Are The Kirloskars Splitting Up?

BUSINESS GROUPS
Are The Kirloskars Splitting Up?

Although a traditionally close-knit family, given the group's sagging bottomlines, the Kirloskars have no alternative.

By George Skaria

Clockwise from left, Vikram, Atul, Rahul and Vijay Kirloskar "We should definitely be a Rs 7,000-crore group by the end of this decade. If we don't try for such targets, I am not fit to head the group. What it means is that what my uncle (S.L. Kirloskar) did in 60 years, I must do in 5-10 years"
Vijay Kirloskar, Chairman, Kirloskar Group
Business Today, May 7, 1994

His 5 years are up. And the wheels of change are whirring away at the conservative engineering powerhouse, the Rs 3,000-crore Bangalore- and Pune-based Kirloskar Group. In a closed-door meeting a few months ago, the unassuming 48-year-old Vijay Kirloskar demitted his post as the Chairman of the Kirloskar Group to the family council.

Simultaneously, he stepped down from the chairman's post at 3 companies in the group: the Rs 700-crore Kirloskar Oil Engines Ltd (KOEL), the Rs 337-crore Kirloskar Brothers Ltd (KBL), and the Rs 165-crore Kirloskar Pneumatic Co. Ltd (KPCL). And initiated a fresh round of restructuring to further define management control in the companies in the group.

Kirloskar's nephews--Atul, Sanjay, and Rahul, the sons of the late Chandrakant Kirloskar, and the grandsons of the late S.L. Kirloskar, who is credited with building the group in the post-Independence era--now get full control of the 3 companies where they already occupy the posts of Vice-Chairman and Managing Director. Thus, Atul Kirloskar has taken over as the Chairman of KOEL, Sanjay of KBL, and Rahul of KPCL.

Meanwhile, Kirloskar will concentrate on the Rs 520-crore Kirloskar Electric, the company he is now singularly responsible for. In addition, the Rs 7.50-crore Kirloskar Systems Ltd (KSL)--the funding route for the Toyota-Kirloskar Motors car project--has been restructured. KSL's switching-systems manufacturing business has been hived off to Kirloskar Electric. Simultaneously, KSL has been spun off as a 51:49 joint venture with the George Soros affiliate, the P.C. Chatterjee Group, taking a minority stake. As a result, Kirloskar's stake in Toyota-Kirloskar has dropped from 26 to 13 per cent.

Obviously, the impact of these changes at the 111-year-old House Of Kirloskars has been nothing short of earth-shattering. While the members of the family wanted time to respond to queries on the changes within the group, BT learns that the events were fuelled by numerous factors: lackadaisical financial performance, Kirloskar's decision to concentrate on his companies, and the perception amongst a few family members that they would be better off on their own.

Anointed by the then-group head, S.L. Kirloskar, in 1994, Kirloskar donned the patriarch's garb of a competent and cohesive--if slow to change and respond--group consisting of 22 public limited companies in the country, spanning the businesses of castings and forgings, pumps, engines, electric motors, power equipment, and compressors. However, the group has not been able to clamber onto the liberalisation bandwagon.

Since Kirloskar took charge in 1994, the group's sales have grown by 54.92 per cent: from Rs 1,717 crore in 1994-95 to Rs 2,660 crore in 1997-98. Net profits--at Rs 141 crore in 1997-98--have grown by 135 per cent in the same period. But this was largely accounted for by one company: koel, managed by Atul Kirloskar. Says a close associate of Kirloskar: "He is Mr Nice Guy personified. But, when you run a large and old organisation, assertiveness and some tough decisions are called for."

Of course, the recession has had a deep impact on the engineering business, which accounts for 97 per cent of the group's revenues. Over the past 5 years, Kirloskar has been trying to impart a greater degree of synergy between the various businesses as well as arrest its high-cost structure and overstaffing. However, the scorecard wasn't convincing enough to rein in the young inheritors--all in their 40s--of the group.

Even Kirloskar was disappointed with the performance of Kirloskar Electric. Its net profits recorded a 130 per cent drop: from Rs 17.78 crore in 1996-97 to Rs 7.23 crore in 1997-98. Says a senior manager, who earlier worked with the group: "kec's profitability has been steadily coming down over the years. Considering that this was one of the more profitable ventures a few years back, Vijay would have wanted to focus more on it now."

Since it is unlikely that Kirloskar's replacement will be anointed in a hurry, the family businesses are expected to be managed, more than ever, as largely independent operations. At cash-cow KOEL, in particular, Atul Kirloskar has been planning to initiate reengineering exercises on the shopfloor. His younger siblings have a tougher job: Sanjay Kirloskar's kbl, which manufactures pumps and valves, earned lower net profits of Rs 10.74 crore in 1997-98. And Rahul's kpcl is in the red, with net losses of Rs 4.15 crore in 1997-98.

More decisions need to be taken. The Kirloskars are in the process of selling the Blue Diamond Hotel in Pune--a unit of Poona Industrial Hotels--to the Taj Group. They are also reviewing their investments in other non-core areas: advertising, textile-machinery, and software. Finally, the group may also get rid of some of its overseas operations, which are mainly of a trading and assembly nature, in Malaysia, Singapore, Thailand, and the Philippines.

However, the reorganisation will not have any impact on the holding-structure. That's because, unlike the Tatas, the Kirloskar Group has no single holding entity that manages group investments. Instead, investments are channelled through a series of inter-corporate cross-holdings. In addition, the family members have realised the benefits of sticking close to each other. Says M.G. Korgaonkar, 51, former director of the Kirloskar Institute of Management Studies: "They all realise that quantum jumps in growth will happen not as individual family members, but as a group as a whole." Adds R. Sridhar, 46, the former CEO of the Kirloskar-owned Pratibha Advertising: "One of the main things that will keep the flag flying at the Kirloskar Group is the high brand equity of the Kirloskar name."

Every Diwali, without fail, all the members of the Kirloskar family--including wives and children--meet at the ancestral family home in Pune for a week of fun. However, as the descendants of the Kirloskar Group grapple with their individual companies, this year's Diwali may turn out to be different.

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