Showing posts with label CAGR. Show all posts
Showing posts with label CAGR. Show all posts

Wednesday, August 08, 2012

"We Need Hunters, not Farmers"

LIVE AND EXCLUSIV: NFOSYS TOP BRASS TALK TO b&e ON LIFE AFTER DEATH AND ON THE ROAD AHEAD. deputy editor Virat Bahri GIVES THE INSIDER ON THE STRATEGIC LESSONS FROM INFOSYS!

“Our growth has significantly come down – from 35% to 7% to much lesser. It is a failure in some sense, since the opportunities are there, we have customer relationships, so I do feel we could have done better.” We’ve met S. Gopalakrishnan (Kris, for everybody), CEO and MD of Infosys, previously too, but perhaps this is the first time we sense his dejection that things could have turned out better for Infosys.

Factually, it’s not as if things are that bad. For starters, they’ve been rated India’s 7th most profitable company in the 2009 B&E Power 100 listings. The five year CAGR for revenues, till the month ending June 2009, was 32%. At the same time, the five year net income CAGR stood at 34%. Market capitalisation was screaming at $21.08 billion in July ‘09. Now it’s screaming better. The number of clients contributing to business has grown from 141 in 2004 to 330 this year. Since Kris took over, the revenue per client has regularly increased, Infosys has gone into newer services, entered newer markets, hired more people, consolidated existing clients, won a few awards, and a lot more.

But Kris comes from a world, where Infosys – under Murthy – was used to growing at rates close to, and sometimes beyond, 100%. Even Nilekani sailed around the 50% figure for long. Compare that to the fact that Kris ended last year with 29.5% growth. “In good times, high repeat business is a very good strategy; in bad times, bad!” says Kris on a Monday afternoon to us, “We need a lot more hunters (who get newer businesses) than farmers (who maintain current businesses).”

The first quarter of FY 2010 hasn’t been too kind. Infosys’ revenues actually fell by 2.9% quarter on quarter, in rupee terms. For the same quarter, as per Angel Broking, “Infosys’ IT Services Business was largely flat in US dollar terms on a sequential basis, while on a yoy basis, a fall of 2.8% was witnessed.” Further, onsite volumes declined 2.1% qoq (0.6% decline yoy) and offshore volumes slipped by 0.6% qoq (but grew by 9% yoy).

The top management at Infosys has been preparing double time for the economic slowdown since the 15/9/2008 debacle. “I predicted the collapse of Bear Sterns six months before it actually occurred,” says Chief Financial Officer, S. Balakrishnan (Bala, for friends). And once Lehman collapsed, the world – as Kris tells – changed for Infosys. And not because Lehman was a big client for Infosys (rather it was a bigger one for Wipro & TCS), but because the American financial industry – including companies like AIG – formed (and still do) an incredibly large part of Infosys’ earnings (more than 60%). Things were changing too fast at that time, and Infosys decided to change faster. And the hero, creditably, in the bloodied times, was not marketing, but finance, whose six strategies are the reasons Infosys today remains the most profitable IT corporation in India...

Strategy #1: Forget the long term; at least when it comes to your money!

Driven in a warlike fashion by CFO Balakrishnan, Infosys rewrote process orientation and risk control like never before. Realising that the war would be played on cost rather than price, Bala opened up a new battlefront, “I realised volaltility of foreign exchange was going to be the key issue as 98% of our revenues is in foreign currency; 62% from North America.” The dual reporting mechanism in both dollar and rupee terms made handling finances a supremely complicated Pythagorean conundrum for Bala and his team. Bala had already implemented the long term hedging route much earlier for Infosys.

Strangely, that was what was turning out to be the biggest headache for Infosys, which decided to shut down long term hedges & convert all exposures to a maximum of two quarters. This saved Infy from getting massacred.


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Friday, August 03, 2012

India’s economic objectives with their private counterparts

Indian psus have followed an optimistic trajectory post-liberalisation and have seen some vital successes through well-timed and executed strategic realignment. Virat Bahri of B&E brings out the lessons from these successes and also on how these psus can keep the growth story intact going forward and fulfil india’s economic objectives with their private counterparts

Post-liberalisation, turnaround has also been a recurring theme for quite a few PSEs, which have been stung by the competition and responded with dramatic turnarounds that only look believable in retrospective terms. SAIL itself is a fascinating example, as it was facing a net loss of Rs.15.74 billion in FY 1998-99. A comprehensive rationalisation of production processes was done, the product mix was strongly realigned and production of saleable steel products was ramped up. Within 6 years, the company had posted an impressive profit of Rs.68.17 billion. BHEL had a net sales of Rs.68.962 billion in 1998-99 and a net profit of Rs.5.99 billion. Once the central government passed the Electricity Act for rapid transformation of the power sector, the company was faced with a tremendous surge in demand and was found wanting in terms of manpower and capacity. Besides, Chinese competition has come in droves, buoyed by the Chinese government’s strategy of having an undervalued yuan. BHEL aggressively enhanced capacity and scope of business. Though problems persist, BHEL posted a revenue of Rs.424.95 billion (CAGR of 16.36% since FY 1998-99) and a net profit of Rs.60.11 billion (CAGR of 21.18% since FY 1998-99) in FY 2010-11. ONGC was often criticized for its inefficient practices and relatively staid approach. It is well known how the company transformed under the aegis of erstwhile Chairman Subir Raha and hasn’t looked back since. When he joined, the company was facing depleting production and reserves. He led the company on an expansion spree and also promoted better utilisation of existing assets. Oil & Oil equivalent gas production of ONGC was 62.07 MMtoe in FY 2010-11. Its net profit of Rs.189.24 billion placed it on top of the B&E Power 100 List for the year. State Bank of India (SBI) was similarly losing market share rapidly to private and foreign banks. The challenge was to shake up an institution with 2,00,000 employees from its stupor. Under ex-Chairman O. P. Bhatt (who joined in 2006), SBI took a unique initiative of stopping the VRS scheme so that they would not lose valuable talent to private enterprises. In addition, they ramped up process efficiency by manifolds and Bhatt made the effort to align the organization towards a common vision and a common set of objectives, primary being their drive to gain favour with mid to large enterprise accounts and with the growingly young workforce in India. The State Bank group’s advances stood at Rs.9.94 trillion for FY 2010-11 (growth of 15.87% yoy) while deposits stood at Rs.12.45 trillion (growth of 12.43% yoy).

