. The benefits, in terms of cost and productivity gains, are immediate. "Companies become receptive (to SCM and other process improvement techniques) when they realise they don't have what it takes to tackle the tough times ahead," says Karl-Michael Mountri, Vice-President (Asia Pacific), Hyperion Solutions, an US-based analytics solution provider. Most companies, however, stop halfway. A low-demand situation is the perfect time to test a customised supply chain solution-different chains for different customers. If it works it can be scaled up to meet a rise in demand. The benefits? An optimal utilisation of plant and machinery, people, and distribution channels. Says Rajan Chibba, a principal with consulting firm, KSA Technopak: "A lot of people make infrastructure investments in the supply chain. But they stop short of addressing issues related to people and processes." Chhibba picks car major Maruti Udyog as a company that has taken a more holistic view of supply chain management. It has recently set up a separate department, Material Control, which issues annual, monthly, and weekly schedules through e-mail to all domestic vendors. An in-house IT department has been set up to take care of the supply chain from customer orders to dispatches. The average inventory of domestic components has been reduced to 1.5 days. Starting last month, Maruti is giving its vendors 15-day schedules broken into each minute of the chain. Up to 85 per cent of the components (a car has 8,000-10,000 components) go into the line without inspection. ''We are using e-commerce and IT to shorten cycles and reduce inventory," says CEO Jagdish Khattar. E-procurement alone saved Rs 75 lakh in 2000-01. That's the way to go. Why wait till things look up to venture into a new business. If you've got the wherewithal, do it now. By Nitya Varadarajan
Most companies are run by smart, well-meaning, rational individuals whose actions are usually smart, well-meaning, and rational. But at the first hint of a slowdown, things change. The batten-the-hatches kind of reaction managers display when faced with the prospect of a decelerating economy often results in strategic inertia. Decisions, important and unimportant, are deferred. ''Have you ordered the new corporate stationery?'' ''No, I'm waiting for things to look up.'' ''Are we going to diversify into that new business?'' ''No, we are going to wait till things blow over.'' Actually, for a company with adequate financial, marketing, and human resources, a slowdown is an ideal time to launch products, enter new markets, or diversify into new lines of businesses. ''What would you rather do?'' asks Kavan Mukhtyar, a partner at consulting firm Frost & Sullvian. ''Launch a product or get into a business when everyone else is doing it or do so when every other company is in a defensive mode?'' That's really a no brainer. That could explain the decision of the Aditya Birla Group company Indian Rayon to acquire, in July 2001, a 50.35 per cent stake in the Bangalore-based psi Data Systems for Rs 71 crore in cash. ''The technology sector offers enormous growth potential over the long term,'' says the group's Chairman Kumar Mangalam Birla. That it surely does, but what's intriguing about the acquisition is its timing: at the peak of the panic over the impact of the slowdown in the US economy on Indian IT services companies. But having got his foot in when things are bad, Birla will be able to build a team of software pros (there's a glut in the market) for far less than it would have otherwise taken. That's a classic strategic response; Emami's is a more tactical one. The Rs 250-crore Kolakata-based personal care products company is considering diversifying into medical transcription or similar low-end IT-enabled services. Unrelated diversification is out for the Chennai-based Tube Investments. But the company's roll-forms division has launched newer, non-commodity offerings targeting the automobile and the defence sectors and its steel tubes division is looking at markets in South East Asia from the export point of view. Both are brave moves in the context of a economic downturn, but these are the kind of efforts that help companies outperform the market. Then, there's always paranoia: if you don't launch a product or enter a business, someone else could. -Additional Reporting By Abir Pal 1 2 |
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Don't
dismiss this as another of those stories on how companies are cutting
costs to keep body and soul together during a slowdown. This composition
isn't about sustenance, it's about companies tackling the downturn head
on, thumbing their nose at the looming recession-to-be. From financial
reengineering to M&As, expansion and diversification initiatives to,
the predictable, organisational restructuring, smart companies are using
the slowdown to plan for the future. Put simply, it's all about fighting
back.
