|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
, Chief Executive
Officer, Essel Propack
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
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
| 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
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
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