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How to prevent sickness in enterprises

Published

6 years ago

January 10, 2019

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Enterprises need to undertake global benchmarking, so as to remain locally, regionally and globally competitive, writes Dr Rajen Mehrotra.

Industrial sickness in any country affects the economy of that country in a number of ways, such as loss of revenue to the Government, increase in non-performing assets held by the banks and financial institutions, erosion of capital invested by the owners/shareholders and likely loss of employment to persons working/associated with the enterprise and also in the supply and distribution chain of that enterprise. In India, post-independence (i.e. 1947 to the beginning of 1970s), when any large size industrial undertaking became sick, the Government was inclined to nationalise the industrial undertaking. This was to safeguard industrialisation plus existing jobs, and we thus landed up with a substantial number of nationalised engineering and textile companies in the country. These enterprises became part of Public Sector Units (PSUs) owned by the Government, and it was not easy for these units to be turned around.

To detect sick or potentially sick companies and industrial undertakings and for their possible revival, or for their closure, Government of India enacted The Sick Industrial Companies Act (SICA), 1985. An important provision of SICA was establishing two quasi-judicial bodies ? the Board for Industrial and Financial Reconstruction (BIFR), and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR). BIFR was set up as an apex board to spearhead handling the industrial sickness issue, including reviving and rehabilitating potentially sick units and liquidating non-viable companies. AAIFR was set up to hear appeals against BIFR orders. SICA was repealed and replaced by the Sick Industrial Companies (Special Provisions) Repeal Act of 2003, which diluted some SICA provisions and plugged certain loopholes. A key change in the new Act was that apart from combating industrial sickness, it aimed to reduce its growing incidence by ensuring that companies did not resort to a sickness declaration, merely to escape legal obligations and gain access to concessions from banks and financial institutions.

The Government brought in The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act) which allowed banks and other financial institution to auction residential or commercial properties (of Defaulter) to recover loans. The first Asset Reconstruction Company (India) was set up under this Act, but it did not yield the desired result. There was a time, when enterprises that were not in a position to pay the interest on their loans with the banks and financial institutions would negotiate concessions from the lenders. Reality is that, the banks and financial institution in turn, did grant concessions and agreed to take haircut. Times have changed, because of the Insolvency and Bankruptcy Code, 2016, wherein the banks and the lenders presently take the defaulting enterprises to the National Company Law Tribunal (NCLT) and the promoters could lose control and ownership of the enterprise, if there are buyers for the enterprise. We are well aware of two recent cases in the country where Bhushan Steel had been brought over by Tata Steel in 2018 and similarly Lakshmi Mittal-led Arcelor won a bid to acquire debt-laden Essar Steel. In 2019, though the transaction is presently pending before the Supreme Court of India.

Enterprises are bound to be impacted by external factors such as technological changes, input raw material shortage or price rise, increasing competition, infrastructure bottlenecks, increasing regulatory and environmental compliance, inadequate credit. Enterprises have to find suitable innovative approaches for continuing to remain viable and grow. Enterprises cannot change the external factors impacting them; but they have to learn, how to adapt and successfully face the impact of changes in the external environment affecting the enterprise, take appropriate corrective steps and ensure that the enterprise remains healthy and does not become sick.

The external environment is dynamic and keeps changing, wherein competitors continuously aim at improving market share, and new competitors also enter the market. Also, enterprises need to keep pace with technological changes, relook at the product portfolio and their margins, and also have an effective employee relations climate where changes can be implemented without delay and the business continues to remain viable and profitable and also avoid getting the enterprise into a debt trap. For this the owners / top management need to be proactive at every stage during the enterprise life cycle and manage the required change effectively and speedily.

Sickness of enterprises
Enterprises at birth should be born healthy, as the objective of setting up a business is that it must be viable and profitable, though there can be an initial gestation period. It is possible that over a period of time the enterprise could become sick for various reasons. Some of the internal factors which could lead to sickness are overestimating demand, unwarranted expansion, excess debt, underutilisation of plant capacity, failure to manage adequate working capital, failure to undertake timely modernisation and also an ineffective labour management relationship.

Sickness in enterprises can be for various reasons and they can be classified under broad three categories and there can be combinations of these also (i) errors of judgment by the owners/top management, which resulted in decisions which were not in the interest of the enterprise and hence the enterprise became unviable, (ii) negligence/mismanagement by the owners/top management in running the enterprise, and not taking corrective timely decisions to prevent the enterprise becoming vulnerable and unviable, (iii) fraud by the owners/top management in running the enterprise by diverting funds from the enterprise.

