By Sushila Ravindranath
India Cements, the cement industry leader in the South, has seven integrated plants in Tamil Nadu and Andhra Pradesh, one in Rajasthan and two grinding units, one each in Tamil Nadu and Maharashtra. It has a capacity of 15.5 million tonnes. It has coal mines in Indonesia, ships to carry them, and captive power plants in Tamil Nadu and Andhra. Its turnover in 2013 was `5310 crore.
When N Srinivasan became the Managing Director of India Cements in 1989, its balance sheet was in the red. Labour indiscipline was rampant. The organisation lacked vision, direction and leadership. Input costs were spiralling while cement prices were under pressure in a glut market situation. For most entrepreneurs, this would have been a nightmare. But for Srinivasan, it was a dream come true. He was confident of turning around a company which had once been co-promoted by his father. India Cements was one of the first cement plants to come up in the country in Tirunelveli district in Tamil Nadu in 1946. It was also the first company in India to have a public issue.
In less than six years, under his leadership, the company’s sales more than quadrupled to `629 crore, to become the largest cement company in the south with a market share of 14 per cent. More importantly, it showed a healthy net profit of `47 crore. In his low key style Srinivasan did several daring things which made the rest of the country sit up and take notice. He aggressively bid for the million tonne Chilamkur cement plant of Coromandel Fertilisers Ltd. in 1990, a year after he took over the management of India Cements. The company had made an operational loss. The market was in the dumps.
Srinivasan offered `125 crore for a plant of 1983 vintage, which was widely believed to be suffering from structural and design defects. Given the circumstances, this was considered a rash move. “I was prepared to pay the price to emerge as the largest cement manufacturer in the south. With it, we gained a tremendous edge in marketing and entered the big league,” says Srinivasan.
For the kind of balance sheet the company had at that time, it required a lot of persuasion from its side to get loans from financial institutions. For the company it was a great bargain, since it neither had the funds to build a new million tonne plant, nor the time to wait through the gestation period. “It was a calculated move, not a gamble. A lot of thought had gone into it. Our conclusions were backed by in-depth technical studies. All this is beside the point. Where I scored over others was in my grasp of the projected outlook for cement, which, thank God, proved accurate.” he maintains.
Srinivasan is the son of TS Narayanaswamy who co-promoted the company with SNN Sankaralinga Iyer, grandfather of the Chairman of the Sanmar Group, N Sankar. The company was run in the 1970s by Narayanaswamy and KS Narayanan, Sankar’s father. On the untimely death of Narayanaswamy, Srinivasan, then barely out of college, was made Joint Managing Director.
(Courtesy: India Cements website).
Subsequently, a rift resulted in the removal of Srinivasan in 1979. Though evicted, Srinivasan wouldn’t give up. He went to court against his ouster and the company’s annual general meetings became noisy affairs. As the battle raged, FIs which held substantial equity, took control of the company. They appointed their nominees to run India Cements. Srinivasan was determined to get back to the company. He knew he had to get close to the powers that were in Delhi. He won friends and influenced people in Delhi. This was the time when the DMK leader Murasoli Maran became a close friend. Srinivasan has never denied his close association with Maran.” My single-minded objective was to get India Cements back,” he has always said.
In the ‘80s when everybody was diversifying wildly, ITC, which was not yet a big name in hotels and other businesses decided to bid for India Cements. Cement seemed a good business to invest in for many wanting to diversify. The industry had been partially decontrolled. The institutional nominees running India Cements were all for it and ITC bought the equity holdings of LIC and UTI. “I had to approach the courts and the Company Law Board and get this deal nullified,” says Srinivasan. ITC finally gave back the shares to the institutions.
A decade later, the Srinivasan and Narayanan families buried their differences. Sankar was made Chairman and Srinivasan the Managing Director. Srinivasan had pulled out all stops, and finally got what he wanted. We will know how he did it when he chooses to write his story. He showed the kind of tenacity which would become the hallmark of all his activities, be it business or sports. Eventually he bought out his brother Ramachandran’s and Sankar’s shares to become the largest shareholder (28 per cent) in the company.
