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The return of the family

The promoters at Murugappa have returned to the helm at a time when group revenues have topped $2 billion, but the market cap has taken a big hit. The challenge is obvious.

By Nitya Varadarajan | Print Edition: July 1, 2007

On May 8 this year, when the Chennai-based Murugappa Group announced its annual results, there was enough in the numbers to allow the low-profile Vice Chairman Arunachalam Vellayan the luxury of a smile. For the first time since it was founded 74 years ago, the sugar-to-fertiliser-to-bicycles group's revenues had topped $2 billion (Rs 8,200 crore); sales at its fertiliser companies (Coromandel and Godavari Fertilisers) were up 19 and 12 per cent, respectively, while profit before tax fared better, growing by at 44 and 79 per cent; at the sanitaryware firm, Parryware, the joint venture with Roca of Spain became fully operational; Carborundum Universal, or CUMI, struck a JV with China Engineering and Exploration Bureau and acquired a 49 per cent stake in Sanhe Yanjiao Jingri Industrial Diamond Company to build its manufacturing base in the country and better serve its global customers. Elsewhere in the group's business empire, there was action as well. EID Parry, for instance, signed a deal with Cargill to set up an export-oriented sugar refinery in Kakinada, Andhra Pradesh.

Yet, Vellayan isn't too happy. At a time when other groups are surging ahead on the back of robust economic growth, global outsourcing and M&As, Murugappa finds its own growth hobbled by regulations in fertiliser and sugar, two of its core businesses. (Broadly, the group's businesses are categorised under three heads: agri-businesses, which include plantations, fertilisers, pesticides, and sugar; industrial products, including abrasives and machine tools; and consumer products-from bicycles to confectionery to financial services).

The Murugappa mantra 

» Make fresh investments to expand capacities at key group companies such as EID Parry and CUMI.
» Push more aggressively into retail in businesses ranging from fertiliser to bicycles to financial services.
» Combat business down cycles in sugar and fertiliser by adding products that are not cyclical in demand.
» Strike joint ventures in areas where building competencies will take a long time-like in sanitaryware and machine tools.
» Tap opportunities in some sunrise sectors such as e-publishing and nutraceuticals.
» Aim for market leadership either nationally or regionally in key product segments.
 
In fertilisers, for instance, the central government owes Coromandel and Godavari Rs 600 crore in subsidies. In sugar, eid Parry, the group's integrated sugar company, has suffered on account of the downturn in the industry, but the state government of Tamil Nadu seems to have done its bit, too, to make things worse for the company. While other states such as Maharashtra, Andhra Pradesh and Karnataka have tried to mitigate the sugar industry's woes by reducing purchase tax, allowing export of molasses and ethanol, and introducing subsidies for sugar exports, Tamil Nadu hasn't done anything of that sort. "Molasses command a base price of Rs 1,800 per tonne in other states and as much as Rs 2,500 in Pondicherry, but (in Tamil Nadu) we are paying an excise of Rs 750 on a base price of Rs 250," points out Vellayan. No wonder, the group market cap took a huge hit last year.

Raising the bar

That is just one of the challenges that Vellayan and his uncle and Executive Chairman M.A. Alagappan face with the promoter family, which is into its fourth and fifth generation, retaking the helm last October, when the tenure of outsider-Chairman of four years, P.S. Pai, ended. The larger challenge-and perhaps the single biggest-is to ensure that the group pursues growth far more aggressively than it has so far, while ensuring that the family, which is getting bigger with every generation, stays together. "I expect the group to remain cohesive for a long time yet, given that the younger generation seems committed to making whatever adjustments are required to sustain the group," says N.S. Raghavan, one of the founders of Infosys Technologies and a Murugappa board member of six years.

A benevolent and highly ethical group, Murugappa may have had a price to pay in balancing family interests with those of the business. For one, it has meant that strategic decisions are deliberated upon longer (since not all family members may have the same appetite for risk), resulting in missed opportunities. Few know, for example, that Murugappa started an IT company back in the early 80s, but shut it down because it didn't seem viable. (Perhaps, they should have given it a few years-they could have created another Infosys or TCS.) Also, although the group has been in a clutch of consumer industries for several decades now, it hasn't capitalised on the opportunity to create dominant brands. It has been in the tea business for 50 years now, but it is Tata Tea and Hindustan Unilever that have better-known brands (Murugappa's tea brand was called Kasthuri). Murugappa's bicycles business (under TI Cycles of India) was set up in 1949, but Hero Cycles is the bigger player. "The group is not aggressive and quick to grab opportunities emerging in the new global marketplace," says Raghavan. "To a certain extent, it is risk-averse when looking at opportunities outside its area of comfort."