Presently in India, we are witnessing quite well-known leading private sector companies, which at one time were prosperous, then went through turbulence, and have now moved towards sickness and in certain cases the companies have also closed operations and are for sale or have been sold under the Insolvency and Bankruptcy Code, 2016. To name a few, some of these leading companies are: Amtek Auto, Dewan Housing Finance Corporation (DHFL), Infrastructure Leasing & Financial Services (ILFS), Jet Airways, J P Infrastructure, Lanco Infratech, Monnet Ispat, Ranbaxy, Ruchi Soya Industries, Videocon Group, Zee Entertainment, and others. The reasons for this situation to occur in each case will differ, but the end result is that each of these companies are sick and hence the lenders desire to reduce their loss by sale of the enterprise, if there is a buyer or for the enterprise to be liquidated.

In quite a few cases, the Directorate of Enforcement, Ministry of Finance, Government of India, which is a law enforcement agency and economic intelligence agency responsible for enforcing economic laws and fighting economic crime, has also launched cases of economic crime on the owners/top management. Some of the cases filed by the Directorate of Enforcement also include charges under Prevention of Money Laundering Act (PMLA), though these allegations are by and large denied by the owners / top management of the enterprise during litigation.

We also have public sector units (PSUs) in the country that are sick; for example Air India, Bharat Pumps and Compressors, Bharat Sanchar Nigam (BSNL), BHEL – Electrical Machines, HMT Machine Tools, Heavy Engineering Corporation, Hindustan Cables, Hindustan Paper Corporation, Hindustan Photo Films Manufacturing, HMT Bearing, HMT Chinar Watches, HMT Watches, Indian Telephone Industries (ITI), Instrumentation Kota, Mahanagar Telephone Nigam (MTNL), Nagaland Pulp and Paper Company, NEPA, Richardson and Cruddas (1972), Sambhar Salts, Tungabhadra Steel Products, Triveni Structurals, Tyre Corporation of India and others, but are continuing to live in comatose stage, as Government is continuing to fund them.

Quite many of these enterprises are over staffed coupled with low work ethics, which have continued over a very long time period. One also needs to analyse, why these PSUs became sick and what led to the sickness and who were responsible for it. Since Government is the owner of these enterprises, by and large the top management of these enterprises do not face the strict scrutiny of the Directorate of Enforcement, Ministry of Finance, Government of India.

Categories of enterprises
Enterprises in India can be divided under four categories by virtue of their birth and present status on sickness and health (i.e. born sick – living sick, born sick – living healthy, born healthy – living sick and born healthy – living healthy). The worst is born sick – living sick and the best is born healthy – living healthy. The following matrix will indicate the various parameters which could be responsible for the defined status.

In the present competitive business environment, one needs to perform much above mediocrity. Innovation of products and services is an essential ingredient of business when expectancy of customer’s change. If the enterprise does not keep pace with changing time, it turns not only sick but can also become extinct. For example, Hind Cycles and Raleigh, both leading bicycle manufacturers in India couldn’t foresee the consumer preference of automated two-wheelers (scooters/ moped/ motorcycles) over bicycles. On the contrary, Hero Cycles, once the biggest manufacturers of bicycles, foresaw what is coming and diversified into motorcycles and became one of the largest manufacturers of automated two-wheeler apart from still continuing to make bicycles. Same is also true of Premier Automobiles and Hindustan Motor, who were one time the monopoly supplier of cars (i.e. four wheelers) in India and are extinct today. Also, efficient management of funds, ensuring a profitable market for their product plus an effective industrial relations climate is a very important ingredient of a successful enterprise. At times, it is also outdated technology coupled with other factors listed above, which eventually results in the sickness of the enterprise, and if not corrected in time leads to the death/sale of the enterprise.

Conclusion
We recently heard of VG Siddhartha Hegde, billionaire businessman and founder of Caf? Coffee Day committing suicide on July 29, 2019. There are various reports emerging in the media about how the enterprise started by him, was presently going through financial difficulties and allegations of "scandalous" business practices and "illegal" wealth generation by his two companies Way2Wealth (earlier known as Sivan Securities and a Caf? Coffee Day company) and Alpha Grepp (apparently operating from Singapore and Hong Kong). Since Hegde is dead, the true story is unlikely to fold and various inferences will be drawn, though a forensic audit has been undertaken by the management of the enterprise. Enterprises need to ensure that they conduct their business in an ethical manner and avoid getting into a debt trap, which they cannot service, otherwise the enterprise will one day close down or get sold to another owner.

Enterprises, which were doing well, have become sick in certain cases, because of reckless expansion, which was not sustainable. There are also cases where enterprises have faltered as they took decisions which have negatively impacted the business and they could not recover. These are enterprises making quick gains in one area but the same did not guarantee sustainability for the total enterprise.

