Chennai: The executive chairman of the Murugappa Corporate Board (MCB), M.A. Alagappan, who took charge of the reins of the $2 billion (Rs7,880 crore) Chennai-based group in October 2006, is looking forward to raise the set target of $3.2 billion of turnover by 2009-10. More than a century old, the group has diversified interests in fertilizers, sugar, engineering products and finance. As Alagappan puts it, the Murugappa Group would soon be on a new path—shedding its “old conservative Madras” image and look at external funding for future growth to “look at larger pictures”, even as Chennai becomes home to new manufacturing companies such as Nokia India Pvt. Ltd and Ford India Pvt. Ltd.
In a rare conversation with the media, Alagappan, one of the grandsons of the founder of the group—A.M. Murugappa Chettiar—talks about the group’s performance, its future plans and family-related issues. Edited excerpts:
Chennai is still considered a conservative market compared to many other cities in the country. Being one of the largest and oldest business houses in the city, what is your take on that?
Chennai is becoming buoyant and as competitive as any other part of the country. Because if you take Hyundai Motor India Ltd, Nokia India Pvt. Ltd, Motorola India, Saint- Gobain Glass India Ltd; with all of them coming in, there is a fair amount of competition, especially in the HR (human resources) market. Because we train people and Nokia picks them up. So, you see, we are not as isolated as before. The attraction for people to come back to Chennai used to be there also. But they want to come back on ‘Bombay wages’ and not ‘Chennai wages’. And I think the Madras companies are starting to pay well because if they have to attract and retain talent, they have to pay well. And no more being a south Indian and having south Indians only, you need to have others as well. Especially in the financial services sector, you need to attract a lot of people at the market rates. So, we can’t afford to be ‘Old Chennai’ at it.
Changing profile: Murugappa Group executive chairman M.A.Alagappan says the focus now is to promote the group as a whole, instead of being seen as a clutch of individual firms. (Photo: R.A.Chandroo/ Mint)
HR policies and their implementation have become an integral part of any business. What kind of HR policies have you adopted to attract and retain your employees?
Among the 32,000-strong workforce, around 3,000 are in management. And among the management staff, I don’t think we have problems in the lower levels. I think it is in the middle and top management levels that we need to attract and retain talent. For the high-flyers and senior managers, we have got the Esop (employee stock option plan) now in place for the listed firms and will also go in for the unlisted companies. Two, our compensation today is fairly in line with the market. In the last two-three years, we did some surveys and corrections and now, we are in line with the market. Three, I think we provide opportunity for growth. Fourth, to attract talent, we have started exercises like the one we did with NDTV Profit—“Making of The Indian Century.” Earlier, we were known as different companies, but now we are communicating that we are a group, a strong one. So, we are trying to attract people to the “Murugappa Group”; people didn’t know about the Murugappa Group. And in general, we are providing a good climate for working.
Chennai, considered to be a debt-loving market, especially traditional business houses, is yet to open up to the world of private equity, venture capital and external funding. Your comments on that?
This is true. Because I think the owners who usually own more than 50% ownership do not want to dilute their stake. Presumably we don’t have “the go” in us like the others have to grow huge and large. But that will change. Because unless we grow, we can’t be competitive in the market; unless we bring in more capital, we cannot be competitive. So you would find people changing.
So can we see a change in the Murugappa Group? When and how?
Yes, the way we are changing. We have not found the need so far to go to the capital market. But, if the need comes, yes, we will. It depends on the growth in each of the businesses and the pressures we have and the opportunities we have in terms of acquisitions. So far, we have done our expansions and acquisitions with our own capital, debt and cash accumulations. This may not be true as we go forward because we may want to look at larger things. We have started to look at larger things. But as of now, most of the companies are able to raise debt and cash and we are not stopping. But if you look at the financial services sector, yes, we are increasing capital regularly. But given the shareholding pattern of the finance company, a lot of the money is coming from us.
