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Mounting ambition

G. Seetharaman | Print Edition: Sep 30, 2012

Ramamurthy Thyagarajan draws inspiration from the iconic Carnatic violinist Lalgudi Jayaraman. "A true genius is someone who has an infinite capacity to take pains to achieve perfection and Lalgudi is one such person," says the 75-year-old patriarch of the Chennaibased Shriram Group.

Thyagarajan, a trained mathematician, claims to have imbibed an important business lesson from the musician - the need for perseverance. "In India, you get talented people to run any business (but) an enterprise needs five-six years before it can stand on its own. One needs patience," says Thyagarajan, who has collected 1,500 hours of the violinist's recordings and even started a partnership firm to aid Jayaraman financially.

And, true to his words, he has shown exemplary patience as the Shriram Group has painstakingly scaled up its non-lending business over the last decade. The group has expanded its footprint in diverse sectors - from infrastructure, insurance to real estate and IT.

Company Name
IPO Floated
Issue Price (in Rs)
Current Price*
% Change in Issue Price
% Change in Sensex in the corresponding period

Take Solutions Ltd.**

Information Technology

August 2007
72***
Rs. 36.85
-48.82
17.45%

Shriram EPC Ltd.

Engineering, Procurement & Construction

February 2008
300
Rs 53.05
-82.32
-3.84%

Orient Green Power Co. Ltd.

Power (Renewable energy)

October 2010
47
Rs 9.40
-80.00
-12.43%

* Closing price as on 30th August 2012
**Shriram group holds 11.43% in Take Solutions
***The price has been adjusted for a 10:1 stock split

The group, whose flagship company Shriram Transport Finance (STFC) finances every fifth truck in the country, got a jolt in the late 1990s when the Reserve Bank of India's stringent guidelines for non-banking financial companies (NBFCS) forced it to exit some businesses such as auto components and logistics. "The regulator felt we were diversifying into the non-finance businesses to siphon off funds.

We were, in fact, diversifying more to add value to shareholders," says Thyagarajan. Despite that setback, the group's non-financial services business has gained heft, with revenues of about Rs 4,500 crore in 2011/12 from about Rs 150 crore in 2001/02.

The RBI's intervention was also the trigger for the group's decision to keep its financial services division separate from its other businesses. "There is a Chinese wall between them and there are no cross-holdings," says R. Sridhar, MD and Chief Executive of Shriram Capital and a group veteran.

R. Sridhar, MD & CEO, Shriram Capital
There is a Chinese wall between financial services and other businesses: R. Sridhar
Shriram Capital is the holding company for the group's entire financial services businesses. STFC alone has assets under management of Rs 41,920 crore. The group also has a substantial presence in enterprise and consumer finance through Shriram City Union Finance and in chit funds through Shriram Chits, the group's first venture, which Thyagarajan, then working with New India Assurance, founded in 1974 with a friend.

With its reputation in the lending business fairly cemented, the group is now intent on scaling up its other businesses. Infrastructure is a key focus area. The group formed Shriram EPC in 2000 by merging some of its engineering services businesses, which now spearheads the group's initiatives in infrastructure. Led by Thyagarajan's IIT Madras-educated son T. Shivaraman, the company provides turnkey solutions in thermal and renewable power, water treatment and industrial plants.

Shriram EPC has made slow progress. It has an order book of only Rs 3,000 crore and reported a standalone topline of Rs 1,400 crore last fiscal. "One of the reasons our order book and revenues are not that big is that we don't do civil projects like roads, bridges and airports," says Shivaraman, conceding that the company failed to capitalise on opportunities in the power sector, losing out to rivals like BGR Energy Systems.

The company intends to stay focused on its core sectors - water, steel and power - and has no plans to enter roads, one of the most vibrant infrastructure segments.

"Shriram EPC is a very niche player. Roads require a different set of skill-sets and there is also huge competition in roads now," says Ajay Parmar of Emkay Global Financial Services. Shriram EPC's efforts to become a wind power developer have also not yielded the desired results. Orient Green Power, a Shriram EPC unit, has 387 MW of installed wind and biomass capacity. P. Krishnakumar, MD, Orient Green Power, says its total installed capacity will reach only half of the targeted 1,000 MW by next year due to some of its projects shifting from Tamil Nadu to other states.

Arun Duggal, Chairman, Shriram Capital and Shriram Ventures
We are not particular about having a controlling stake in a company: Arun Duggal
Orient Green, which went public in October 2010, has since shed 80 per cent of its issue price on the BSE compared with a 12.43 per cent fall of the benchmark Sensex.

In addition to power generation, Shriram EPC makes wind turbines through a joint venture with Italy's Leitner Technologies. Last fiscal, Leitner Shriram installed about 100 MW while rival ReGen Powertech installed four times as much. While wind turbine makers are producing higher capacity turbines, P. Ashok, MD, Leitner Shriram, says his company will stay focused on the 250 KW segment. "We manufacture 1.5 MW and 1.8 MW turbines too but we see demand for 250 KW continuing among smaller power producers."

Separately, Shriram EPC was recently forced to acquire a majority stake in Sree Jayajothi Cements in lieu of the Rs 500 crore dues the latter owed it for a construction contract. "Shriram should not have put in its own equity to complete the project when Jayajothi couldn't pay up," says a former executive of the group.