Enterprises need to undertake global benchmarking, so as to remain locally, regionally and globally competitive. There are examples in India of enterprises like Asian Paints, Gujarat Co-operative Milk Marketing Federation (GCMF), Hindustan Unilever, ITC and others, which have flourished over the years, because of constant innovations as per the need of the hour and the management of each of these enterprises made it a practice and a working philosophy to constantly innovate and move as per the changing environment and ensure that they remain healthy.

ABOUT THE AUTHOR:
Dr Rajen Mehrotra is Past President Industrial Relations Institute of India (IRII), Former Senior Employers" Specialist for South Asian Region with International Labour Organization (ILO) and Former Corporate Head of HR with ACC Ltd. and Former Corporate Head of Manufacturing and HR with Novartis India Ltd. E-Mail: rajenmehrotra@gmail.com

(Published in September 2019 issue of Current Labour Reports & Arbiter)

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Price hikes, drop in input costs help cement industry to post positive margins: Care Ratings

Published

3 years ago

October 21, 2021

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Region-wise,the southern region comprises 35% of the total cement capacity, followed by thenorthern, eastern, western and central region comprising 20%, 18%, 14% and 13%of the capacity, respectively.

The cement industry is expected to post positive margins on decent price hikes over the months, falling raw material prices and marked drop in overall production costs, said an analysis of Care Ratings.

Wholesale and retail prices of cement have increased 11.9% and 12.4%, respectively, in the current financial year. As whole prices have remained elevated in most of the markets in the months of FY20, against the corresponding period of the previous year.

Similarly, electricity and fuel cost have declined 11.9% during 9M FY20 due to drop in crude oil prices. Logistics costs, the biggest cost for cement industry, has also dropped 7.7% (selling and distribution) as the Railways extended the benefit of exemption from busy season surcharge. Moreover, the cost of raw materials, too, declined 5.1% given the price of limestone had fallen 11.3% in the same aforementioned period, the analysis said.

According to Care Ratings, though the overall sales revenue has increased only 1.3%, against 16% growth in the year-ago period, the overall expenditure has declined 3.2% which has benefited the industry largely given the moderation in sales.

Even though FY20 has been subdued in terms of production and demand, the fall in cost of production has still supported the cement industry by clocking in positive margins, the rating agency said.

Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. The cement sector will be seeing a sharp growth in volumes mainly due to increasing demand from affordable housing and other government infrastructure projects like roads, metros, airports, irrigation.

The government’s newly introduced National Infrastructure Pipeline (NIP), with its target of becoming a $5-trillion economy by 2025, is a detailed road map focused on economic revival through infrastructure development.

The NIP covers a gamut of sectors; rural and urban infrastructure and entails investments of Rs.102 lakh crore to be undertaken by the central government, state governments and the private sector. Of the total projects of the NIP, 42% are under implementation while 19% are under development, 31% are at the conceptual stage and 8% are yet to be classified.

The sectors that will be of focus will be roads, railways, power (renewable and conventional), irrigation and urban infrastructure. These sectors together account for 79% of the proposed investments in six years to 2025. Given the government’s thrust on infrastructure creation, it is likely to benefit the cement industry going forward.

Similarly, the Pradhan Mantri Awaas Yojana, aimed at providing affordable housing, will be a strong driver to lift cement demand. Prices have started correcting Q4 FY20 onwards due to revival in demand of the commodity, the agency said in its analysis.

Industry’s sales revenue has grown at a CAGR of 7.3% during FY15-19 but has grown only 1.3% in the current financial year. Tepid demand throughout the country in the first half of the year has led to the contraction of sales revenue. Fall in the total expenditure of cement firms had aided in improving the operating profit and net profit margins of the industry (OPM was 15.2 during 9M FY19 and NPM was 3.1 during 9M FY19). Interest coverage ratio, too, has improved on an overall basis (ICR was 3.3 during 9M FY19).

According to Cement Manufacturers Association, India accounts for over 8% of the overall global installed capacity. Region-wise, the southern region comprises 35% of the total cement capacity, followed by the northern, eastern, western and central region comprising 20%, 18%, 14% and 13% of the capacity, respectively.

Installed capacity of domestic cement makers has increased at a CAGR of 4.9% during FY16-20. Manufacturers have been able to maintain a capacity utilisation rate above 65% in the past quinquennium. In the current financial year due to the prolonged rains in many parts of the country, the capacity utilisation rate has fallen from 70% during FY19 to 66% currently (YTD).

Source:moneycontrol.com

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Wonder Cement shows journey of cement with new campaign

Published

3 years ago

October 21, 2021

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The campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV…

ETBrandEquity

Cement manufacturing company Wonder Cement, has announced the launch of a digital campaign ‘Har Raah Mein Wonder Hai’. The campaign has been designed specifically to run on platforms such as Instagram, Facebook and YouTube.