There have been instances of lack of planning on Indian companies’ part when it comes to succession. How has this been managed at the Murugappa Group?
I think at the corporate board level, we are fairly well clear about our succession plans—be it the chairman, vice-chairman and the directors. At the various business levels where we have the managing directors, we also try and identify two or three people who can take their positions if something should happen. We do it on a regular basis—identification of people, send them for training and other outside courses; and then take them through. We’ve already seen it. In terms of sugar, the managing director is retiring in April. We have already appointed a deputy managing director to take his position from within. With respect to Cholamadalam MS General Insurance Co. Ltd, the managing director will retire in March-end. So, we have sent the successor’s name, again from within, to the insurance apex body Insurance Regulatory and Developmnet Authority for approval. We keep looking at succession plans at the corporate board-level as to who will succeed who. Hypothetically, we may discuss “if this fellow leaves, who have we got?” and “if this fellow gets pinched, who have we got?”
So, would you prefer the succession plans to be internal or are you fine with external people as well?
We would prefer people from within, though we’ve had one or two external members. But we would prefer succession from within the group because they know the culture of the group and it is much easier.
When it comes to family-run businesses, there have been instances of practices such as preferential allotment at reduced prices before an initial public offering or merging of group companies in a manner that the swap ratios favour companies with higher promoters’ equity stake. What is your take on that?
Today, lots of businesses have used the preferential issue or warrants to shore up. To some extent, when we are running the business and taking the risks, I don’t see why we should not increase our stake at the current market price. If the market price goes up tomorrow, that’s my luck. But the issue today is done at today’s market price because the Securities and Exchange Board of India (Sebi) lays down certain rules. It is not that I am taking it at one-tenth the market price or something. I am taking it at today’s market price or at an average of 26 weeks or whatever formula Sebi lays down, I am taking the shares at that price. So, it is fair. Tomorrow, because of my efforts, I turn the company and the stock market rewards me with a higher price, that’s my luck. And that’s not only my luck, but that’s the return I am getting for my efforts.
You had non-family members such as P.S. Pai and N.S. Raghavan as chairmen sometime back, but the post is now with a family member. What is the reason?
I just want to ask one thing: Are family members not professionals? A professional succeeds a professional. I was vice-chairman and I succeeded as chairman. So, what’s wrong?
Currently, most of the group’s turnover is being brought in by businesses, including fertilizers and engineering products. Is the equation likely to change?
If you take last year’s figures, 43% was from fertilizers and the sugar and plantations sector accounted for 47-48% of the turnover. Moving forward, I see fertilizers being a large portion of turnover, followed by engineering products, which includes both Tube Investment of India Ltd (TI) and Carborundum Universal Ltd (Cumi). This will be closely followed by the financial services, which will include insurance. Then, this will be followed by our sugar business if you don’t include it in the fertilizers business.
If you take sectors such as fertilizers which you say would contribute a significant portion in terms of turnover and sugar, the prices are government-controlled, which do not fetch better margins. How do you plan to tackle this issue?
In case of fertilizers, yes, you are right, it is a totally controlled commodity. But there are two things to this. One is all the raw materials for fertilizers are imported. So when you get into the market, to get them is necessary. But we clearly look at our efficiencies, how to improve our efficiencies and how to improve our margins. Also, on the by-products side, we evaluate what can be done and how we could add other products whose prices are not controlled, that will bring us better margins. The classic example is we market G-Sulphur and bentonite sulphur, which are not controlled commodities. In the by-products section, we market gypsum. In terms of the sugar business, when we produce sugar, we have got bagasse; when you crush the sugar canes, you get molasses after you take out crystal sugar. With bagasse, you can have cogen; and with molasses, you can make rectified spirit and alcohol. Those two will give you much better returns than sugar would give you. So, moving forward, this is what we are going to do.
The Murugappa Group has set a target of achieving $3.2 billion by 2009-10. Which companies do you think would contribute the maximum and what would be the revenue contribution pattern by the companies?