No doubt the family knows its constraints, but the good news is that things are changing. Vellayan, who led the acquisition of Godavari Fertilisers in 2003 from the Andhra Pradesh government and bought out IFFCO's stake in April this year to increase holding to 75 per cent, is seen as more aggressive and result-oriented. The group's immediate goal: Touch $3.5 billion (Rs 14,350 crore) in revenues by 2010. "We aim to be number one or two either nationally or regionally in our market segments," says Vellayan, 54, responsible for group strategy.

Giving Murugappa Group the needed heft will be a slew of investments it plans across its major companies. Over the last three years, it has invested more than Rs 1,000 crore in capital expenditure, but that's how much (actually, Rs 1,100 crore) it will be investing this financial year alone. EID Parry is investing the remaining Rs 350 crore this year out of Rs 652 crore that is going into expanding sugar capacity (from 14,300 to 22,000 tonnes crushed per day by 2008-09), setting up cogeneration power plants that will up capacity from 43 mw to 127 mw, and a joint venture with Cargill International for a sugar refinery only for exports.

Tube Investments, which has grown at a CAGR of 25 per cent since 2000, is spending Rs 320 crore on capacity addition and modernisation. Says M.M. Murugappan, Director (Technology) on the Murugappa Corporate Board, and who looks after TI: "Investments in capacities and better technology applications will improve margins and exports." Carborundum Universal, a federation of nine companies and four JVs, is investing in buying out strategic distributors (like in the case of CUMI Canada) and setting up facilities where it feels it has some advantage, in terms of proximity to customers or raw materials, or cheaper power. CUMI is setting up a bonded abrasive plant in China that would serve as a backend for its global customers, and planning acquisitions in Russia. Says Chairman Alagappan: "There is enough and more to do to grow and sustain the group.''

The two fertiliser companies, which are to be merged, are diversifying their portfolios as well. "We've given R&D a new thrust and will be making a whole host of value-added products," says V. Ravichandran, Managing Director, Coromandel Fertilisers. In other businesses, too, including financial services (Chola DBS) and nutraceuticals, investments of Rs 100 crore each are planned. Then, there are some new-age businesses as well. Laserwords, an e-publishing company managed by M.V. Subbiah's son and former McKinsey consultant, Subbiah Vellayan, has ambitious plans of ramping up. Says Vice Chairman Vellayan: "Even within the core businesses, there are plenty of opportunities, both inorganic and organic, that we haven't yet tapped."

Succession planning at Murugappa

The Murugappa corporate board was set up in 1993, but family members decided during the end of M.V. Subbiah's (a third generation scion) chairmanship in 2001, to make way for an outsider professional for this post. This was done to introduce modern corporate governance norms; N.S. Raghavan, founder member of Infosys, and subsequently P.S. Pai, former Vice Chairman of Wipro, took over. On turning 67, Subbiah quit the MCB. Last year in October, his brother M.A. Alagappan, 63, became the Chairman, and will retire in another two years.

So, who's next? Evidently, A. Vellayan, 54, who is currently the Vice Chairman, and may be followed by M.M. Murugappan, 51, who may become the Vice Chairman to start with when Vellayan moves up. Although both the cousins have brothers of their own, the more visible faces among the fourth generation are Arun Alagappan, 31, (the current Chairman's son) and Arun Murugappan, 40, who is son of the late M.A. Murugappan, cousin to M.V. Subbiah. Arun Murugappan now heads Parry Travels and a couple of smaller consumer-facing businesses of the group, while Arun Alagappan is Head of International Business Development of the group (he swung the Roca deal). A recent entrant to the family business is Subbiah Vellayan, 38, Subbiah's son and a former McKinsey consultant, who runs an e-publishing venture called Laserwords. Among the fifth generation scions, the names to watch are Arun Vellayan, the Vice Chairman's son, and Muthu Murugappan, son of M.M. Murugappan. Arun Vellayan, who is in his mid-20s, works for a private equity firm; and Muthu Murugappan, also in mid-20s, works with an FMCG company that's not part of the group.

Outsiders who understand the family structure say that it is inevitable that the group will shed some of its conservatism when the fifth generation moves into key roles. But that, at the moment, is some way off.

Some years ago, Tata Sons' director J.J. Irani described Murugappa as "the Tatas of South India". In terms of integrity and ethics, Murugappa more than deserves the tag. Where the comparison ends is in terms of aggression. While the Tatas have made one big acquisition after another in sectors ranging from steel to auto to it services, Murugappa has only cherry picked. Perhaps, with the promoters back in the saddle, South India's dark horse may start galloping yet.

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