Sanjiv Goenka has chosen his loss-making retailer, and to a smaller extent, its carbon black business, to lead the Group’s ambitious growth trajectory. It needs to shake off its complacency to do so
When Sanjiv Goenka inherited half of Rama Prasad Goenka’s Rs 19,000-crore empire (the other half went to his brother Harsh), he had to make some big decisions regarding the future orientation of his company. His first act was to christen his company the ‘RP Sanjiv Goenka Group’. His other, more pivotal, move was to orchestrate a complete rethink on which businesses to place an emphasis on.
Today, the companies in the RP-Sanjiv Goenka Group are: CESC, Noida Power and Integrated Coal Mining (ICML) in power; Phillips Carbon Black which makes carbon black—a substance used as a pigment and reinforcement in rubber and plastic products; Spencer’s Retail, MusicWorld Retail and Au Bon Pain Cafe India (ABPCIL) under the retail umbrella; Saregama India and Open Media Network in entertainment and media; and CESC Properties, a real estate company.
Goenka has charted out an ambitious plan—he wants his Kolkata-based business to go from a combined revenue of Rs 9,000-crore today to Rs 25,000-crore in five years. The power business will continue to be an important part of the Group’s business he says, but much of the growth—and this forms the brunt of the re-think on the portfolio—will come from non-power businesses, primarily Spencer’s’, and to some extent Phillips Carbon Black.
According to Goenka, the non-power business will grow to contribute at least 50 per cent of the Group’s revenue by 2016-17, from the current 39 per cent. Of this, the 14 per cent that comprises revenue from retail will mushroom to almost 30 per cent. “For us, non-power is as important as our power firms in our growth plans,” said Sanjiv Goenka, chairman, RPSG. The group, he says, is planning an overall investment of Rs 36,000 crore in the next five years.(Click here for graph)
Achieving this vision, however, will take some doing.
Betting big on retail
In the past 15 years that Spencer’s has been with the Goenka’s, it has done everything in its power to make money by trying to find the right mix of location, store format and geographies. Yet, the company lost boatloads of cash— Rs 520 crore during a turbulent 2008, Rs 220 crore in 2009-10 and Rs 130 crore in 2010-11. Much of that has to do with the fact that the premium segment retailer had to shut almost 150-odd stores between 2008 and 2010 after figuring out that the smaller format stores were just not financially feasible. Today, Spencer’s has about 220 stores, where the focus is on hypermarts and larger versions of its supermarkets that are up to 8,000 square feet in size.
Despite paring down costs, break-even is still a while away for the company. Even Goenka, who had said in July last year that Spencer’s would breakeven in middle of 2013 appears to have second thoughts today. “Break-even is difficult to predict. The slowdown has affected margins, by Rs 1.5 crore a month,” he said.
Analysts say that the problem with Spencer’s is not necessarily something specific to the retail chain, but rather symptomatic of what ails the retail industry in general. “It is a long haul business which needs time and investment, where the rates of return are slow. Moreover, the segment is subject to the vagaries of the market and buying is often impacted by sentiment,” said an analyst with retail consultancy Technopak. While at a company level Spencer’s is still in the red, according to a Spencer’s official it broke even on a store basis a year ago. Revenues have grown 19 per cent and the same store sales growth is 16.5 per cent—yet this still lags an industry galloping at 25 per cent a year.
Spencer's road map to success will largely be based on improving its margins as well as becoming leaner. Goenka is already in talks with several domestic retail players for a tie-up on the back-end of the supply chain. This, he says, could help boost margins by up to 50 per cent by cutting wastage. "Amongst retailers, somebody has strengths in Punjab, or in Bengal, or in Delhi—or in consumer durables or vegetables. Hypothetically, if our backend is Rs 10 crore a month and four retailers come forward to share and pool in all the expenses, the combined cost will not be Rs 40 crore. It would probably be Rs 20 crore. Everyone ends up saving," he explained.
Also important to his plans is a potential tie-up with a foreign partner, which will help with a capital influx needed for expansion. Besides this, Spencer’s plans to add 1 to 1.5 lakh square feet trading space in the next three quarters.
Complacent with Black Spencer’s may be losing money but making carbon black through Phillips Carbon Black Ltd (PCBL)— which is the second largest player in India after the AV Birla group and the eighth largest in the world—is clearly good business for Goenka. The unit made a net profit Rs 116 crore for 2010-11.
Yet, despite its handsome numbers, analysts believe that the firm is losing out to its main competitor Aditya Birla Group as far as overseas presence is concerned. “The tyre industry in India is expected to grow by 20 per cent this year, so the carbon black sector growth will also be on the same lines. But the issue with PCBL, compared to Aditya Birla Nuvo, is that it lacks risk appetite as far as acquisitions are concerned. Moreover, the expansion projects are moving at a snail’s pace,” said an industry insider.
While PCBL lost out to Kumar Mangalam Birla-steered group in the race to buy the world’s third largest carbon black firm, the US-based Columbian Chemicals Company (CCC), PCBL also had to back out from the bidding for $1.2-billion carbon black division of Germany’s Evonik Industries, which is the second largest carbon black maker.
“These are two big opportunities missed by PCBL. Had it been done, PCBL would have been easily in the top-three of carbon black players globally by now,” added the industry insider. According to analysts, the firm's plan to set up a 60,000-tonne carbon black unit and a 12MW power plant for $63 million (Rs 280 crore) in Vietnam, are also progressing very slowly.
However, Goenka believes that there still are acquisition opportunities left in the international market. The firm is now planning to come up with its biggest facility yet, in Tamil Nadu, with an investment of Rs 500 crore and has already got more than 60 acres of land in possession in Thervoy Kandigai near the Ennore port. Apart from this, PCBL is also planning to set-up overseas plants. By the end of this year, the carbon black firm will increase its power capacity to 84MW from the just above 60-MW mark now.
Though media and entertainment business contributes just 2 per cent of the group’s total revenue, the transformation of Saregama India Ltd (HMV) into a completely digital platform, conceptualised in 2000, holds a lot of promise for the company—yet, that strategy too is taking more time than necessary. Goenka is certain that it will happen in the next six to nine months. “About 330,000 songs from our library will now be available digitally on Google Music and iTunes. It will be rooted through our website and through a separate portal also and with a new logo,” he added. Finally, a new real-estate venture has been kicked-off by a swanky mall project in the heart of Kolkata, scheduled to be completed by March 2013, as well as a luxury mall project with several upscale brands such as Louis Vuitton apparently already signed on. This is good news for a company that needs to shake off its complacency and harness the full potential of its properties.