Today’s winners were yesterday’s outliers
In early 2000, Sajjan Jindal-owned JSW Steel managed to survive the commodity crisis.
After returning to Apple in 1997, Steve Jobs launched what later became a world-famous campaign: ‘Think Different’. “…the ones who see things differently, they’re not fond of rules … the only thing you can’t do is ignore them because they change things, they push the human race forward” — these were his exact words. The same words resonate while thinking of some of India Inc’s success stories of the last few years. Here are a few companies that thought differently from the herd, showed courage and conviction in their ideas and emerged winners.
It is said that a crisis brings the best out of you. It is true for those who learn from their mistakes and don’t repeat them. In early 2000, Sajjan Jindal-owned JSW Steel had just managed to survive the commodity crisis. Its capacity of 1.6 million tonnes (MT) was half that of the largest player, Tata Steel, and market capitalisation was Rs500 crore, or one tenth of the leader. Since then, its market cap has risen 150 times to Rs 76,000 crore, around 25% higher than Tata Steel.
That despite having no captive iron ore and coking coal mines. Other contemporaries such as Essar Steel, Bhushan Steel and Monnet Ispat have failed to match up. Jindal Steel (Navin Jindal-owned) continues to struggle with heavy debt, which is also partially true for Tata Steel and state-run SAIL — each of them has a debt-operating profit or EBITDA (earnings before interest, tax, depreciation and amortisation) multiple of above 4, compared with 2 for JSW Steel even though it has the largest steel capacity of 18 million tonnes in the country. So, what did JSW Steel do differently? With no access to cheap raw materials, JSW knew the only way it could outdo them was beating them in other costs, at the same time selling its products at higher prices. The company developed a combination of technologies at different manufacturing stages resulting in lesser wastage and improved staff and other logistical efficiencies. Collaborating with Japan’s JFE Steel Corp in 2009 was a major step in that direction. JFE brought in the technology for automotive and electrical steel used in value-added products,
which bring in much higher profitability. Instead of forming a separate joint venture, JSW offered a 10 per cent stake to JFE, which was later on increased to 15 per cent. The result is that JSW Steel now tops the global list in terms of conversion costs. No other steel producer in the world can produce steel at a cost lower than JSW. In addition, the proportion of value-added products in sales has increased to two-thirds from one-fifth a few years ago. Since 2000, financial prudence along with consistent cost reduction helped the company survive the commodity crash in 2007 and 2010, along with mining bans and dumping by China. This is demonstrated by the company’s recent capacity expansion of 5 million tonnes at a cost of Rs15,000 crore, while Tata Steel plans to add similar capacity at Rs23,500 crore. Given the cost efficiency, JSW generated a 16 per cent return on capital employed, compared with under 10 per cent for Tata Steel and other peers. Despite having the most powerful balance sheet in the metals sector, JSW has carefully avoided bidding aggressively for steel assets on sale. Perhaps it understands the industry better than the others. After all, the financial discipline has ensured an annual capacity expansion of 16 per cent and annual growth in revenue and operating profit before depreciation (EBITDA) of 27 per cent over the past 16 years, the highest in the industry.
Dilip Buildcon is not a typical construction company that bids for projects and then relies on subcontractors to finish the job — a model that has failed quite a few developers. As a subcontractor in the 2000s, the company quickly understood the importance of timely and cost-effective execution. Having noticed how closely the fate of developers depended on subcontractors, it invested heavily on equipment and training staff to operate them — the core of all construction activity. After successful executions of a few projects, there was no looking back. Its order book grew rapidly from Rs20 crore about a decade ago to Rs25,000 crore currently. The company owns 10,000 various types of construction equipment and has a trained workforce numbering 35,000. Investment in technology systems and financial prudence has kept costs under control and various employee welfare schemes have helped maintain the attrition rate to below 5 per cent annually. In contrast, most other construction companies continue to depend on subcontractors and have been blaming the lack of
timely availability of equipment and trained workforce for execution delays and cost escalations. Dilip Buildcon reported a 19 per cent operating margin before depreciation (EBITDA margin), even after factoring its ownership of construction equipment, compared with under 12 per cent for its peers. Its return on capital employed was 18 per cent for FY18 — more than twice the industry average. With a strong emphasis on getting the basics right in the early days, Dilip Buildcon is now the most reliable developer for India’s infrastructure growth and the only one that has been able to deliver projects before time. It will be building nearly one-fifth of the country’s upcoming national highways. Another factor that gave the company an edge is its financial discipline. Its debt-equity ratio is 1 compared with three for some of the peers. The company has now started diversifying to other construction segments such as dams, buildings, bridges and airports to reduce dependence on roads.
