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Deals pipeline is overflowing, but discipline now is to not get tempted

Deals pipeline is overflowing, but discipline now is to not get tempted
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First Published: Mon, Feb 09 2009. 10 50 PM IST

Healthy targets: Mahindra Systech president Hemant Luthra says that instead of buying sick companies, he only looks to acquire profitable firms and spends 12 months making friends so that they stay wi
Healthy targets: Mahindra Systech president Hemant Luthra says that instead of buying sick companies, he only looks to acquire profitable firms and spends 12 months making friends so that they stay wi
Updated: Mon, Feb 09 2009. 10 50 PM IST
Mumbai: The president of Mahindra Systech, Hemant Luthra is a collector of old maps, some of which are framed and displayed in his office room. He says he bought them at unbelievably low rates many years ago, perhaps the same way he has been acquiring companies abroad. In an interview, Luthra spoke about the company’s acquisitions in recent years and its plans for the future. Mahindra Systech is the auto components and design engineering arm of Mahindra and Mahindra Ltd. Edited excerpts:
Since its inception, Systech has adopted an inorganic growth strategy. Last year you acquired two companies; how do you see plans unfolding this year?
Last year we had decided the rationale of those acquisitions was to leverage India’s low cost, their technology and access to developed markets, and Mahindra’s reputation to build products in India and sell in Germany and Italy.
Healthy targets: Mahindra Systech president Hemant Luthra says that instead of buying sick companies, he only looks to acquire profitable firms and spends 12 months making friends so that they stay with the company for life and share the same passion to work with the deal. Abhijit Bhatlekar / Mint
(The) rationale for those acquisitions was that we don’t have enough management bandwidth to go and manage all these companies. We never change the management. So to incentivize them to stay, we created structures that made sure that their interests were aligned with ours.
So if we had bought a company in Germany and bought three-fourths of it and we had an Indian company in which we own 100%, then if a profitable order ever came, there would be a conflict whether to produce it in Germany or produce it in India. We did something unique. We offered the German stakeholders owning 25% an option to convert their stake into Indian equity. If there are excess assets lying in Germany, they just move it to India. German and Italian managers have got stock options in the Indian companies. Hence, the interests are closely aligned.
When was this done?
It was being done over the last two years. All the entities we acquired, the model is exactly the same. The overseas company will become the subsidiary of the Indian. The Indian (company’s) shareholders will be German. We are not concerned about the nationality of the individual, but we are concerned about the values and systems of the individual.
A lot of Indian firms that have made acquisitions in Germany are going through a lot of pain. Have you been saved because of this model or have you been lucky?
Maybe circumstances have forced us or maybe my non-auto background must have forced us to be a little humble about all the things that I don’t know.
Hence, instead of daring to buy a sick company, I only look at profitable companies and spend 12 months making friends so that they live with us for life and share the same passion to work with the deal. Mr (Baba) Kalyani (chairman of Bharat Forge Ltd) may dare to buy a sick company and turn it around. Luthra doesn’t know how to do it.
Our role model, and maybe the envy, (is the) success of Bharat Forge. I have to salute him. He is (an) iconic Indian manufacturing outsourcing story. But Bharat Forge makes its profits from selling heavy forgings to the truck industry. That is why we went and bought (German forging company) Schoneweiss, their only competitor in Germany.
What has been the impact of the slowdown on your overall global operations?
We have close to 2,800 people in Germany, Italy and UK. In Germany, we have done something smart. There is a very sensible concept of borrowing labour. If you are a member of the IG Metall union, you can borrow labour from a company’s plant that has excess skilled labour. This saves the company which has excess labour the layoff costs, and the company which needs it, the pension costs. We borrowed 300-odd people and terminated their contracts when it expired, hence we didn’t have to terminate permanent employees.
In England, we had to terminate 130-odd people.
