Murugappa group's vice chairman & director strategy, A Vellayan tells of his dissatisfaction at the group's performance in the past fiscal, reports Venkatachari Jagannathan.

Chennai: The Murugappa group's vice chairman & director strategy, A Vellayan sounds disappointed at the fiscal that went by. Even as the group touched the $2 billion turnover (Rs8446 crore) and profit before tax figures of Rs 649 crore at the end of FY 07, he says, "I am not satisfied with the performance," he says.

The year that went by had been a mixed bag of fortunes for the Chennai based conglomerate. (See: Murugappa group in a box)

The bitterness in Vellayan's tone is due to the downslide in the fortunes of group's sugar business run by E.I.D.Parry (India) Limited. While the group companies had logged double digit growth ranging between 11-79 per cent, Rs583 crore turnover E.I.D. Parry logged 22 per cent downslide in its topline and 45 per cent in its profit before tax as compared to the previous year. (See: Not so sweet performance by E.I.D. Parry (India).

According to Vellayan the company was not able to recover its sugar production cost. "Our cost of production per kilogram is around Rs16.50 while the realisation is just Rs13.20." The depressed selling price dampened the company's spirits during the second half last year.

Further the policies of the Tamil Nadu government with regard to molasses and ethanol are also a hindrance to the growth, he adds. Citing states like Karnataka, Andhra Pradesh and Karnataka which have reduced the purchase tax and are giving export subsidies to sugar he urges that the Tamil Nadu government also follow suit in the long term interests of the sugarcane farming community and the sugar manufacturers.

"The prevailing price of molasses in many sugar producing states is Rs1850 per tonne whereas it is just Rs250 per tonne in Tamil Nadu. The government should allow the companies to sell molasses to other states," he demands.

According to the group's director-Finance N Srinivasan, only integrated sugar manufacturers - sugar companies with cogeneration of power facility and distillery- can survive in this condition. Meanwhile the company has applied for government's permission to set up a distillery in the Sivaganga district, Tamil Nadu.

Looking forward Vellayan says E.I.D.Parry will focus on selling branded sugar and also sugar variants. Presently the company has two brands to offer Parry Pure and White Label. The company has commenced private labeling for leading retail chains.

The other ambitious business derisk plan he talks about is to reduce the share of sugar division in the total turnover to 35 per cent out of which 25 per cent will be from branded sugar. This the company would do by growing the other divisions-nutraceuticals and bio pesticides.

This would be a long haul as sugar presently contributes nearly 94 per cent to E.I.D. Parry's turnover and 24 per cent to the profit.

Nevertheless the company is setting up a facility to produce Omega 3 algae products at an outlay of Rs100 crore. "We have achieved pond level success in Omega 3 production. The idea now is to scale it up to commercial level," remarked Vellayan. The company is on the look out for a 300 acre site on the coastal belt for this purpose.

Meanwhile E.I.D. Parry's sugar refinery company Parrys Sugars Refineries Pvt Ltd-a 51:49 joint venture with Cargill International- is awaiting sanction from the government for special economic zone (SEZ) status. As a result there will be a delay of few months in setting up and commissioning the 6 lakh tonne per annum sugar refinery plant at Kakinada, Andhra Pradesh. The plant will come up on 250 acre land leased from group company Godavari Fertilisers & Chemicals Limited.

While the sugar business leaves a bad taste in the mouth Vellayan is also concerned with the group's fertiliser business transacted by two companies viz Coromandel Fertilisers Limited and Godavari Fertilisers.

Though the two companies have posted good top and bottomline growth they are facing a different kind of challenge. The duo suffers around Rs500 crore dues from the central government towards fertiliser subsidy. "This in turn increases our working capital costs," Vellayan adds.

The two companies have started a retail venture styled Mana Gromor catering to the varied needs of the farming community-agri inputs and financial credit. Plans are there to increase the number of outlets so as to sell products of other group companies like cycles, sanitaryware.