Radhakishan Damani is a man of many qualities. But two principles that led the foundation of India’s most successful retailer, DMart, are superior understanding of the business financials, something which came naturally to him and a long-term vision executed with tremendous patience. From the very beginning, he understood the importance of cost and inventory management, which made him keep only the most successful brands at the store. Optimum space utilisation and product layout also played an important role. These practices ensured high inventory turnover and less capital blocked in unwanted inventories. He spent the first nine years in getting the business model right. In contrast, peers Pantaloon, Hypercity, Spencer, More, Cantabil and Vishal Retail were expanding aggressively across geographies. India’s organised retail was booming, and everyone wanted a larger share of the pie. Global giant Walmart, too, did not want to miss out and formed a joint venture with the Bharti Group in 2007-08. When its first store opened in 2000, DMart, was well positioned to ride the wave. But Damani’s earlier career as a stock trader had taught him well that herd mentality could be dangerous. He focused on keeping costs low with an eye on long-term viability. Retail businesses operate on very thin margins and any mistake could be fatal. Rather than overleveraging its
balance sheet to have a presence across regions like its peers, he started forming clusters, having several stores in the same area. DMart understood the customers there and this also saved inventory management costs. It preferred to own stores rather than rent, as in the long term this would give a significant cost advantage. After 2008, when others started to falter with high debt and inventories, DMart knew it’s time to accelerate. It took nine years to open the first nine stores. But, in the next nine years, its store count touched 175. With scale came better negotiating power, thereby making it possible to offer products at lower rates. All this has resulted in the company’s earnings growing consistently at 30 per cent over the past 10 years. Debt has never exceeded equity. Its working capital cycles are the lowest in the sector. The recent entry of Walmart in India (through Flipkart acquisition) and Amazon’s aggression have concerned DMart’s investors, but to the management, it makes no difference to the growth story — it’s going to be business as usual.
Arun Kumar, the promoter of Sequent, has always detested crowds. As a promoter of Strides Pharma (same group company), he targeted the Australian market when the rest of the Indian drug companies went to the US and Europe. While others focussed on oral drugs, Strides developed injectables before eventually selling the business. In 2013, when the US Food and Drug Administration became strict, he knew the supply disruption in the animal healthcare could be worse as the quality standards were compromised. So, he once again chose the road less travelled. Over the past three years, Sequent has made nine acquisitions in western Europe, Brazil, Mexico and Turkey to create a sales infrastructure on the ground. It also set up an active pharma ingredient (API) manufacturing facility in Visakhapatnam, which began selling products in the US early this year. It has now emerged as the largest Indian player in the animal healthcare space and has the top five global players — Zoetis, Merck, Bayer, Boehringer and Elanco — as customers. It has 14 API generic filings, the most, in the US. According to the management, Sequent is in a strong position in this dramatically changing API environment, led by the lack of reliability of Chinese supplies. It also has generic products contributing around half the revenue. Results have started to reflect in the numbers. In
the September 2018 quarter, revenue grew by 27 per cent to Rs251.7 crore, and operating margin improved by 310 basis points to 12.7 per cent. This resulted in a four-fold increase in net profit from continuing operations to Rs12.2 crore. It was also the tenth consecutive quarter of consistent growth. Strong R&D pipeline with more than 35 products under development should maintain the growth momentum, the company believes.
Thinking of tyre companies, the name Balkrishna Industries does not even come close to popular names such as MRF, Ceat or Apollo Tyres. It is still the fastest growing and most profitable Indian tyre company. From its beginnings as a supplier of scooter tyres, a venture that did not end well, Balkrishna has not deterred from taking tough decisions, which are now benefiting its shareholders — the stock has outperformed peers. Soon after it commissioned the first scooter tyre plant in 1984 for Bajaj, the demand for scooters plummeted as consumer preference shifted towards motorcycles. It then modified the plant to make bigger and heavier off-highway tyres (OHT), an uncharted territory. This continued for a while. Come early 2000s, the Indian economy was doing well and the IT industry was booming, thanks to India’s low-cost advantage. Balkrishna capitalised on this factor in tyre manufacturing. It started selling overseas. Its share of employee cost in sales was 5 per cent, compared with 18-20 per cent for global peers. Its products are increasingly used in agricultural machinery, mining and industrial segments as well as heavy vehicles meant for construction work. Its share in the global market has grown from 3 per cent in FY11 to 6 per cent in FY18. During this period, volumes grew 7.5 per cent annually. Today, exports make up 90 per cent of its sales.
Despite selling its tyres at 20-25 per cent discount to the competition, the company’s operating margin before depreciation (EBITDA margin) is as high as 30 per cent. For global names in the tyre business, OHT is a sideshow. For Balkrishna Industries, it is the core. The international market for OHT is worth nearly $15 billion.