Mr. Baba N. Kalyani, Chairman, Kalyani Group
How the Kalyani group is transforming itself into a major force in the forgings and auto ancillary industries.
The Rs16bn Kalyani group, based in Pune, has extensive presence in the forgings and automobile ancillaries industry. The company?s flagship company, Bharat Forge Ltd, is one of the largest and most modern forgings plant in the world. The group has alliances and joint ventures with leading global companies like Meritor Automotive, Carpenter Technology, Hayes Lemmerz, Robert Bosh and Sharp Corporation. In the early 90s, the group had extensive plans to diversify into financial services and infrastructure. However, in the current downtrend it has been one of the first groups to commence restructuring and start focussing on its core activities.Leading the Kalyani group?s restructuring efforts from the front is the 50 year old group Chairman, Mr. Baba N. Kalyani. Mr. Kalyani is a Mechanical Engineer from the Birla Institute of Technology, Pilani and then obtained his M.S. from Massachusetts Institute of Technology, USA.
Mr. Kalyani is currently the Chairman of Western Region of CII. In this exclusive interview with Anirudha Dutta of India Infoline, he discusses how the Kalyani group is transforming itself into a major force in the forgings and auto ancillary industries. He also discusses the reasons behind forging successful joint venture with MNC partners. Present alongwith Mr. Kalyani was the person who is spearheading the M&A activity in the group ? Mr. P. C. Bhalerao, Executive Director of Bharat Forge.
Q. Most of the Kalyani group companies operate in sectors closely linked to the health of the company. This year there has been a lot of talk about the economy reviving. Are you seeing any signs of revival and is pricing power coming back?
Yes, we are witnessing a turnaround in the commercial vehicles and automobile sector. But all sectors are not exhibiting the same growth trends. In CII we have been monitoring the growth rates of various industries and we find that automobiles and consumers are exhibiting high growth. Capital goods continue to exhibit poor growth rates. The reason is that in the last three years hardly any new investment has taken place. And without a sustained revival in the capital market, investment plans are unlikely to be revived. Currently with most business houses focus areas are restructuring and cost cutting. Large sections are under serious difficulties and growth is not a priority area.
As far as pricing power is concerned ? the answer is both yes and no. The way I see it is that industry is getting regrouped ? this is apart from the internal restructuring that companies are doing. In the regrouping, companies with higher capabilities are slowly regaining pricing power. However, when the companies have not developed their capabilites, they continue to lose pricing power. Companies that are going to succeed in this new environment are companies who cross this barrier.
We believe that we have crossed this barrier by developing a technological base in all our companies and working in global markets. Global market presence is important because these are discerning markets. For example, in forgings today most Indian OEMs and overseas people want components and not raw forgings. Thus, there is a differentiation that is coming in.
The same is happening today in the alloy steel business as well. Technology, which is lowering costs of production and helping us to produce products in narrower specification bands, will be the distinguishing factors ? it will separate the winners from the losers.
Q. The group has taken several restructuring initiatives. Could you explain to our readers the ongoing restructuring of your steel business?
Restructuring of our steel business has been a masterstroke. Otherwise it is very doubtful whether we would have survived in the alloy steel business. Our strategy is to convert the Mundhwa plant into a plant, which will produce high value steel for both the domestic and international markets. We have given a minority stake to Carpenter Technologies of USA. Carpenter is a very focussed player in the niche markets of high value added steel. To give you an idea, while ordinary engineering or forging grade steel sells for US$500/ ton, the speciality steel fetches US$1,300-1,500/ ton. We will be moving 50% of our production in the JV company over a period of 4-5 years into this high value added segment, which includes tool steels, die steels, valve steel and special stainless steel. In fact, we have already started supplying die steel to Bharat Forge, which was earlier being imported from Japan and Germany. Carpenter is helping us to market our product in USA. Kalyani Carpenter, the JV company, is investing in finishing facilities and with marginal investment our capacity will increase to 120,000tpa.
