RPG group on overdrive to beat slowdown

The Rs 13,500 crore RPG group has embarked on a four-pronged drive to counter the economic slowdown. The plan includes increasing the hurdle rate for project-based businesses, shortening the payback time on new investments, reducing costs through manufacturing efficiencies and better people practices to improve productivity.

The move makes sense, as the group’s consolidated net profit was down 33 per cent for the nine months ended December 2008. Sales were up 13 per cent. The combined debt of RPG’s 12 listed companies touched Rs 4,972 crore, a rise of around 15 per cent, for the year ended March, 2008, compared with the previous year. The market capital has slumped 69.75 per cent to Rs 4,531 crore, from a peak of Rs 14,980 crore on January 8 last year.

RPG Group Chairman Harsh Goenka said his companies had already taken corrective actions and the results would be visible soon. “In times like these, cash is the king. So, I am not in the game of increasing my top line just to impress people,” said Goenka. That explains, for example, the group’s power company KEC International’s decision to increase the hurdle rate for new projects.

To ensure that the company doesn’t get caught in the middle of possible payment delinquencies in a tough economic environment, KEC is trying to get as close as possible to assured payment cycles. For many of the projects, the group is insisting on a 50 per cent down payment before taking the contract. “We have lost some projects because of this, but that’s according to our plan,” said Goenka.

To improve the capital deployment efficiencies, the gestation period for all new projects has been made shorter. The payback time for projects such as tyre company Ceat’s greenfield radial tyre plant at Halol, has been reduced from the earlier three years to two.

Pointing out that there has not been any curtailment of the group’s capital expenditure plans, Goenka said, “There are two kinds of capex plans — must do and nice to do. The latter can be and are being deferred, but the former are going on smoothly, with more efficiencies built in”.

Goenka said the group would invest Rs 15,000-20,000 crore over three years to consolidate its existing verticals — primarily power, tyre, biotechnology and retail. “We are one of the few companies who are serious about our investment plans,” Goenka said, without elaborating how he would raise funds for this expansion.

These are all must-do expansion projects, Goenka says. The Halol plant, for example, will raise Ceat’s market share in the car and truck radial segments to 15 per cent. Ceat has a 5 per cent market share in the car radial tyre segment and will manufacture truck radial tyres for the first time.

The expansion will also see Spencer’s expanding its retail presence by adding 200 stores in the next two years. The third part of the group’s drive to prosper even in the current slowdown is ensuring manufacturing efficiencies, which are resulting in substantial savings. The group is following what it calls 10/10 formula, which means 10 per cent cost reduction in 10 months across all companies. Besides, the variable component of salaries is being raised from 20-25 to 30-35 per cent.

Ceat, for example, has been saving Rs 10 crore a month through, among other things, a better product mix aimed at the premium segment of the automobiles market and improved productivity, partly achieved through a voluntary retirement scheme.

Finally, people efficiencies. To begin with, the group is increasing the variable component in salaries from 20-25 to 30-35 per cent. More than the manpower reduction (which is being done on a smaller scale), the focus is on minimising the complicated hierarchical structures to speed up decision-making processes.

Spencer’s, the group’s retail chain, apart from closing down unviable outlets and renegotiating rentals, is reducing the various layers within the organisation so that new ideas don’t get buried in bureaucracy.

Goenka said the group was also experimenting with a new formula of a “self-managed workforce” for keeping the manpower to the minimum in its new projects. At the Nalagarh plant of the group firm — Raychem RPG — the company has a total manpower of 300. “For a comparable project of this size in other group firms, we usually have 700 workers,” Goenka said. These workers are trained in multi-skilling and paid well.