When Hinduja Foundries chairman R Seshasayee recently met the company’s shareholders at their annual general meeting in Chennai, he started by saying: “Don’t get emotional, it doesn’t solve the problem.” The reason for this pragmatic advice was that the foundry arm of the Hinduja group had become a sick company and landed on the operating table of the Board for Industrial and Financial Restructuring (BIFR). Around half of the company’s net worth had been eroded on September 30, 2012, thanks to losses accumulated in the preceding four financial years. In spite of Seshasayee’s advice, shareholders poured over every page of the annual report and grilled the management for over an hour to find out why the company had reported sick and what was it planning to do about it.
Analysts and observers were taken by surprise. “The company is incapable of failing, especially after having put up a state-of-art facility at Sriperumbudur,” says an industry expert. This is the second time the company has reported sick.
A decade ago, Ennore Foundries (as it was then called) became potentially sick after its net worth had turned negative on March 31, 2004. However, it returned to sound financial health in March 2005 after registering a profit in 2004-05.
While several attempts to speak (through phone calls, SMSs and even a visit to the company’s AGM) to Hinduja Foundries managing director B Swaminathan failed, Seshasayee said at the AGM two significant external issues impacted the company.(KEY INDICATORS)
Global Challenges
One is the slowdown in the automobile market. Swaminathan elaborated at the AGM that medium and heavy commercial vehicles sales grew 8 per cent in 2011-12, but declined 13 per cent in the first half of 2012-13; tractor sales grew 10 per cent in 2011-12, but declined 4 per cent in the first half of 2012-13; construction equipment grew 24 per cent in 2011-12, but fell 40 per cent in the first half; and passenger car sales, including utility vehicles, grew around 4.5 per cent in 2011-12 and then dropped 7 per cent in the first half of 2012-13. Analysts doubt if the recent slowdown alone has dented the company’s net worth so severely. The market, they say, stayed robust between 2008, the last slowdown, and the beginning of 2012-13.
“We really don’t know whether the market alone could lead to this situation,” says an industry expert.
To be sure, the production and sale for the 18 months ended September 2012 were 157,408 tonnes and 130,750 tonnes, respectively, as against 88,545 tonnes and 73,170 tonnes in 2010-11 (12 months).
Two is power — the most important input in a foundry. “We cannot run the foundry with diesel generator sets. Power is a major constrain, particularly in Tamil Nadu,” Seshasayee had said at the AGM.
According to him, Hinduja Foundries had to buy high-cost power from the exchange but the customers weren’t willing to pay more. Power costs, Swaminathan added, rose 42 per cent during the year.
Rating agency ICRA says the loss was due to a combination of higher costs and inadequate compensation, and the higher costs were on account of several factors including rising input costs, an inventory write-off of Rs 82.95 crore, increase in power costs, higher rejection rates, writing-off of bad debt to the tune of Rs 15.2 crore, one-time payout of compensation towards voluntary retirement scheme/wage arrears settlement and a surge in interest expenses.
Seshasayee admitted at the AGM that internal factors were at play too. “We did not do a good job of stabilising production at the new plant in Sriperumbudur. We took lots of new products, very complex blocks and heads. While we planned for a learning process, it took much longer.”
However, under the supervision of an independent director a technical committee was formed; it looked into the issue, found the problem and fixed it. Seshasayee said the Sriperumbudur facility is one of the most modern foundries in India, the equipment there is comparable to the best in the whole world.
Analysts agree that this facility will not only lead to an increase in capacity and productivity but can also help the company make products of a higher value and superior quality. The Sriperumbudur facility is said to be equipped with robots, while the old facility near Chennai is running with “old methodology and with people who belong to the old school of thought”.
Seshasayee said the company’s intention in investing in this new facility is to become a competitive foundry which can meet not only the domestic demand but also the demand from the global market.
Turnaround plan
India has nearly 4,600 foundry units, 80 per cent of them in the small and medium sector. Only about 50 of these have international quality accreditation and only about 10 have modern manufacturing facilities. Around 70 per cent of the total production is from grey iron.
Hinduja Foundries mainly operates in this segment. In the niche segment of cylinder blocks and heads, the company is the largest casting manufacturer in India.
“If we get competitive quality and cost here, the market is huge, because foundries all over the world are closing. We thought we will have a globally benchmarked foundry; so we had set up this facility,” said Seshasayee who described the Sriperumbudur factory as a “gold mine”. He added the company’s directors are spending a lot more time to address the issues and the company has roped in global consulting firm McKinsey to look at the operations and improve efficiency. “All I can say is we have started taking action; this will take time to get us to the global level. Once we do that, the opportunities are significant,” he said. Seshasayee disclosed that Hinduja Foundries has bagged orders from French car maker Renault and British construction equipment maker JCB.
Swaminathan added that the company had come up with “Mission New Leaf”, an integrated turnaround programme with focus on improving delivery and quality. It could involve production improvement through debottlenecking, reduction in rejections to the global standards, and better control over product mix and cost.
He added the promoters of the company have invested in this foundry to make it a global company and the prospects are good. Seshasayee, who also represents the promoters on the board of Hinduja Foundries, said: “We (the promoters) are fully committed to take forward this company; whatever is required (people and finance), we will provide”. The promoters have committed to infuse around Rs 300 crore, of which Rs 150 crore has already been pumped in and the remaining will come before March, said Swaminathan. “We will ensure this company will come back to the growth path,” Seshasayee told the shareholders.
