CHENNAI, JUNE 8:
Leading abrasives and industrial ceramics maker Carborundum Universal Ltd, part of the Murugappa Group, has a strong international presence that used to account for about half of its topline. However, it slipped into a stagnant mode in the past few years due to some mistakes and change in global market situation. After some rejig of its international businesses, the company is now confident of getting back to strong double-digit growth. In an interview with BusinessLine, K Srinivasan, Managing Director, outlines the growth map. Excerpts:
What went wrong in the past few years?
We were growing at about 26 per cent for many years. But the past four years have been relatively flat. We had what I call ‘black swan’ events. The entire SiC micro grit business at Kochi disappeared. This was one big disaster. Secondly, the Russian currency depreciated significantly against US dollar from the level of 28-30 to 75-80 due to oil price fall and sanctions. This meant our business, which was worth about $100 million plus, fell by 50 per cent in about six months. We had to clean up South African and Chinese businesses as they were struggling.
What kind of restructuring did you undertake in China?
In China, we completely sold land and building. But we kept our sales operations. We paid all our debt and became debt-free. Chinese operations have been changed into some kind of an Apple-Foxconn model. We keep our design and input material. But our lines have been leased out or contracted to other manufacturers in China. We get our products done through Chinese manufacturers. Size of sales in that country didn’t come down, but our assets became lighter.
You were bullish on China. Why did you change your model?
We have not abandoned China. But we changed the business model. We realised that there is a certain cost arbitrage available to state-owned enterprises (SOE) in China. This is not there for international companies. We were profitable when we were in a joint venture (JV) with an SOE. Because, SOEs have the advantage of pushing the prices back and forth. My suppliers to the JV were also SOEs. So profit can move up and down in the value chain in a very brotherly manner between SOEs. So, they were not cooking books, but had the advantage of flexing their value chain up and down. As soon as we become an independent 100 per cent subsidiary, those benefits died. Our costs were higher and we started making losses.
Nobody was backing and we were buying everything on our own. Later, we realised that there is a certain part where you create value and there is certain another part where you only have disproportionate costs. We decided that we shouldn’t get into hardcore manufacturing.
Now we own design, technology, quality and branding, while production is done by a Chinese SOE. Our presence in China will get even more distributed in a larger area, but it will be an asset light model.
There is enough capacity available practically for everything in China, you don’t have to own any assets. It will be a collaborative building of business in China.
What about the South African business?
We shrunk Foskar Zirconia (South African subsidiary) and shifted one of the largest plants to our SEZ in Kochi. South Africa is a great country for a vacation or holidays. It has all the advantages — English speaking population, very similar system, good law and order. Unfortunately, it is still a fractured society and not a business-friendly environment to run a competitive business. Advantages in terms of cheap raw material or cheap power are no longer there. Without a local market, there is no room for growth. Plus there are some other complexities of running the business. We decided to cut down our commitment and repositioned all our assets and paid back all our debt.
Are your international businesses generating profits now?
Except our US business, all others are profitable. The US will also come to a good shape as we have done some changes. Revenue mix has shifted a little bit. We were running 50:50 (domestic vs international). Last year, domestic became bigger than international (53:47).
But, we expect it will go back again in favour of international at 60:40 in the next couple of years. Though India business is growing, the opportunities outside the country are even bigger. Going forward, our focus will be on cutting edge products and less of commodities.
Post-rejig of some of your operations, what are your growth targets?
With all the clean up in the recent past, we have become a zero-debt company. We are hungry for growth. Hopefully from this year we should get back to strong double-digit growth. The capacities we shifted and commissioned can take us to about ₹3,500 crore in 2-3 years. This is what we are aiming for. We are worried only about transition of GST in abrasives in Q1. This year, after 3-4 years, we will get back to big number growth. Our immediate objective is to grow the revenues to ₹3,500 crore in 2-3 years from ₹2,200 crore now.
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