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By Ranju Sarkar
Worse, ICI could stay in black during the fiscal ended March 2000 (it reported net profits of Rs 64.15 crore) only by disposing off properties (which fetched it Rs 84.02 crore) and selling a 49 per cent stake in its explosives business to Orica (Australia) for Rs 22.36 crore. This was offset by a provision of Rs 69 crore for a separation scheme, and an additional stamp duty of Rs 17.70 crore it had to fork out for the sale of the fertilisers business in 1993. Concedes Narayan: ''If you see our continuing businesses, all have seen a robust growth. It's not reflected in the financials because of the discontinuation of certain businesses, while the new businesses (like starch or the flavours and fragrances, which ICI is evaluating), which have substituted the old, are still in a start-up mode and will yield results in future.'' No wonder, the ICI scrip has been driven down from a high of Rs 268 on January 10, 2000, to Rs 80.60 on February 2, 2001. Revamping The Portfolio ICI's current problems are partly due to its changing portfolio---it has tried to align its portfolio with the UK-based parent, ICI Plc, with a focus on decorative paints, starch (food starch, adhesives, and polymers), flavours and fragrances, and industrial specialities (surfactants and catalysts). ICI India has a presence in paints and speciality chemicals, seeded operations in starch with a plant in Thane, and is evaluating its entry into the Quest business (ICI plc's subsidiary which makes flavours and fragrances). Indeed, ICI---with some help from McKinsey & Co.---had formulated a 10x strategy in 1995, which aimed at increasing ICI's turnover 10 times within a decade; the change in portfolio has meant that the company has gone down by 20 per cent. Defends Narayan: ''10x as a concept was relevant then.'' Narayan says most of the 10x strategy was in place when he came in. ''Whatever ICI was in terms of the product portfolio in 1995, 70 per cent of that doesn't exist. So, 10x have become irrelevant today.'' Strangely, while the parent exited businesses like polyurethane's, pharmaceuticals, or explosives, ICI India held onto them as these businesses enjoyed good presence in India. But keeping in view their future needs (technology, R&D, etc.), ICI has divested its stake in explosives, selling off the polyurethane's business to the US-based Huntsmen Group (for Rs 72 crore, plus Rs 10 crore linked to the performance of the business in future), spinning off the industrial paints business at Rishra (West Bengal) into a joint venture with Berger Paints (Rs 16 crore), and is scouting for buyers in rubber, chemicals, and pharmaceuticals. Defends Rajiv Jain, CFO & CEO (except paints), ICI: ''I am not going to sell off a business just because it has a strategy fit. I will sell off only for value; only if it benefits our customers, shareholders, and employers.'' Narayan says that this has been the guiding philosophy in all its disinvestments that have fetched good value. ICI is in the process of putting together a new strategy on how best it can grow existing portfolio, and how it can extract the best value from businesses it wants to exit. Adds Narayan: ''The strategic intent is there; there's no ambiguity about the direction.'' The Problem In Paints The other key problem for ICI has been paints, which accounts for 40 per cent of its sales. Despite his best efforts and several change in heads, Narayan has been unable to arrest the slide in paints. Even as the industry grew at 12-13 per cent per annum, ICI has been losing marketshares; 10 per cent today (down from 11 per cent in 1999). Asian Paints, the market-leader, holds a 40 per cent, followed by Berger Paints which holds 18 per cent and Goodlass Nerolac (15 per cent). Says Bhagesh Kagalkar, Analyst, D.A.Shaw & Co. ''The top three players are competing and grabbing marketshare; they no longer consider ICI to be a threat.'' ''Paints has been one of our key problems. We are revamping our network and products, with a major brand-building exercise. You will see some changes in 2001. We were not geared internally,'' concedes Narayan. While ICI put up two greenfield plants at Thane in 1997, and Mohali in 1998, it did not pay much attention on strengthening its internal systems (distribution) or creating the brand pull which would have brought the expected growth in volumes. Says Rakesh Sharma, CEO (Decorative Paints): ''The emphasis on the back-end was right, but the period for which we continued was wrong.'' ICI operates through 45 depots and 6,000 dealers in 300 towns, and is trying to ensure that its existing channel works more effectively. ''The shape and mix of retailers and wholesalers wasn't right. There was an imbalance. We are trying to get the mix right,'' adds Sharma. For instance, take the Nagpur market, which has 300 dealers. To improve sales, it should have a presence among 100 dealers. But if 50 per cent of its sales are going through wholesalers, it curtails the company's ability to grow on retail. In such instances, ICI has pulled back from wholesalers by reducing their discounts or credit period to revive the retail network. But how did Narayan's massive change process elude the paints business? To be fair, Narayan tried to rejuvenate the paints business by hiring a top-notch five-member team from Asian Paints, headed by Atul Joshi; but they could not recreate their success of Asian Paints as the same was supported by Asian's well-oiled distribution network. And that's a story Narayan would be reluctant to share. Says a former President of the Paints Association of India: ''You can't copycat Asian Paints. They went and gave products to dealers, with an axiom 'payable when able.'' This was catastrophic and ICI landed into a massive outstanding problem with debtors soaring to over 80 