Year of stake consolidationThe FY07 also saw Coromandel Fertilisers acquiring Indian Farmers Fertiliser Cooprative Limited's 25 per cent stake in Godavari Fertilisers thereby taking its total holding in the latter to 74.92 per cent. Coromandel Fertilisers also invested towards 15 per cent equity stake in Tunisian Indian Fertilisers S.A, a joint venture formed for putting up a phosphoric acid plant in Tunisia.

According to Vellayan the current fiscal is going to be year reckoning for the group's capability in managing fertiliser operations. It may be recalled that in February 2005, Coromandel Fertilisers acquired 2.5 per cent stake for Rs27 crore in a South African fertiliser company Foskor Limited.

Part of the deal was that the Indian company should advice Foskor on operational issues so that its financial performance improves. Based on the financial performance Coromandel Fertilisers will be allotted additional stakes subject to a maximum of 16.5 per cent. Today Foskor is a $70 million net profit company. And based on the performance of Foskor this year, its additional stake percentage would be decided. Incidentally the South African company holds 5-per cent stake in Godavari Fertilisers.

A wholly-owned subsidiary of the South African development institution Industrial Development Corporation (IDC), Foskor is one of the largest producers of phosphoric acid in the world and exports large quantities of phosphoric acid to India. Coromandel Fertilisers buys sizeable quantities of phosphoric acid from Foskor.

The group's two other listed companies - Carborundum Universal Limited (CUMI) and Tube Investments of India Limited have turned good performance last year. (See:CUMI rolls with the economy and Tube Investments to invest Rs65 crore in new chain and car door frame plants)

Last year CUMI acquired two refractory cement plants in Madhya Pradesh enabling it to offer a comprehensive range of super refractories in the monolithics segment. The company also commissioned its new coated abrasives plant.

Joint ventures forge aheadMeanwhile the Murugappa's three joint ventures - Parryware Roca Private Limited, Cholamandalam DBS Finance Limited and Chola MS General Insurance Company Limited- turned out an impressive performance.

Commissioning a new plant at Perundurai the sanitaryware company Parryware Roca launched Roca range of high end bathroom products. (See Parryware Roca strides ahead) The company is in the process of setting up an exclusive retail network for this purpose.

Cholamandalam DBS which had stopped accepting public deposits, posted a 79 per cent growth in topline. The company started focussing on personal loans.

According to the group finance director, Srinivasan, the non life insurance company Cholamandalam MS General has started making profits. The company earned a premium of Rs330 crore and a profit before tax of Rs8 crore last year. "The accumulated loss is around Rs3 crore and will be wiped out this fiscal. With an equity base of Rs145 crore the company is adequately funded for the present," he remarked. Both the financial services sector companies will be expanding their distribution network this year.

Group to invest Rs1000 croreThe year ahead is going to be busy for the group executives as investments to the tune of Rs1,020 crore have been lined up under various businesses.

According to Vellayan, the company wise investment plans are: (a) CUMI (outlay Rs150 crore) (b) Tube Investments (Rs320 crore) (c) E.I.D. Parry (Rs350 crore) (d) Coromandel Fertilisers (Rs100 crore) (e) Godavari Fertilisers (Rs100 crore) and the financial services group consisting of Cholamandalam DBS and Chola MS General (Rs100 crore).

The investments will be for setting up new plants in the case of manufacturing companies and expanding the distribution network in the case of financial services group. Last fiscal the group had spent around Rs500 crore on capacity creation and acquisitions. "Most of the group's manufacturing companies have decided to set up a facility at Uttarakhand," he added.

As the group companies are lowly leveraged different funding options-debt, suppliers credit- are available, says Srinivasan.

Talking about the group's plans for the plantation business Vellayan says that there were plans to offer eco tourism as the group owns tea plantations in Assam and Tamil Nadu.

Last fiscal the Murugappa Corporate Board saw some changes. The members of the new board are: M A Alagappan, executive chairman, A Vellayan, vice chairman & director Strategy, M M Murugappan, director, Technology, N Srinivasan, director, Finance, Sridhar Ganesh, director, Human Resources, N S Raghavan, Marti Subrahmanyam and Deepak Satwalekar are non executive external directors.