In Hospet, we alongwith Mukand Ltd, have set up a Kalyani Ferrous Ltd ? out of the two mini blast furnaces (MBFs), one has been commissioned and it is performing very well. Our share of production is 42% and we will be using it to roll billets and blooms in the rolling mills set up by Kalyani Steels at Hospet. The products from this plant will be supplied for standard engineering applications like forgings. We are presently producing at 12,000 tons per month of pig iron and will gradually increase it to 25,000 tons per month.
Q. Isn?t the market size of such speciality steel like valve steel in India very small?
You are right. The total valve steel demand in India, to take your example, is about 2,500 tons. But we estimate that with 4 stroke engines being made mandatory in two-wheelers due to environmental reasons, we will se a manifold growth in demand going forward.
Q. The alloy steel industry is plagued by overcapacity. What is the viability of a new plant and how do you see the restructuring in the industry?
Today I can confidently say that except us nobody in the alloy steel industry is making any money. We, at Hospet, are the lowest cost producers of alloy steel today. The Hospet complex, put up by Mukand and Kalyani Steels, has a total project cost in the region of Rs4.7bn before preoperative expenses for a capacity of 300,000 tpa. We believe that at some point of time, a large number of the unviable and loss making alloy steel plants will shutdown. When this happens depends on the FIs and the banks, which have been funding them.
Our cost of production is currently Rs14,094/ ton for carbon steel blooms at Mundhwa. For producing the same product in Hospet, my present cost is Rs10,700/ ton and this is targeted to come down top Rs10,000/ ton over a period of time. Both the costs are before interest and depreciation. The fixed costs (interest and depreciation) at the Hospet plant at full capacity is about Rs2,400/ ton and thus, we will still be cheaper than a conventional EAF alloy steel plant. And as the costs of metallics (scrap) and power increase, the differential can only increase further. Of course, will have to incur an additional Rs600/ ton in transporting the products from Hospet.
As far as the viability of the JV plant in Mundhwa is concerned, it is a debt free company and is earning profits today of about Rs25m per month. Once the full potential of the value-added products is realized the Mundhwa plant is projected to turn in net profits of Rs300m. In five years, 50% of the products will be in the value added range and exports will be about Rs1.2bn.
Q. What is the future of the forgings and auto ancillaries business?
In forgings we see fantastic opportunity. When in the late 80s and early 90s, we embarked on the forge modernization program (FMD, which involved setting up a 16,000 ton Weingarten press and another 6,000 ton press) at a cost in excess of Rs1bn, a large number of people were critical of our plans. Today I can confidently say that if Bharat Forge has survived and prospered it is because of FMD. The cost of setting up the same facilities today would be prohibitive. Most companies hardly have cash flows to embark on such a massive expansion program and access to capital markets is restricted.
What we foresee happening is that M&A activity will pick up. We are very seriously looking at acquisition targets. We are also moving into cold forging business. I seriously believe that India has a vast potential in primary conversion. Hence, even during the last three years of recession Bharat Forge has spent Rs2bn in capex plans and is now implementing FMD II in which we will install a second 16,000-ton Weingarten press. To give you an idea of the exports potential, let me tell you that very recently we have signed an export contract with Meritor for US$40m annually. Bharat Forge today is the second largest producer of machined crankshafts in the world.
In auto ancillaries, we have a presence in wheels (minority partners), brake systems and axle assemblies. Each of these businesses is being converted into a global business. Automotive Axles is going to increase its exports from US$4m today to US$30m in five years. This company has been identified by Rockwell Meritor as a world supply base for RS120 and C series axles. The mantra is "to be global players in niche markets".
Q. The group had major plans in the early 90s an your companies were the first ones to take advantage of initiatives like the abolition of Controller of Capital Issues (CCI). What happened to slowdown the pace of growth in the second half of 90s?