Sree Jayajothi Cements currently has a greenfield integrated manufacturing facility in Kurnool, Andhra Pradesh, with a 3.2 million tonne per annum capacity.

Shriram EPC is planning to seek PE funding for Jayajothi, which has a net debt of Rs 600 crore, and has no plans to exit in the immediate future, according to Shivaraman. But he has a big task on his hands with the plant operating at a utilisation of 35 per cent and the industry itself battling excess capacity.

Shriram group's top executives assert that they take a measured and cautious approach to business ventures and M. Murali, MD of Shriram Properties, is no different. Murali wants Shriram Properties to be a South India-focused player.

"Real estate is a very localised business. To master the local environment you need 8 to 10 years," he says. The developer, since its inception in 1995, has developed 8.5 million sq. ft., three-fourths of it in the residential segment. "We have land under possession for 80 million sq. ft. We develop most of the projects with an investor on board and that reduces our risk," he says.

Walton Creative Capital, Starwood Capital Group and TPG Creative Capital are among the private equity (PE) players who have invested in Shriram Properties' projects or the company itself. In an industry saddled with huge debts, it has cash reserves of Rs 400 crore and debt of only Rs 100 crore.

Indeed, PE has played a key role in the group's growth. According to Venture Intelligence, a research firm, 17 PE firms have invested in various group companies since 2004. The group's conservative use of capital has served it well, says Ravi Bahl, MD, ChrysCapital, one of the first PE firms to invest in the group. While ChrysCapital has exited STFC and Shriram EPC, it has a 13 per cent stake in Shriram City Union. "They have the right balance between growth and profit," says Bahl.

Striking a balance between growth and profit is the objective of Manoj Jain, CEO of Shriram Life Insurance. The group forayed into life insurance in 2005 and general insurance three years later. South Africa's Sanlam Ltd holds 26 per cent in both Shriram Life Insurance and Shriram General Insurance.

While life insurance companies take seven to 10 years to turn profitable, Shriram Life, which has accumulated profits of about Rs 80 crore, was profitable from its first year of operations largely due to the group's existing customer base and wellspread network of 55,000 agents.

"Our distribution costs are the lowest in the industry," says Jain. About 60 per cent of its individual policies and 75 per cent of its policies are from the group's clientele. "We would like to reduce our dependence on the group." But that means distribution costs would rise, affecting profitability. "We will expand in such a way that we continue to be profitable," Jain says.

Shriram General Insurance, 98 per cent of whose business is in motor insurance, has halved its dependence on group customers since inception. It made an underwriting profit of Rs 21 crore on a premium of Rs 1,266 crore last fiscal and has cumulative profit of Rs 86 crore. This comes at a time when general insurers are "saddled with considerable underwriting losses," according to an Ernst & Young (E&Y) report. "The industry's average third party claim ratio in motor insurance is 245 per cent but ours is 145 per cent. We want to bring it down to 100 per cent," says J.S. Gujral, MD and CEO, Shriram General Insurance.

While private general insurers are betting big on health insurance, Shriram General has no immediate plans to enter the sector. It's no longer a disadvantage for a non-life insurer to not offer health policies, according to Ashvin Parekh, Partner, Global Financial Services, E&Y. "Earlier health insurance was bundled with other general insurance policies. Now, health has become a very specialised area," he says. India has four standalone health insurers.

Thyagarajan still doesn't own a mobile phone, but Gujral says he is always available to the group's top executives. In 2006, Thyagarajan delivered on his promise to form a trust of senior officials, which would be the owner of the group companies. The Shriram Ownership Trust is now the majority stakeholder in Shriram Capital. The senior-most members of the trust - such as Thyagarajan and Sridhar - get 2.5 per cent and others 1 per cent in their companies, though the benefits accrue to them only after they retire. The group is planning to bring all its non-financial services businesses under Shriram Ventures, with Shriram Enterprises Trust as the majority stakeholder.

H. R. Srinivasan, Vice Chairman of Shriram Ventures, was mentored by Thyagarajan when he founded IT company Take Solutions in 2001. The group, directly and indirectly, has an 11.43 per cent stake in the Rs 700-crore company that provides solutions for supply chain management and life sciences. Srinivasan believes Take Solutions could become a Rs 5,000-crore company in five years. The group also owns Shriram Value Services, a Rs 90-crore BPO company.

Besides core infrastructure & energy, technology and real estate the group's current investments in non-financial services span auto components and pharma, metallurgical coke and even include a musical instruments company. "We are not particular about having a controlling stake," says Arun Duggal, Chairman, Shriram Capital and Shriram Ventures.

Emkay's Parmar believes the group is more aggressive than other Chennai-based groups. "They take calculated risks." Sometimes, those risks have not paid off but Thyagarajan always looks for the silver lining. For instance, the group was making PET bottles under the brand name 'Shripet' in the 1990s but had to exit the business later. "One good positive of this business was A.R. Rahman's radio jingle for the product. He was not well-known at that time but the jingle became very popular," he says.

Additional reporting by K.R. Balasubramanyam

*Correction: The original version of the story did not account for the stock split in Take Solutions and mentioned the IPO price as Rs 720 in the table. The error is regretted.

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