Srinivasan’s comeback at ICL coincided with the time when the cement industry was waking up to total decontrol. “I realised that we needed enormous marketing skills to face the new challenges. Plant location and nurturing of strong brands in home markets became crucial,” he says. In the era of controls, a cement company had to merely produce cement. Equalised freight rates allowed movement across the country. But, after decontrol, cement became a freight sensitive commodity. Srinivasan and his marketing team seized the opportunity to reinforce the company’s brand leadership in the south where ICL fortunately had a good distribution network.
Srinivasan showed a lot of aggression in his acquisition strategies but he kept his accounting and investment policies conservative. In October 1994, ICL raised about $49.5 million through a GDR issue. Despite difficult market conditions at that time, it was oversubscribed. It was one of the few Indian GDRs issued in 1994 to be trading above the issue price. The proceeds were spent on upgradation of Chilamkur and other units, setting up of another plant and the retiring of debts. After the Euro issue the company had enough equity to handle its debt requirements.
Srinivasan set up a shipping division in the early 1990s. That did not surprise anyone who knew him. Srinivasan’s father, TS Narayanaswamy, was a pioneer of Tamil Nadu’s shipping industry. He was a co-promoter of the South India Shipping Corporation (SISCO), which was in the dry bulk cargo trade. When SISCO was put up for sale in 1990, Srinivasan did not bid for it. He was committed to acquiring the Chilamkur plant from Coromandel, which was more important from ICL’s core competency point of view. Eventually, the Ruias of Essar bought the stakes of the copromoter Tarapore and the Tamil Nadu government to acquire the highly successful SISCO.
He did not rush into a diversification binge as many groups in this period did. “We do not believe in diversification for the sake of diversification. We are also wary of entering fields unfamiliar to us. We step in only when we are sure of success.” His executives with one voice credited ICL’s turnaround to the leadership and vision of Srinivasan. As Srinivasan himself put it, “I think I have succeeded in motivating my team to perform to the best of its ability. I did it mostly by setting an example and also by involving them. The emphasis has been on application, commitment and a conservative approach.”
By 1996 ICL’s turnover had gone up to `832-crore. It was building size. A number of acquisitions had been completed. These included its `198-crore bid for the public sector Cement Corporation of India’s 0.4 million tonne plant at Yarraguntla in Andhra Pradesh and Visakha Cements, another Andhra-based company. Visakha was then setting up a 0.9 million tonne plant and India Cements bought out its entire equity at a cost of `60 crore. In addition, it had taken over Aruna Sugars Finance and Aruna Sugar’s license to put up a 2,500 MT per day sugar plant in Karnataka. The hostile takeover of Raasi Cement by India Cements that started with a bang finally ended with a whimper. Ever since Srinivasan announced his intentions to bid for Raasi Cement, its Executive Chairman, BV Raju, made noises about coming up with a counter-offer. He was all the while negotiating with Srinivasan to sell his 32 per cent shares in the company. Raju got over `150 crore from the sale of his shares. For Srinivasan this was a great victory. He won despite stiff opposition from the institutions.
Srinivasan’s boldness in digging his heels in the face of opposition from the FIs set a new precedent for many other companies to follow. It was widely acknowledged that there was no political pressure brought upon by Srinivasan either at the Centre or at the state level. Financial industry sources were delighted that these kind of M&A activities shored up the stockmarkets. Raasi, which was never a star performer on the bourses, saw its price shooting up to `260 from `60 in end-1997.
This was a time when FIs disapproved of deals which did not receive their blessings. IDBI Chairman SH Khan apparently was not keen on this takeover. He went on record saying that IDBI would not fund hostile takeovers. Many in the industry said that institutions like IDBI were so used to playing God that they found it difficult to come to terms with market realities. IDBI apparently faced a lot of pressure from Gujarat Ambuja, L&T and the Aditya Birla group to prevent the Raasi takeover by India Cements as they all wanted a larger share of the southern market.
Eventually Raasi got delisted and merged with India Cements so that the company could get the benefits of the combined operations as early as possible. As it happened India Cements also ended up acquiring the one million tonne Vishnu Cements in which Raasi had a 40 per cent stake. This was originally not a part of the deal. However, when India Cements came up with its open offer for Raasi Cement, it was discovered that the latter’s entire stake in Vishnu had been sold to some of the promoter’s group companies.
