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The acquisition machine

Top-line vanity with bottom-line sanity is Vivek Chaand Sehgal's success mantra

Malini Bhupta 

The acquisition machine

In times when 'under-promise and over-deliver' is the order of the day, few would dare to place lofty targets before stakeholders. And those who do this successfully tend to create history. This is exactly what billionaire Vivek Chaand Sehgal, co-founder and chairman of the $6.9 billion Samvardhana Motherson Group, is in the process of doing. Over the last two decades, Sehgal has taken the flagship company Motherson Sumi's revenues from Rs 10 crore (back in 1996) to Rs 34,600 crore in 2014-15. And he isn't done yet.

Sehgal's journey in the world of business started at the age of 18, when he tried his hand at silver trading. In 1977, he set up Motherson along with his mother to manufacture power cables. His foray into the auto component sector began in 1983, when his company entered into a technical agreement with Tokai Electric (now Sumitomo Wiring Systems) to manufacture wiring harnesses for Maruti Udyog. In 1986, Sehgal formed his first joint venture with Sumitomo Wiring Systems, which led to the establishment of the group's flagship company, Motherson Sumi Systems. Motherson Sumi is now one of the largest auto ancillary in India.

Success is best measured in numbers and Sehgal's company is easily a chart-topper by this yardstick. Sehgal says that modern-day gurus have taught him three things: top-line vanity, bottom-line sanity and that there's no better reality than having cash in the bank. Even though the company began its journey in the automotive sector in the 1980s, the company has grown at breakneck speed since 2000. Its revenues have grown at a compounded rate of 44 per cent between 2001-02 and 2014-15, while profit has grown at 35 per cent. A large part of this growth has come inorganically. His future projection too is a mix of organic and inorganic drivers.

Corporate history may be littered with failed acquisitions and joint ventures, but Sehgal has built his empire through a string of acquisitions - seven at last count. Some of these were made when the world was struck by the biggest financial crisis since the Great Depression. The first big acquisition was in 2009, When Motherson acquired the rear-view mirror business of Visiocorp plc UK and rechristened it Samvardhana Motherson Reflectec (SMR). This acquisition is relevant not only because it was made at the peak of the recession but also because the size of the company Sehgal was taking over was larger than his own. Today, SMR is one of the largest manufacturers of rear view mirrors in the world. This acquisition propelled the Samvardhana Motherson Group on to the world stage as an established global tier-I supplier.

In 2014-15 the company closed three other acquisitions - those of Stoneridge, a wiring harness business in the US; Minda Schenk, an interior and exterior plastic parts maker in Germany; and Scherer & Trier, an extrusion and hybrid parts maker, also in Germany.

The company has consistently achieved all the five-year targets it set for itself. After exceeding the $5 billion sales target in 2014-15, Motherson has set a new target. Earlier this year, when investors pummelled the stock after Volkswagen was caught in a storm over its emission-cheating software - Motherson derives over 44 per cent of its sales from the Volkswagen group - Sehgal remained unruffled. He reiterated that the company was on course to clock revenues of $18 billion by 2019-20 and in the process, no customer, country or component would account for more than 15 per cent of sales. While there would be some impact on volumes in FY16 thanks to the Volkswagen issue, JM Financial expects consolidated earnings to grow at a compounded 35 per cent a year between FY15 and FY18, supported by 17 per cent annual growth in revenues and a 280-basis points margin improvement.

Given the company's past record of meeting aggressive targets, investors are buying into Sehgal's vision this time around too.

'We have consistently achieved our targets for the last 20 years'
Setting high targets and achieving them have become a habit for Vivek Chaand Sehgal, chairman of the $7bn Samvardhana Motherson Group, and a man known for his deep-rooted belief in the Divine. In an interview with Malini Bhupta, he discusses the group's journey - which has seen revenues soar from Rs 10 crore to Rs 34,600 crore in twenty years - and the road ahead. Edited excerpts:

The year 2015 has been an interesting year for you. While you closed three acquisitions, the market pummelled your stock after the Volkswagen fiasco. How was the year according to you, for the company?

