CG Power turnaround: Culture, timing and execution behind a rare revival

Learnings from the most successful turnaround

 

Over a period of time, one of the heuristics I have developed in investing is to not look at any M&A given the two layers of unknown unknowns involved. I don’t know what I don’t know about the acquirer, and the acquirer of the target company. Adding turnaround to this mix would make me more averse towards the opportunity.

 

However, when one such company appears in the list of the largest wealth creators post COVID, a deeper look is warranted. What has allowed them to not only beat the average outcomes we have seen in M&A but also beat every healthy player in their business? In studying ‘The Great Revival’ by Natrajan Srinivasan, I was hoping to add some nuanced caveats to my heuristic of ignoring M&A deals. 

 

Unknown unknowns remain

 

What stands out in the acquisition of CG Power by Tube Investments, is that unknown unknowns remain. The accounts of CG Power were under a recast process and therefore the true extent of the liabilities emerging from the financial fraud remained unknown at the time of the acquisition. The conviction to buy came from one simple fact.

 

The dealers of the company after being apprised of the financial difficulties being faced by the company in 2019, had given cash advances to CG Power’s suppliers to finance raw material purchases in order to sustain CG Power’s market share and brand equity. This illustrated not just the quality of the product that the dealer network was willing to stand by, but also the quality of people that ran this business at the ground level.

 

Culture matters

 

“Given this reality, the last thing one needed was more information and consequent fear.” Mr. Vellayan Subbiah’s gut had given the call to buy basis a simple distinction he made- is the company’s DNA infiltrated by financial fraud? The first thing to evaluate in such a transaction for us would therefore require us to determine if the fraud is a few people

going rogue or is it steeped in the company’s culture? If the former is true, ask a follow up- how good of a business they run?

 

CG Power’s market dominance (25 per cent market share in motors) even in times of constraint, spoke of their product quality. The business ex of the skulduggery was strong with industry leading margins and capital efficiency. Years of being cash strapped had resulted in market share and margin leakage due to underinvestment, yet it was just a wounded tiger. 

 

Right place at the right time

 

CG Power was a great quality business that was at the precipice of a significant tailwind- energy sovereignty demanding a upgradation and addition to existing energy infrastructure. In a desire to broad base revenues at Tube Investments, they did want to have a play in the power sector, “large, core and perennial”. Luck favors the brave and while the desire to foray into the energy sector was well informed, the thrust from the government on the same, post the pandemic, enhanced the pace of the turnaround.

 

The pandemic, in hindsight, turned out to be a lucky break as competitors didn’t have the mental and managerial bandwidth to take advantage of a wounded competitor. The managerial staff at CG Power very easily conceded to pay cuts for the time being as every company was going through the same.

 

More importantly, luck favored them in allowing this transaction to happen through the RBI Stress Asset Mechanism (2019) and not through the IBC via NCLT. Apart from requiring cooperation from only domestic secured lenders, this imposed a deadline for reaching a settlement with the domestic lenders. Unsecured creditors would have to be dealt with outside the ambit of this settlement. This resulted in 100 per cent of the secured bank liabilities being settled within 30 days of the new management taking control, and consequently a reclassification to standard assets from NPA. This led to a resumption in the ability to bi for

and win new business. While in hindsight it seems like they were fortunate, it was made possible because of the work ethic and preparedness of the new management team.

 

Division of labor allows for focus

 

The speed of resolution was possible because of the MD’s relentless work ethic and presence in all conversations. While being the overarching presence, he ensured the teams focused on their scope of work and not worry about anything else by keeping the firefighting and operations team separate. One fought to resolve every issue at hand with ferocity while the other was told to prepare a “dream battle plan” to “regain” ceded market share. This is best illustrated by CG Power announcing a capex plan to double capacity in motors division, transformers division and expand capacity in switchgear segment, just two years after the takeover. At every instance, the management in dealing with the company's operations have behaved as if legacy issues did not exist. This was further propelled by the 7800 crore capex announced in OSAT facility of semiconductors- a showcase not just of another bold gut call but more importantly the promoter group’s faith in CG Power. This trust was backed by the performance of the company. The performance in turn was enabled by how the new management dealt with the existing ecosystem of the company. “In settling the bankers, the company had used persuasion, logic and negotiation skills. In addressing the vendors, it did the reverse.” Recognising the faith the ecosystem had shown in CG Power at its lowest, every last penny owed to vendors, employees was paid back in full and with speed.

 

Best practices were adopted in operations- SAP upgradation, Kaizen, Project Mudra and Leap under McKinsey’s aegis, etc.- even as a fight for survival was being fought at the other end. In doing so, it ensured that as the tiger’s wounds would heal, it would come back roaring.

 

Even as I am in awe of the feat pulled off by the CG Power promoters and team, I can’t help but conclude that this is a one off. A situation that cannot be modeled. The combination of Mr. Subiah and Srinivasan is in itself a rarity. Even with their acumen and integrity, a lot of external circumstances had to fall in place for a turnaround of this quantum to be pulled off. I would still not undo my heuristic of touching a M&A deal as an investor, but perhaps upon successful proof of execution, a year or 18 months in, looking at CG Power would have still made a lot of money. That has been my larger learning. Proof of execution demands my attention as an investor.    Disclaimer: Harini Dedhia is Fund Manager at Tamohara Investment Managers. Views expressed are her own.