By August 1997, India Cements had made big investments in Raasi and its interest in the company was out in the open. At this point Raasi hurriedly convened a couple of board meetings and its shares in Vishnu were divested at `10 each, allegedly to Raju’s friends and relations. After the takeover was completed, India Cements examined Raasi’s books and found that it had violated the Sebi takeover guidelines which prohibit the target management from disposing of any asset during the open offer period. Then India Cements staked a claim to the control of Vishnu Cements complaining to SEBI that a valuable asset was stripped from the company to the detriment of Raasi’s shareholders. Vishnu Cements was part of Raasi and had been sold below par. A million-tonne cement plant had been acquired for barely `9 crore. Srinivasan had his way. India Cements ended up acquiring Vishnu Cements as well.
In less than two years, India Cements’ capacity had grown to nine million tonnes. The acquisitions cost was `1,600 crore and was predominantly funded by debt. What was not anticipated was that every other cement company worth its name would charge to the southern region to set up capacities before the government withdrew all sales tax-related incentives. Without these incentives no cement plant was viable at the cement prices prevailing then. Too much capacity was added which sent prices crashing. At one point a truckload of sand cost more than a truckload of cement in parts of AP. India Cements began to incur losses and its ability to service debt suffered.
By the turn of the century the company had defaulted on some of its loans. Production had to be curtailed as there was no working capital. Srinivasan sold Vishnu Cements to keep the company going. This could not resolve the crisis. He said in an interview to Business Today, “We realised we were in a hole and opted for a corporate debt restructuring (CDR) scheme, which came into effect from January 2003. The CDR bought us time to focus on operations. We shed manpower (about 1,000 employees), cut production costs, sold our ships and some land.”
In September 2005, India Cements came out with a Global Depository Receipts issue while still in the CDR scheme. “Many warned us that it was an unwise thing to do. Investors would not even look at a company that had defaulted on its debt obligations. But we went ahead and raised `477 crore, which was used to pay off some debt. That was the turning point.” said Srinivasan. Soon cement prices began to improve and this accelerated the company’s revival. In the following years, he raised more funds from the market to finance the company’s growth plans. From 2010, the cement industry has been facing problems once again. The economic slowdown had hit the company hard. According to the company’s annual report, “With the huge supply overhang in the South, the industry had to face the brunt of severe competition in the market resulting in lowering of the prices particularly in Andhra Pradesh during the second half of this fiscal. The cost of production has been impacted with the increase in the price of input materials, fly ash, gypsum, power and fuel and higher transport charges.”
The cement industry twenty-five years ago was in a different place as most industries had been set up in the pre-liberalisation area. It was dominated by Indian giants based in the West such as ACC promoted by the Tatas. By 2004, the scene changed totally. The management control of ACC was taken over by Swiss cement major Holcim in 2004. Gujarat Ambuja which was the most celebrated cement company in the country which had tied up with L&T also sold out to Holcim. Today, the largest Indian cement company is Birla Ultratech, which is part of the Grasim Group. It took over L&T Cement.
Holcim itself has announced its merger with the French cement maker Lafarge. If the merger takes place it would dwarf every other player in the world. The industry is dominated by a lot of international players who have been picking up Indian cement companies all over the country. About 60 per cent of cement industry is controlled by four or five large players and the rest are fractured small units here and there.
In this situation can Srinivasan hold on to his company and make it profitable once again? Can he retire his company’s debt? Srinivasan remains his unflappable self. He says, “One cannot borrow all the time to grow. One cannot try and increase market share in a fractured industry with debt. In the last few years capacity has shot up from 170 million tonnes to 320 million. Maybe there will be a resurgence. Then I see a lot of M&A activity happening. It always takes much longer to set up a new plant. Let’s look at the positive side. There are only eight states with limestone reserves. Tamil Nadu is one of them. Per capita cement consumption compared to the rest of the developed world is very low in India. I have a sugar company which provides 4000 tonnes of cogeneration capacity. I have 25000 acres of land bank. We have invested in coal and power and shipping. In a licence free atmosphere, there are no short cuts to success.”
Is he paying as much attention to cement as he did to cricket? People who know him say he will never sell out India Cements.
Excerpted with permission from Surge: Tamil Nadu’s Growth Story by Sushila Ravindranath, Westland, August 2016.
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