Confucius said, "May you live in interesting times." I am sure if he is watching the world from the other side of the lens, he would be really excited. We do live in very interesting times...

The market is always right so I do not go against that wisdom. Having said that, all our products are agnostic to the type of engine! So though it was an engine problem, but because we are supplying to the VW group (probably the largest by a company of Indian parentage), the market thinks we will be affected. Well, the numbers will do the talking. We feel that though the effect may be there, we would not be seeing much of the hit.

We have seen bigger recalls from almost all customers; we know they are good for the end-customer. We are sure that things will become normal very soon. We are excited by the trends in new cars. They have a lot of and this is good for us, as it increases the selling price and our patented products are being appreciated and are in demand. For us the year was terrific. We saw the culmination of our last five-year plan and the setting of a new target, with the focus on return on capital employed (ROCE). We are already well on our way to achieving this new target.

Nearly 44 per cent of your revenues come from the Volkswagen group. Do you think the fallout will impact the company in 2016? Do you have a plan in place to insulate the company from this risk?

We are a well-diversified group and we follow "3C X 15" to the letter, which means that no single customer, country or component should constitute more than 15 per cent of our total turnover. We are following this and by the end of 2020 fiscal we would be near 3C X 10. We are confident that 2016 will be a great year as well, as planned.

You tend to set stiff targets for the company. What is your vision for the next five years and how do you plan to achieve it?

We always set targets after meetings with our customers and they tell us in confidence, since they have these figures clearly - which car, what volumes, the model life, etc. We thought it is better to inform all investors upfront. We have consistently achieved our targets for the last 20 years. We feel these targets put in the annual report are healthy and all the stake-holders are clearly guided. We focus on five years, as the normal life of the model rarely exceeds five years.

My team sets these targets for the next plan and the first draft is in by the end of the fourth year of the running plan, which is fine-tuned and released at the start of the first year of the new five-year plan. Our next five-year target is to take the company to $18 billion with a ROCE of 40 per cent. The target has an acronym which is OTT FPR or One lakh Twenty in Twenty and Forty Percent Return on Capital Employed.

Given that you are supplying to the world's top OEMs, how do you see the global automobile market changing?

These are fast-changing times and hence we feel car makers want suppliers who will change and move along with them. Where our customers go, we will follow. Our entire thinking is aligned with them, as they wish we will do.

What segments will help the company get to this target?

We have a clear vision of approximately $12 billion or so with organic growth, which is just by orders won from customers. The rest will come through acquisitions, which even if we do not get for some reason, we would still have happy shareholders as whatever money we do not spend will be shared with them. Our gurus in the current world have taught us: top line vanity, bottom line sanity and cash in bank reality!

Do you see Motherson going up the value chain? If so, what segments/components would the company go after?

"Nan Demo Eii" meaning "everything okay", as the Japanese say. We do not strategise on where we want to be, rather we wait for the customers to advise us on what we should do next.

Other than the high exposure to the Volkswagen group, as far as revenues are concerned, what other business risks do you feel need addressing?

A great company like VW cannot be marred by a few people who had an error of judgment. Risks are opportunities. Even crossing a road is a risk, so we will not change our focus. We will however continue increasing the content in the cars that we supply to.

You possibly are among the few to have made a success of acquisitions. Why do you think global acquisitions have worked for your company?

India is a great teacher. In 1947 over 500 kingdoms became India. There exists great diversity in this country. We learned to work with different cultures and beliefs. When we go outside we do not teach or learn, rather we share the best practices we follow. We do not impose ourselves on others and we do not allow anyone to impose themselves on us either. In the process we just do normal business, that's the secret we think...It is like the great river Ganga Maiya - she encompasses all the rivers and tributaries and just goes to the Gangasagar as one.

Going forward, do you still see inorganic growth fuelling revenue growth?

Sure, if the customers will tell us, we will not hesitate to study, and if the terms are agreeable we will do acquisitions as required. As long as the ROCE is intact up in 2020, we will probably go ahead.

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First Published: Wed, February 10 2016. 00:17 IST