#HarRaahMeinWonderHai is a one-minute video, designed and conceptualised by its digital media partner Triature Digital Marketing and Technologies Pvt Ltd. The entire journey of the cement brand from leaving the factory, going through various weather conditions and witnessing the beauty of nature and wonders through the way until it reaches the destination i.e., to the consumer is very intriguing and the brand has tried to showcase the same with the film.

Sanjay Joshi, executive director, Wonder Cement, said, "Cement as a product poses a unique marketing challenge. Most consumers will build their homes once and therefore buy cement once in a lifetime. It is critical for a cement company to connect with their consumers emotionally. As a part of our communication strategy, it is our endeavor to reach out to a large audience of this country through digital. Wonder Cement always a pioneer in digital, with the launch of our IGTV campaign #HarRahMeinWonderHai, is the first brand in the cement category to venture into this space. Through this campaign, we have captured the emotional journey of a cement bag through its own perspective and depicted what it takes to lay the foundation of one’s dreams and turn them into reality."

The story begins with a family performing the bhoomi poojan of their new plot. It is the place where they are investing their life-long earnings; and planning to build a dream house for the family and children. The family believes in the tradition of having a ‘perfect shuruaat’ (perfect beginning) for their future dream house. The video later highlights the process of construction and in sequence it is emphasising the value of ‘Perfect Shuruaat’ through the eyes of a cement bag.

Tarun Singh Chauhan, management advisor and brand consultant, Wonder Cement, said, "Our objective with this campaign was to show that the cement produced at the Wonder Cement plant speaks for itself, its quality, trust and most of all perfection. The only way this was possible was to take the perspective of a cement bag and showing its journey of perfection from beginning till the end."

According to the company, the campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV. No other brand in this category has created content specific to the platform.

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In spite of company’s optimism, demand weakness in cement is seen in the 4% y-o-y drop in sales volume. (Reuters)

Published

3 years ago

October 21, 2021

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Cost cuts and better realizations save? the ?day ?for ?UltraTech Cement, Updated: 27 Jan 2020, Vatsala Kamat from Live Mint

Lower cost of energy and logistics helped Ebitda per tonne rise by about 29% in Q3
Premiumization of acquired brands, synergistic?operations hold promise for future profit growth Topics

UltraTech Cement
India’s largest cement producer UltraTech Cement Ltd turned out a bittersweet show in the December quarter. A sharp drop in fuel costs and higher realizations helped drive profit growth. But the inherent demand weakness was evident in the sales volumes drop during the quarter.

Better realizations during the December quarter, in spite of the 4% year-on-year volume decline, minimized the pain. Net stand-alone revenue fell by 2.6% to ?9,981.8 crore.

But as pointed out earlier, lower costs on most fronts helped profitability. The chart alongside shows the sharp drop in energy costs led by lower petcoke prices, lower fuel consumption and higher use of green power. Logistics costs, too, fell due to lower railway freight charges and synergies from the acquired assets. These savings helped offset the increase in raw material costs.

The upshot: Q3 Ebitda (earnings before interest, tax, depreciation and amortization) of about ?990 per tonne was 29% higher from a year ago. The jump in profit on a per tonne basis was more or less along expected lines, given the increase in realizations. "Besides, the reduction in net debt by about ?2,000 crore is a key positive," said Binod Modi, analyst at Reliance Securities Ltd.

Graphic by Santosh Sharma/Mint
What also impressed analysts is the nimble-footed integration of the recently merged cement assets of Nathdwara and Century, which was a concern on the Street.

Kunal Shah, analyst (institutional equities) at Yes Securities (India) Ltd, said: "The company has proved its ability of asset integration. Century’s cement assets were ramped up to 79% capacity utilization in December, even as they operated Nathdwara generating an Ebitda of ?1,500 per tonne."

Looks like the demand weakness mirrored in weak sales during the quarter was masked by the deft integration and synergies derived from these acquired assets. This drove UltraTech’s stock up by 2.6% to ?4,643 after the Q3 results were declared on Friday.

Brand transition from Century to UltraTech, which is 55% complete, is likely to touch 80% by September 2020. A report by Jefferies India Pvt. Ltd highlights that the Ebitda per tonne for premium brands is about ?5-10 higher per bag than the average (A cement bag weighs 50kg). Of course, with competition increasing in the arena, it remains to be seen how brand premiumization in the cement industry will pan out. UltraTech Cement scores well among peers here.

However, there are road bumps ahead for the cement sector and for UltraTech. Falling gross domestic product growth, fiscal slippages and lower budgetary allocation to infrastructure sector are making industry houses jittery on growth. Although UltraTech’s management is confident that cement demand is looking up, sustainability and pricing power remains a worry for the near term.