The Hindu Business Line : `We doubled our turnover without raising capacity'

The year 2004-05 promises to be good, with sales projections going up to Rs 116 crore from around Rs 100 crore expected this year. Alongside, the company has just completed an exercise of balance sheet clean-up, scrubbing off the accumulated losses and contingency claims against the share premium account.

In an interview to Business Line, the company's Managing Director, Mr Murali Venkataraman, speaks about the turnaround story.

Excerpts:

What went wrong with your company and how was it set right?

In late 1990s, we had a number of adverse issues. First, both domestic and overseas demand suddenly collapsed due to shortage of funds with electricity boards and the South-East Asian crisis. This was a new situation for companies in the electrical sector, for in the previous two to three decades we never had faced a demand constraint.

We then had two plants. The one in Chennai had a lot of debt on its balance sheet and was badly affected by the postponement of orders. The other in Bangalore, that was making substation equipment, was assembly-oriented, had less fixed costs, consequently the demand constraint was less of a problem.

We decided that from a strategic viewpoint, it was better to retain the problematic plant because we knew there was more value to be made out of a turnaround, the ability to survive new environment with competitive pressures was much more, export possibilities were much more and strategic relationships were possible. So, we divested the plant in Bangalore, (late 2000), for a consideration of Rs 50 crore and used the proceeds to considerably pare our debts. We had reduced our debt by about Rs 30 crore. We used the rest of the funds to modernise the Chennai operations.

As a result, interest costs came down drastically from Rs 17 crore to Rs 7 crore. Modernisation led to more efficiency. We also reduced manpower, which brought the wage bill from 18 per cent to 12 per cent. We brought in energy conservation measures, which saves Rs 2 crore.

With these, last year we ended up with a profit of about Rs 4.6 crore. For this year, we had projected a net profit of Rs 6 crore and we are on target.

The important issue is this: the turnover between 1999 and 2003 has doubled from Rs 50 crore to Rs 100 crore, without any investments in expansion in capacity — capacity went up roughly by the order of about 2,000 tonnes to 11,800 (now, after some investments, 12,800 capacity.

You have said that you used ABC costing to help turnaround. How?

Yes. Unlike in conventional costing, (overhead allocation) is based on what time is spent on each activity. After we completed this, it threw open a lot of very interesting data to us. For instance, where we thought we were making profitable products, based on conventional costing, we found we were actually losing money.

As a result of this, we rationalised the number of products — we brought down the number from over 1,500 to about 250-300. Second point, we went one step in using this activity, costing, to decide on pricing and also to decide at what price levels we could take orders. We also went in for a Business Process Reengineering exercise. We used Linear Programming models to determine the optimum contribution. The combination of ABC and BPR really helped the turnaround.

Explain the balance sheet clean-up moves?

We had accumulated losses of past years of about Rs 20 crore, then the settlement of corporate guarantees of Rs 13 crore and Rs 6 crore of advances to the subsidiary. We had given corporate guarantees and advances to a subsidiary company, W S Telesystems, which was making switching equipment.

We took the entire Rs 20 crore comprising Rs 13 crore plus advances of about Rs 8 crore of the carry forward losses (which was Rs 12 crore that that time) and set off against Rs 27 crore in the share premium account. We will take effect in the balance sheet this year. This restores dividend-paying capacity to the company.

What is your comment on the outlook?

Outlook is very good. The Indian insulator industry is today recognised by global players such as ABB and Alstom for its quality and competitiveness. They want to enter into long-term relationship with companies like ours.

In the domestic market, the Government is keen on the national power grid. Power Grid Corporation of India Ltd is noted for its efficiency in implementing large projects. That automatically spins off to good business prospects.

The other aspect is the accelerated power reform and development programme of the Government for restructuring the efficiency of the SEBs. They are entering into MoUs with state governments, giving them funds for power reforms. That will also help companies like ours.

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