O.P. Lohia, MD, Indo Rama: Back in the reckoning

Four years ago, you could have written off Indo Rama Synthetics' Managing Director Om Prakash Lohia as yet another has-been. The East Asian crisis had just struck and Lohia, a wannabe player in the polyester market, was watching his dreams go quickly sour. Lohia, whose polyester and fibre plant near Nagpur had just gone on stream, hadn't been ready for what happened: an almost overnight collapse of the global polyester market and widespread dumping by polyester manufacturers in Korea, Taiwan, and Indonesia, depressing prices in the Indian market. Margins in the polyester business plummeted from over $1,000 a tonne in 1994-95 to about $200. Plus, there were the high interest payouts and depreciation on Lohia's new plant. In March 1998, Lohia ended the financial year with a loss of Rs 87 crore and followed it up the next year with an even bigger loss of Rs 159.6 crore.

Back then, many blamed Lohia's audacity for his travails. With some reason. Lohia had chosen to enter a business where he would face arguably India Inc.'s most formidable opponent-Reliance. It was a classic David vs Goliath story. Indo Rama vs Reliance. Back in 1995, when Lohia set up his 63,000-tonnes-a-year plant, Reliance, with a capacity of 500,000 tonnes, already controlled over 50 per cent of the market. And thanks to its scale of operations and the soft market following the Asian crisis, smaller players in the polyester business were going belly-up in rapid succession. Companies that plunged deep into the red included Modern, Sanghi, and Century Enka. Some of these never recovered. Others, like Raymond Synthetics, Orissa Synthetics, and RPG's India Polyfibres, were snapped up by Reliance.

Only one lived to tell the tale. Cut to 2003, and Indo Rama Synthetics is doing very well, thank you. It has a 21 per cent marketshare; its Nagpur plant is operating at 30 per cent more than its capacity; turnover at the end of this year could top Rs 2,500 crore and profits Rs 140-150 crore. What's more, Indo Rama's return on capital employed-a good measure of how efficiently a business is running-is 20 per cent. Oh, and just in case you missed it, it still makes polyester chips, yarn, and fibre. So how did Lohia do it? How did he overcome being nearly wiped out by the crisis of the nineties and the smothering might of his arch-rival. Ask him that question and you'll get a truism. "If you are strong, nobody can stop you," says he.

Playing With Fire

Not so long ago, strength was probably something Lohia was praying for. Back until 1994, Indo Rama led a peaceful existence. It bought cotton, viscose, and PSF, and manufactured spun yarn, blended and pure. Its bottomline was healthy and it paid its shareholders dividends regularly. But Lohia, who set up Indo Rama in 1989, was bitten by the bug. Egged on by the dismantling of the licensing regime, he ventured on to Reliance's turf by setting up a polyester plant in Butibori near Nagpur and drew up plans to manufacture purified terephthalic acid (PTA), the crucial raw material in polyester production, in a joint venture with Mitsui and Itochu, both of Japan. The second move, especially, was worse, since it would end Reliance's status as the only PTA manufacturer in the country.

Lohia had three sound reasons for the two moves. First, he believed that polyester demand would soar if the government corrected-as it did to some extent-a tax structure, which overwhelmingly favoured cotton over polyester. He also believed that Reliance, with 500,000 tonnes spread over three locations at that time, wasn't as formidable a rival as it was made out to be. And thirdly, he believed it was unhealthy for the industry to have just one supplier of the crucial raw material.

But just when he had it all mapped out, things began to fall apart. With the onset of the Asian crisis, which knocked Indo Rama's bottomline, came other problems. Lohia's proposed PTA plant, which had a layout of Rs 2,700 crore, began facing-some say, inexplicably-several hurdles. Clearances got delayed and Haldia Petrochemicals, whose plans were formulated later, marched ahead. Lohia admits to a certain wariness on the part of potential lenders. In a seemingly unrelated development, labour unrest surfaced at Butibori. Things came to a head in 1997, when Lohia finally shelved the PTA project, offering by way of explanation that his wish to have a second PTA manufacturer was anyway being fulfilled by Haldia Petrochemicals.