When liberalization started, there was a general euphoria. Everybody expected Indian markets to grow at a very rapid pace. That dream was short lived and was shattered by 1996. We saw this in 1994-95. And that is when we undertook a strategic planning exercise ? Tata Strategic Management Group (TSMG) worked with us for 4 years continuously. We redefined our strategy then by answering the question where do we go from here? The answer was "consolidate and become international suppliers". At that stage we started believing that Indian markets will not grow as anticipated and today we stand vindicated.
The other major decision was to get out of unrelated businesses. Hence, we gave up our majority stake in Kalyani Sharp to Sharp Corporation. We also decided to get out of financial services. Currently we are at the last leg of it and I can tell you that we got out of it without losing our principal.
In our wheels business, we gave away majority stake to Lemmerz mainly because of two reasons:
- Lemmerz would go global with this company only if they had a majority stake; and
- We did not see the product taking off in a big way in India.
However, we did earn very good returns on our initial investments.
The other company, which has been performing poorly, Kalyani Seamless Tubes Ltd, is being merged with Indian Seamless Metal Tubes and we hope to conclude the deal by March 2000.
Q. Bharat Forge has a large investment portfolio and investors are particularly critical of intra group investments. What are your plans going forward?
Look the core investments in group companies either through Bharat Forge or through subsidiary companies (to whom Bharat Forge has given loans and advances) will not change significantly. However, as we strategically sell our investments, the numbers will come down. But any Indian industrial house, including the Tata group companies, have such core holdings.
Q. Your group has been involved in a large number of JVs with MNCs. What do you think are the attributes to have successful JVs?
We have had very successful JVs for 18-20 years. In India JVs can work if you learn relationship management. And relationship management is the job of the top man in the company or group. In our group, I have to do it. The basic idea is to create trust and confidence. Then leverage it and use the reach of the global partner to access overseas markets and/ or superior technology. Today Kalyani Sharp is the largest exporter of consumer electronics products in India ? higher than BPL or Videocon. We export about 1,500 VCPs per day to the USA. And what we can contribute to the JV is our knowledge of the domestic markets and our strong presence in the local markets. The very important step towards building up the trust is that the Indian partners will have to be totally transparent. Foreigners are also very finicky about time schedules and no "chalta hai" business will do for them. Then there are small gestures. Which go a long way to build relationships ? like having board meetings at the JV partner?s office. This also enables one to network at the head quarters of your JV partner.
Q. What is the agenda you would like to set for the new government and the new finance minister?
First and foremost the government will have to control the fiscal deficit. Long term growth is finally dependent on the same. Secondly, I would like to see some real reforms in the financial markets especially in the following areas:
- Infrastructure and policy to deal with the NPAs. If this is not tackled fast, then India can enter into stagflation like Japan. Today the NPA levels in the banking system are assuming abnormal proportions.
- Free banking system for real competition. Change the risk-reward profile dramatically by lowering interest rate. What is the big deal in a bank Chairman investing in gilts when flushed with liquidity! Bring pressure on the manager?s to perform.
- Deregulate the insurance and savings sectors and convert these assets into productive investments. These are the only source of long term funds.
And finally, develop or channelise large investments into the infrastructure sector investments need not be unviable. For example, at CII we see a tremendous potential in water supply schemes by various municipalities.
Q. How do you propose to get rid of the NPAs? Isn?t it easier said than done?
There are 150 steel companies still in the books of FIs and banks. Most of these companies are bankrupt and sick. If the bad lots are not taken out, then the good companies will start to suffer and credit flow to large sectors will dry up. Maybe asset-restructuring companies can be floated and the assets sold at a few cents to a dollar.
India Infoline Research Team / 08:44, Jun 26, 2015
IIFL is hosting 10 companies at a Management Roadshow in Mumbai today. The opening is a subdued start. US market saw minor losses with Dow, S&P 500 and Nasdaq closing marginally lower.