It’s now common knowledge that Chinese state-owned enterprises are so well integrated with the central government that they are able to serve long term national strategic objectives with amazing efficiency. In addition, they go global with a clinical aggression that surprises even the leading private companies in the Western world. As with other aspects of the Indian economy, our PSUs are a few steps behind China, but there are notable examples where they are making their contributions count. ONGC itself has been competing head to head with global oil majors to acquire E&P assets. This year, it signed a deal with KazMunaiGas in Kazhakastan for acquiring 25% interest in the Satpayev exploration block. SAIL, which has an order book of Rs.540 billion in its drive for 23.5 million tonnes hot metal capacity by FY 2012-13, has also developed a structured R&D set up and plans to take R&D spends to over 1% of total turnover. Along with NTPC, NMDC, Coal India & RINL, SAIL set up a consortium named International Coal Ventures Ltd. (initial authorised capital of $2 billion) a few years back to pursue metallurgical coal and thermal coal assets across the globe. On the flip side, though, no successful bid has happened yet, in large part due to mines getting expensive, and the initiative needs a push. Also, it has got into tie ups with global giants like POSCO and Kobe Steel for strategic collaboration over projects, technologies, et al. ONGC now runs 31 projects across 14 countries and also made the big ticket acquisition of Imperial Energy. NTPC is planning to become a 75,000 MW company by 2017 compared to current capacity of 34,854 MW and is setting up a power plant in Sri Lanka. By 2032, it is also planning to have 28% of its power production coming from carbon free energy sources. GAIL is targetting a turnover of Rs.1 trillion by FY 2016-17 from Rs.324 billion currently. Part of the plan is to aggressively pursue global investment opportunities throug investment arms and JVs. Another interesting case is Rural Electrification Corporation of India, which finances rural power projects after proper due diligence. The company has been proactive on tapping international markets for funding and in FY 2010-11, it mobilised $1.17 billion from overseas instruments. Indeed, there are struggling firms and Air India is the most vivid example of the worst that can happen with PSUs. They are telling reminders of the road that’s not to be taken.


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Monday, July 16, 2012

B&E highlights the possible opportunities and imperatives for the company

As Reckitt Benckiser’s India business heads towards contributing more than 5% to global revenues, B&E highlights the possible opportunities and imperatives for the company.

Reckitt Benckiser India’s turnover is just over Rs.20 billion (of which Dettol alone makes over Rs.10 billion). With the assimilation of Paras Pharma, which has a turnover of around Rs.5 billion, and Reckitt’s own CAGR of around 40% should see it rise the Indian FMCG ladder and soon match the likes of GCPL and Dabur (revenues of around Rs.40 billion), in near future. Moreover, Reckitt’s India division is well on its way to cross the 5% contribution (to global turnover) benchmark, even before HUL & P&G.

Reckitt is investing over Rs.2 billion in a Paras manufacturing facility near Badii to further strengthen its OTC offerings. Chander Mohan Sethi, MD, Reckitt Benckiser India informs, “Currently, OTC comprises 15-20% of business, and is one of our strategic growth pillars.” With Reckitt’s track record for innovation – 40% of its sales comes from products developed over the last three years better times are expected. Besides, it gives Reckitt the opportunity to enter hitherto unknown categories like haircare/body care (Set-Wet deodorants & hair gels), hair oil (Livon). Reckitt has already moved up to the third spot in the Rs.75 billion soap market with its Dettol variants.

But one of Reckitt’s biggest weaknesses has been that its brands are more popular than the company itself unlike the Unilevers and P&Gs. While individual product brands & extensions have worked since ages, the aura of a strong parent brand does lend a great degree of credibility and preference. Heritage brands like Dettol, and high performing brands like Harpic and Lizol are doing well, but since Reckitt banks too much on new innovations, and has to invest heavily on marketing each of these products (it spends 12% of revenues on marketing, highest among top FMCG players), it would do well to ensure that corporate branding initiatives get stronger. To be fair, it has started the process in two markets Germany (developed) and Brazil (emerging) to gauge the results. Ramping up these initiatives across countries is critical. Akshay Bhalla, MD, Protiviti Consulting comments, “Reckitt has lagged in bringing some of its brands in time unlike HUL and P&G. It has to ensure that it comes up with more homogenous products in tune with changing consumer habits and preference in India.” Also, as the company gets more aggressive in rural areas, it has to fix its relatively low penetration. The company has distributors across 3000 towns via a hub & spoke model compared to 5500 for HUL and 4000 for Godrej Consumer Products Ltd. Finally, its flagship Dettol has a very strong presence in the health segment; but beauty still leads the FMCG space, where Reckitt still lacks as much as a foothold. It would be risky to let Dettol do the honours as it would interfere with its traditional positioning. Perhaps the situation calls for another big brand acquisition!


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