By the end of 1999, Indo Rama's fortunes began to turn. The Asian crisis ebbed and a wave of consolidation-primarily Reliance gobbling up Raymond Synthetics, Orissa Synthetics, and India Polyfibres (adding to its earlier acquisition of ici's fibre plant)-eased the situation. In 1999-2000, Indo Rama made a remarkable recovery with a loss of only Rs 7 crore, after making a provision of Rs 100 crore in depreciation. Nevertheless, the spectre of doom was never quite dispelled, with Reliance leveraging its PTA strength to sell the final product at low prices. Margins continued to rule at around $200 a tonne.

Fighting With Fire

All eyes were on Shailendra Tandon, who joined Indo Rama as its President & Chief Financial Officer in January 2001. In his previous job as corporate treasurer of ICI India, Tandon had played a key role in restructuring the beleaguered multi-product conglomerate, and had struck the deal to sell its 30,000 tonne-a-year fibre plant at Thane to Reliance in 1993. Not keen to relive the experience, he along with Lohia got down to revamping the company with, you guessed it, Reliance as the benchmark.

Tandon and Lohia went in for a massive cost reduction, targeting raw material, financing costs, wages, and stores and spares. High-cost borrowings were substituted with low-cost ones and working capital needs were brought down. In what was a novel move at that time, Indo Rama outsourced its entire it operation to Accenture to be able to focus on its core functions.

The market too helped. Since late 1999, polyester demand has begun to grow again. With rising cotton prices and falling polyester prices, polyester now constitutes 50 per cent of the fibre market compared to 20 per cent when Indo Rama entered the business. That ratio is expected to move closer to the global figure of 57 per cent polyester and 43 per cent cotton. Total polyester demand in 2003-04 is expected to grow to about 2 million tonnes from 1.5 million in 2002-03. Against this total capacity, including Reliance's 800,000 tonnes a year and Indo Rama's 250,000 tonnes a year, just about matches the current demand with some of the less fortunate manufacturers unable to produce at the rated capacity. The margins, which continue to rule at the post-Asian crisis low of $200 a tonne, act as barriers to new entrants enabling existing players to benefit by raising capacity utilisation. ''The frontline players are operating at higher than the rated capacity and fresh capacity is essential if they are to meet the increased demand,'' says a Mumbai-based analyst.

According to Lohia, the high capacity he set up was crucial to Indo Rama's survival as marginal players got wiped out. He also cites his ability to foresee market trends, commitment, and a sharp focus on the cost side of the business; he chose to set up a captive 60-mw power plant rather than depend on the Maharashtra State Electricity Board. "People didn't believe me earlier and said I will be wiped out by Reliance. Internally, too, there were doubts on our survival. But we never gave up," crows Lohia.

Some think Reliance's massive diversification-into energy and then telecommunications-actually helped Indo Rama. Fibre and textiles, which account for about 10 per cent of the group's turnover, are no longer seen as crucial to its overall scheme of things. "Polyester is no more as important to Reliance as it was four-to-five years ago. It won't mind if someone else caters to the demand that Reliance doesn't care to tap," says a Mumbai-based analyst. Admits an Indo Rama insider: ''Reliance and we are not exactly brothers in blood. But we have a healthy working relationship, which marks a change.'' Lohia says he pre-empted this and ''could see Reliance's focus turning away from this business in 1995 itself."

With Big Brother-despite a three times bigger polyester capacity and 54 per cent share of the market-growing benign, Indo Rama wants to grow bigger. It is adding 175,000 tonnes to its capacity at the Butibori plant and an additional yarn capacity for 20,000 tonnes. There has also been a change at the front end. "Earlier, they used to declare their prices only after Reliance. Now, they don't wait," says Bharat Sheth of Mumbai-based Quest Securities.

Barely four years ago, that would have been unthinkable. Don't cheer yet, though. Polyester staple fibre is still taxed at twice the rate of cotton and polyester yarn at three times, inhibiting demand growth and the prices for its major input, PTA, have been soaring (PTA prices have risen 50 per cent between January 2002 and now). That's a double-whammy for Indo Rama. Remember, Reliance, which makes its own PTA also sells it to others-and Indo Rama is one of its customers. Lohia may have brought his company back from the brink, but the road ahead isn't smooth.