JULY 7, 2002
 Cover Story
 Personal Finance
 Case Game
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Nasscom Does Some Brain Racking
Slowdown or not, NASSCOM is still eyeing Indian software revenues of $77 billion by 2008. Just what will make it happen? To get a strategy together, it got some top minds to meet in Hyderabad at the India it and ITEs Strategy Summit 2002. A report on what came of it.

Q&A With Ashraf Dimitri
The CEO of Oasis Technology, a key provider of e-payments software, tries to win over converts to a new system.

More Net Specials
Business Today, June 23, 2002
The Big Squeeze
It may not have television's glamour but his low-profile packaging company has Subhash Chandra all smiles. And, oh yes, it's global to boot.
Zee's Subhash Chandra and his family own 37 per cent of Essel, but the company's global odyssey began after its management was handed over to professionals
"There are two or three M&A discussions at fairly advanced stages that will help Essel consolidate its presence"
, Chief Executive Officer, Essel Propack

As cross-examinations go, a certain Torquemada may have done better. That doesn't stop Cyrus Bagwadia from, by his own admission, "getting butterflies" in his stomach when he thinks of an inquisition he went through last November.

Now Bagwadia isn't your everyday ingénue to scare easily; he's 54, a veteran of two companies-the last was Voltas where he was Product Manager-and Chief Executive Officer of the world's largest lamitube (that's the packaging toothpastes and the like come in now) company, Essel Propack. But eight sharp Procter & Gamble suits on the other side can be a handful.

That was the number of people Bagwadia, Essel Propack's man-in-the-US Manuel Diaz, CFO R. Chandrasekhar, and CTO M.R. Ramaswamy met on a frosty November morning in P&G's HQ at Cincinatti. The stakes were high: the supply of toothpaste tubes, some 500 million of them a year to P&G, the entire requirement of the company's North American operations (See Project Taj). Tubes account for between 15 and 20 per cent of toothpaste production costs and the Essel team expected to be grilled. That it was. The scheduled one-hour session extended to two. "They wanted to know everything about the company," recalls Bagwadia. "The technology, the production process, management practices, even reward structures."

The eight from P&G must have liked what they heard: Essel landed the contract.


It's easy to miss Essel Propack's HQ altogether. The three-storied Essel House stands opposite one of Mumbai's landmarks, the towering 300-metre Doordarshan Centre at Worli, but it is a building that is-just a wee bit-the worse for wear.

The modest second-floor boardroom where Bagwadia meets with this writer is Spartan, standard-issue swivel chairs and the regulation wood paneling- alright for a mid-sized Indian company but a little too self-effacing for a multinational. With a turnover of Rs 588 crore ($120 million), cash flows of Rs 147 crore ($30 million), and factories in eight countries, Essel Propack is just that.

Any cadence surrounding the Essel name probably originates from its ownership. The company was founded in 1984 by Subhash Chandra (he and his family still own 37 per cent of the company). Essel's fortunes, though, started to turn when Chandra handed over the company's management to a team of professionals headed by Bagwadia in 1993.

A flurry of overseas initiatives followed: factories in Egypt, China (one each in Shanghai and Guangzhou), Germany, Nepal, the US; and the y2k acquisition of Switzerland's Propack AG, then the world's fourth largest lamitube company (the deal involved $11 million in cash and 6.87 million equity shares of Essel).

Spread over 60,000 square feet, work at Essel Propack's spanking new lamitube plant in the sleepy town of Danville (Greensborough, North Carolina) is in full earnest. Being set up at a cost of $15 million, the new plant shall exclusively supply the entire toothpaste tube requirements for Procter & Gamble North America. "Basically what it means is that next time you pick up a toothpaste like Crest & Fixodent in any supermarket across it'll be in a tube made by us," says a proud Bagwadia. Part of five-year contract with the Cincinnati-based consumer goods giant, the first batch will roll out by the end of the year and full-scale production by end of next year. Strategically located next to P&G's tubing plant, machinery is being directly supplied by KMK of Switzerland and Essel is working on a new technology that'll help to seal in flavours.

The acquisition gave Essel access to Propack's 600 million-pieces-a-year capacity, entry into the Latin American, Indonesian, and Chinese markets, and rights to pp340, a proprietary high-speed tubing technology (it slashes costs by 30 per cent) patented by the Swiss company. For the record, Propack owner Bernhard A. Schwyn now owns 22 per cent of Essel Propack and sits on its board.


In a word, overseas ops. Today, these account for more than 50 per cent of Essel's revenues (See Where Essel's Revenues Came From), and employ nearly 600 of its 1,000-strong workforce. That's a trend that will continue, believes Chandrasekhar. "By 2005, at least 70 per cent of our revenue will come from overseas operations," he says.