days.'' Industry experts estimate ICI to have outstanding of more than Rs 10 crore in the market, which it's unlikely to recover. Adds ICI's Jain: ''The paints business has been a drag on our profitability. All our businesses which have done exceedingly well have been masked by paints.'' To improve volumes, ICI tried to launch low-end products like cement paints, low-priced distempers and primers, but did not sufficiently promote its three best-selling products: the Dulux range of enamelled (for doors and windows), emulsion (for walls), and the Velvet touch super-emulsion. Says an industry expert: ''ICI had an image, which they destroyed by launching cheap products. They haven't taken advantage of their strengths but exposed their weaknesses. They are not equipped to fight competition; they are monopolists.'' But Narayan is hardly the man who will give up in a hurry. He's working on a strategy to rejuvenate the paints business, which would include a slew of product launches and relaunches, a major brand-building exercise, which would communicate the proposition more aggressively and rectify the perceptions which have got jaded. Says P.N. Murthy, Head (Decoratives), Asian Paints: ''Top of the mind recall is critical.'' And this time, the focus would be on areas where it's good at. With two new plants, Narayan has also tried to rationalise production; what would be produced where. For instance, the Rishra Plant was producing only industrial paints, and the same has been hived off into a joint venture with Berger Paints. ICI has put up plants in the West and the North, both fast-growing markets. But were they really needed? Defends Narayan: ''One could argue but freight costs matter, so do servicing ability.'' To improve information flow, ICI has connected its top 25 godowns with a back-end infotech system. To drive change in paints, he has roped in B. Rajagopal, earlier CEO of speciality materials, and whose main focus would be to ensure that the internals are in line. But there lies the problem. Rajagopal may be a good manager (and Narayan could be dynamic leader but has too much on his plate) but industry experts feel that what ICI needs is a paints specialist, someone who understands the numbers game in paints. The rest...a mixed bag The residual is a mixed bag of stars and question marks. These include older businesses like pharmaceuticals (which accounts for 8 per cent of ICI's sales, and rubber chemicals (11 per cent), and new businesses like catalysts (5 per cent), nitrocellulose (7 per cent), speciality chemicals and starch (12 per cent), trading (2 per cent) and polyurethanes (14 per cent), which is being sold off to the US-based Huntsmen Group, which also bought ICI's acrylics business earlier. Although many of the new businesses (Nitrocellulose grew by 20 per cent last year) are growing fast, they are small and niche businesses. But that doesn't bother Narayan as they are highly profitable businesses as well, which goes well with the parent's strategic shift from bulk chemicals to speciality chemicals. Thus, despite growing by 50 per cent in 1999-2000, ICI is divesting the polyurethanes business. Explains Sanjay Anand, Chief Executive (Speciality Chemicals): ''We thought the business needed to align with an owner which had the technology and long term commitment.'' ICI would be forced to do the same with pharma as it does not do any R&D and needs to secure a product pipeline although ICI has an agreement with AstraZeneca (ICI had spinned off the pharma business into a separate company, Zeneca, which subsequently merged with Astra). But with AstraZeneca picking up the Hindujas stake in Astra-IDL (it's other company in India which has been in existence prior to the merger) there's some uncertainty on ICI's pharma business. But ICI dismisses the same as it issued a No-Objection Certificate to the Foreign Investment Promotion Board only after it was reassured by the UK giant that it would continue to support ICI with technology and new product development. Explains P. Chadha, Chief Executive (Regional Businesses): ''In areas where ICI has the strength, we will have the support from AstraZeneca.'' Even while the pharma business makes money (where profits are in line with the industry), ICI's aim would be to secure a product pipeline for it through a joint venture. The rubber chemicals business, which is highly commoditised, came under threat after a 40 per cent drop in prices post-Asian crisis, which squeezed its margins. ICI has turned around this business through a massive cost cutting exercise to rein in cost hikes, and rationalising product portfolio. But as globally ICI has exited both these businesses, it would follow suit in India, but at an appropriate value. The new businesses hold a lot of promise. The catalyst business (catalysts are used in ammonia/fertiliser plants, and petrochemical industries) has doubled in the last four years, which is a highly profitable business for ICI. Its Kanpur plant has become global sourcing point, which accounts for nearly 35 per cent of its sales. Similarly, in nitrocellulose, exports will account for a third. Ever since it acquired the Valsad-based Asha Nitrochem in 1998, the business has grown more than three-fold. But growth, and ICI's future, would depend on how quickly Narayan can get rid of the shades of grey in paints. |
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Ever since
Aditya Narayan took over as the CEO in August 1996, ICI has been on a
change mode. Narayan has sold off some businesses, hived-off others into
joint ventures, and reduced his workforce by a quarter. Although ICI may
have emerged a more leaner, meaner, and sharper company, the same is not
reflected in the topline or bottomline growth. For the nine-month ended
December 2000, ICI'S net profits slipped by 45 per cent even as net sales
fell by 8.4 per cent.