In Italy, fortunately, the companies we have are not servicing the automotive sector but providing equipment to harvester combines, construction equipment companies, military off-road vehicles, to companies like Caterpillar, etc. As the commodity prices have been strong most of last year and agri-prices had gone through the roof, farmers were making money. So this company is still making money.
Many people see it as a disaster. We see it as a bottle that is half full. There are estimates that between 20% and 30% of the auto components companies will die. If we turn out to be one of the survivors and one-third of competitors are dead, even if our volume in the market doesn’t grow, but market share will grow. We are telling our friends in Germany, “Don’t worry about top line, which is vanity, don’t worry about bottom line, which is sanity, just worry about cash flow, which is reality.”
Consultancies often say if you make an acquisition in the UK and you have some colonial past, it helps. Therefore, for Indian companies, going to the UK makes better sense than going to any other European country. Do you agree?
UK is a waste, at least from an engineering and manufacturing point of view. It has become uncompetitive. We bought one UK company because of its technology. If there were a financial services or design company, we would still look at it, but not any manufacturing company.
With the world economy going through a recession, there are quite a few big companies on sale. Will you be looking at them?
Why hasn’t the IT (information technology) industry bought big companies? Because the model works if you have got few people in Europe to understand the project and 90% of the people in India doing the hard work so that the value is delivered. If I buy a $1 billion company in Germany, I will need to have a $10 billion company here to get the synergy of outsourcing going. I don’t think we would go for a big company.
What is the share of auto and non-automotive revenue in Systech?
The share of non-automotive (revenue) is too little now. Maybe 15-20% in Germany, little more than that in Italy and 5-7% in India. Today, the turnover of Systech is Rs5,000 crore. Out of that 80% comes from automotive. That includes what our steel plants sell to gear manufacturers who eventually sell it to Mahindra Gears. Non-automotive may be what the steel plant sells to the railways industry.
Till five or two years ago, automotive components were the flavour of the season. All these analysts of the world thought they were so smart that they know everything. If that were the case, they would have predicted what would happen. Every time something happens, you overshoot. Auto components, which contributes 5% to India’s GDP (gross domestic product), will become 10%, everybody and his grandfather (were) buying auto component companies in Germany. One little downturn, you overreact in terms of gloom and doom.
Automotive industry contributes 10-12% of Germany’s GDP, which is well over a couple of trillion dollars. In India, it’s 5%. Absolute growth in automobiles in Western Europe, North America and Japan in terms of volume has been less than India, China and Brazil combined. You will continue to see, in my opinion, the migration from big cars to small cars as this oil shock of $140 has changed everybody’s mind. The Hummer is dead.
You had envisioned being a billion-dollar company by 2010…
We exceeded that target by a long shot. In 2005, we had said that we would become a billion-dollar company by revenue and a billion-dollar company by market capitalization by 2010. We became a billion-dollar company by revenue by half of fiscal 2009. We are behind in our target of market capitalization because of what has happened to the market and...because we have entered into a bit of a recession.
Your key priority this year...
Cash flow, operational efficiency and best return on capital.
Are you revising this year’s targets?
In Germany, they gave us a choice. They said we would have to revise our targets by at least 25% or 30%. We asked how much cash they will generate if we reduce it by 30%. They said, if we shut one more facility at night and do two shifts instead of three, we would be able to save and generate more cash. We said, don’t worry about the top line. Let’s generate more cash.
Share prices of everybody are shot to pieces. There’s nothing that you can do about it. Hence, you are going to have difficulty in raising money from banks or markets. Hence, you might as well conserve cash into the system.
So you still have a lot of deals in the pipeline?
Our deal pipeline is overflowing. Even now, we are getting offers from companies that we had negotiated (with) in October and November and broke up because the price was too high. The same guys are coming back to us with 30% lower prices, but the discipline now is not to get tempted. How do you set the price when you don’t know how deep the recession is? How do you settle a price when you don’t know which customer of the transmission manufacturer you are going to buy is going to survive?
shally.s@livemint.com
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First Published: Mon, Feb 09 2009. 10 50 PM IST