Those looking for the one thing that shaped Essel's success need look no farther than China. The company entered the country in 1997 with a not insignificant tubing capacity of 50 million tubes a year.

Today, its two factories in Shanghai and Guangzhou do 1.2 billion. Indeed, P&G first noticed Essel when the company won a small local supply contract in China. Says Prakash Wakankar, Essel's Regional Director (East Asia & Pacific Region), "China is a challenge bigger than I've ever faced, and yet, today we cater to MNCs like Unilever, Colgate-Palmolive, and Procter & Gamble, as well as over 15 Chinese companies, including Masson Corporation."

Some of Essel's competitiveness can be attributed to commonsensical ideas such as its model of building tubing lines within the customer's filling facility. Still, analysts are impressed. "This lowers inventories, reduces transportation costs, and economises the cost of utilities-all resulting in a lower cost of production," explains Pankaj Choksy, an analyst with brokerage Enam Securities.

Bagwadia attributes Essel's competitiveness to its integrated manufacturing strategy. The company straddles the five-step production process from resin to tubes and caps.

The key differentiator, though, is not a low cost of production or integration across the manufacturing cycle, but logistics. Essel ships four million tubes a day. "Given that a 10-tonne truck can carry only 250,000 tubes and we have 40 different tube-types that have to be sent to destinations across the country, the permutations are mind-boggling," laughs Chandrasekhar.


Call it the momentum-effect. Essel's existing contracts-such as the ones it has with Unilever in China and with P&G in the US-help bring in new business. China, and India, are primary targets for most consumer products marketers; while markets in the US and Europe are attractive, they do not hold the potential for growth that these do. And Essel's presence in China and India should provide it with an edge over the competition. The company's run, then, will continue as it can continue to address the issue of scalability, without compromising on quality and cost.

"The focus on research and development and their global presence will help them service transnational companies," says Mohit Jain, the Country Head of Procurement at Glaxo SmithKline Consumer, which sources nearly half its requirement of Aquafresh tubes from Essel.

"They've always been able to come up with offerings to suit our changing requirements," adds Darshan Patel, the Managing Director of the Ahmedabad-based Paras Pharmaceuticals, which sources its annual requirement of 60-70 million tubes from Essel.

Still, it isn't as if Essel's dominance is unchallenged. It may be the undisputed leader in the Indian lamitube market, and does boast 25 per cent share of the global market for lamitubes, but France's Cebal (13 per cent) and UK's Betts (17 per cent) are no minnows.

Lester Pinto, Executive Director, Betts India, acknowledges that Essel is a worthy competitor but feels the European and US markets will be harder to crack: "EPL leads the Indian lamitube market because of its longstanding presence here. However, EPL's entry into developed markets, with long-established competitors who have customer relationships, will probably prove to be much slower, difficult, and costlier."

Still, the deal with P&G shows that Essel has what it takes to compete on the global arena. And its relationships with Unilever in China and now, with P&G in the US should help.

Over the long-term, though, the company, a newly-minted transnational, will have to address the issues related to managing a global workforce and a global supply chain.


From a capacity of 3 billion tubes a year now to 7 billion by 2007 (a $750-million, Rs 3,675-crore opportunity)-in numerical terms, that's Bagwadia's five-year target.

Achieving that target organically may be a stretch and Essel could find itself on the acquisition trail in an effort to increase its footprint. After all, it was the Propack acquisition that really marked its emergence as a multinational.

Acquisitions, the CEO admits, are very much part of this strategy. "There are two or three discussions at fairly advanced stages that will help Essel consolidate its presence in markets where it already has operations," says Bagwadia.

Money isn't something the company needs to worry about: cash flows have grown at an average of 15 per cent over the past five years and Essel boasts Rs 147 crore in cash and cash equivalents on its balance sheet. And while the company's stock hasn't really breached the stratosphere, it has remained a consistent performer and could serve as useful currency in any acquisition.

The $150-million (Rs 735 crore) investment in the company's US plant will be funded equally by debt and internal accruals. "Essel's balance sheet is strong and it should be able to borrow cheap given its debt-equity ratio of less than one," says Arun Panicker, Director (Corporate Rating), Crisil, who rated Essel's July 2001, Rs 100-crore debt issue, AA- , signifying high safety and timely payment of interest and principal.

Essel's ascent has coincided with the global shift towards lamitubes. Although 10-15 per cent more expensive than conventional metal tubes, these are safer, more hygienic, and better-looking. However, lamitubes still account for just 31 per cent of the 31-billion-units-a-year global tube market, providing companies such as Essel with a tremendous canvas for growth. It's a squeeze.

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