I am hoping that all the companies would contribute the maximum (laughs). The revenue contribution would go by the size of the companies. But I am hoping that when I meet the team later this month, this target will be revised upwards.
By how much?
I don’t know. One, the rupee appreciation helps me. But without the rupee appreciation, I am hoping the target will go up. The reason for this is I think we have done very well in terms of expansions, and we have done it without having to go to the markets. We have done it with our own internal accruals. We have expanded and now, it’s time for those to pay back.
Recent history of the Murugappa Group shows that much of the growth has been through mergers and acquisitions. What can we expect in 2008?
There are two things—at all times, we have expansion plans going on and there is organic growth coming through. But all the time, we look for acquisitions in the areas of businesses where we are, whether in this country or outside the country. So, when the opportunity comes, we take it. We’ve never said no to an opportunity.
But which areas of businesses do you think could take the inorganic path this year?
I wouldn’t know because as far as I am concerned, my business plans are all contained within organic growth. I am sure if, during the year, opportunities come, we won’t say no in the major businesses. This would include fertilizers, sugar, TI and CFL (Coromandel Fertilisers Ltd). Like, last year, after we came up with our business plans, we got the opportunity to buy Russian firm Volzhsky Abrasive Works (VAW). (Cumi acquired it in June 2007.) We may have a similar opportunity.
Cumi had acquired 96% equity stake in VAW and you were considering to take complete control of the company. Has the remaining 4% been mopped up?
No, we still haven’t got the remaining 4% because there are some problems which are being sorted out but I am not really aware of them. Our team members are in Russia and they should have finalized by now, but I am not sure.
Post-merger of the two fertilizing units—CFL and Godavari Fertilisers and Chemicals Ltd (GFCL), what is the kind of cost savings that would be generated?
Cost savings can come only in terms of marketing. Currently, we have two products because CFL addresses a certain market and GFCL addresses another section of the market. I think we would like to keep it separate for a while. So, I don’t think we are looking at major cost savings now.
There were talks that you planned to acquire Madras Fertilizers Ltd. Are you looking at that option?
I don’t think we will ever do that.
Why is that?
See, I think they put urea in a naphtha-based urea unit, if I am not mistaken. We will have to spend money in maintaining it. Plus, it has got a huge labour force and they have fair amount of losses. And to give it away from the government to us, will be a huge task. I don’t think the Tamil Nadu government will also be supportive of a private sector taking control over it. I don’t think it will happen. So, the unit will keep lingering on or remain half-closed most of the time.
Murugappa Group has a presence in the NBFC (non-banking financial company) and non-life insurance space. Are you looking at the life insurance and banking sector (post-2009 if regulations permit)?
Not currently, no. Because, the life insurance business requires a huge amount of capital. And, if you look at our general insurance business also, we started it and we put in the entire Rs100 crore before we roped in a partner. If we do it, we will do it where we can afford to put in our capital. Life insurance is a major opportunity. It is not that it has not crossed our minds as to why we haven’t got into life insurance or that it doesn’t keep crossing our minds. It constantly keeps coming back as to “why the hell are we not in the life insurance business when we are in general insurance business?” I think we need to settle a little bit in general insurance and then, maybe a couple of years down the road or something, we might look at setting up a life insurance business. But we won’t look at the banking sector post-2009. We would have looked at it earlier but now that DBS Bank of Singapore has come in as a partner in our NBFC, we can’t consider that option. DBS has its own branches in India. We will be an NBFC all the while.
Of the 29 companies, seven are listed. Would you be looking at unlocking value of any other companies in the group? Have any of them reached that level as yet?
No, I don’t think so. Because the companies that need to be in the exchanges are already there.
Maybe two-three years down the line…
I can’t say anything because unless we spin off some companies later, we have currently no plans. If we decide to go into retail, we would like to spin off retail separately. But, that’s not on the plans at the moment.