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With focus on fertilizers, can Muthiah revive SPIC’s fortunes?

With focus on fertilizers, can Muthiah revive SPIC’s fortunes?
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First Published: Tue, Apr 26 2011. 10 56 PM IST
Updated: Tue, Apr 26 2011. 10 56 PM IST
Chennai: The pre-liberalization generation in Tamil Nadu may remember the jingle ‘SPIC DAP, SPIC Urea’—a lone crusader for fertilizers among popular advertisements trying to peddle orange drinks, detergents and two-wheelers.
Yet, SPIC—or Southern Petrochemical Industries Corp. Ltd, a joint venture between the MA Chidambaram Group and the Tamil Nadu Industrial Development Corp. Ltd (Tidco)—acquired cult status as a brand. The SPIC commercial was aired during the telecast of Vayalum Vaazhvum (Fields and Livelihood), a popular show for farmers on Doordarshan. The twin SPIC buildings on Anna Salai, or Mount Road as that generation knew it, were landmarks in Chennai. Only one of the two buildings still stand, the other being sold and partly demolished, underscoring the declining fortunes of the group.
SPIC’s fortunes since its beginning in 1975 have been linked to the founding family, specifically to A.C. Muthiah who has been at its helm since 1983. The group was founded by M.A. Chidambaram, after whom the cricket stadium in Chennai is named. His son Muthiah is also a cricket administrator like his father.
So far, the company hasn’t had the succession struggles that trouble several other family business, mainly because of single male heirs. Muthiah has one son, Ashwin Muthiah, who is the vice-chairman of SPIC.
“Usually, decisions taken in family businesses are unclear as the family members on the board are unable to build a consensus, especially when they span over generations. Sometimes, these boards are not even strongly built,” said Kavil Ramachandran, who teaches a course on family businesses at the Indian School of Business, Hyderabad. “But in some rare cases, when the decisions are taken by one central strong figure-head, it is a make or break scenario.”
While keeping control, the SPIC family has let professionals have their say.
Satish Kumar, who joined SPIC as a management trainee from the premier Indian Institute of Management, Ahmedabad, in the early ’80s and became the managing director of Spic Henkel in 1991, remembers the time when engineering and management students vied to be a part of SPIC.
“S. Venkitaramanan, who later on became an RBI (Reserve Bank of India) governor, was vice-chairman and president (equivalent to chief executive) of SPIC between 1977 and 1983,” Kumar said. “He introduced best practices in hiring, training and other management practices which made SPIC one of the best companies to work for.
Kumar considers Muthiah a visionary. “He had ideas of diversification, foreign collaborations and a risk appetite even in the 80s. His investment ideas were well founded, in sunrise sectors like petrochemicals, pharma, electronics, etc.”
Then, liberalization happened opening up industries such as chemicals and pharma for unregulated competition.
“Companies like SPIC operate in a sector that is vulnerable to government controls and regulations. When those policies change, the businesses in that sector are either given a boost or suffer,” said Tamil Nadu industries secretary Rajeev Ranjan, who is also the chairman of Tamilnadu Petroproducts Ltd.
“It happens even more with family businesses,” said Ramachandran. “They are very confident and stable before the sector that they operate in opens up, after which they are surprised that there is competition that operates more efficiently.”
Unless the business restructures to fit the new economic environment, it is likely to face difficulties. “Post-2000, even survival would have been difficult for such companies for by then, the post-liberalization players would have established themselves solid and strong.”
SPIC chairman Muthiah looks wistful in his ninth floor office. “Maybe we weren’t adept at maintaining a rapport with our partners and competition, and that came in our way,” he said in retrospect, referring to the external factors that tripped SPIC.
“We had invested close to Rs 1,000 crore in our aromatics project, which I believe had a lot of potential. If CPCL (Chennai Petroleum Corp. Ltd) had not taken us to court on that project, and if our IPO (initial public offering) had gone through, the project would have succeeded and cash flow would have also been taken care of,” Muthiah said.
His wood-paneled office painted a sparkling gold communicates the kind of empire he had hoped to build. “Diversification was our interest then. We wanted to be a conglomerate, not a fertilizer company, for which scope for growth was less in a price controlled regime,” he said. “That’s what all large businesses did back then.”
Liberalization also came when the firm’s cash reserves were leveraged in investments in other firms, such as Madras Refineries Ltd, Manali Petrochemicals Ltd, Tamilnadu Petroproducts, and Arochem, all public sector joint ventures like SPIC.
There was even an entry into detergents through a joint venture with Germany’s Henkel as SPIC Fine Chemicals Ltd. The company had also invested in unrelated ventures like Standard Motors, SPIC Electronics, SPIC Pharma (making Penicillin) and biotech. There were also joint-venture projects in West Asia.
“But the difference was that SPIC was operating in a sector that was dependent on government subsidies for cash flow. Instead of shoring up on cash reserves to use on a rainy day, they had incurred debt of the order of Rs 1,200 crore by the late 90s,” said a Tidco official, who did not want to be named as he is not authorized to speak to the media.
Through a build-up of interest rates and penal interest rates on unpaid loans, SPIC has accumulated a debt of Rs 2,845 crore owed to a consortium of 30 banks.
“If SPIC Petrochemicals’ IPO had gone through in 1995-96, the company would have been one of the largest in that sector today,” said Raja Vaidyanathan, who was with SPIC for about 20 years. “Then, there would have been funds to not only sustain the petrochem ventures, but also continue other projects like the Tuticorin power plant.”
But that was not to be, and thereafter one project after the other failed.
“We set up the gas-based fertilizer plant in Dubai at a cost of Rs 400 crore, (but it) did not take off as the Dubai government suddenly decided to supply gas to us only intermittently,” Muthiah said. “With an investment of a mere Rs 100 crore, SPIC Pharma did well making Penicillin, until Chinese imports foiled it.”
He doesn’t think the problems had anything to do with SPIC’s decline.
“The company could have built a profitable empire around petrochemicals if its core fertilizer business had been stable. But that was becoming less profitable with naphtha becoming an inefficient feeder. Other companies which came up even post-liberalization had started using natural gas as the feeder,” said a former SPIC executive who, too, did not want to be named.
With the removal of import duty on petrochemical products and fertilizer plant feeders, competition became tough in the sector. “The company, because of its close ties with the Tamil Nadu government and Tidco, did not venture into projects outside the state. It did not, say, invest in the KG basin to explore natural gas. The ties that helped Muthiah in an era of licences and government controls bogged him down then,” he said.
Muthiah agrees with the assessment. “There were incentives for import substitution then, and so we invested in backward integration. When import became cheap, we were at a disadvantage.”
SPIC’s revenue fell steadily from Rs 2,711.48 crore in the fiscal year 2000 to Rs 415.04 crore in 2009-10. The last year the company made any profit was 2005. Its net losses for the fiscal year 2010 stood at Rs 124.57 crore.
What industry veterans call its best asset—the fertilizer manufacturing plant at Tuticorin—remained non-functional for three years from 2007-10. Its loans are being bought and managed by the Asset Reconstruction Company of India. Real estate properties owned by the company and its promoters, including one of the SPIC buildings on Anna Salai, and parts of Muthiah’s Adyar villa, were sold to pay some of SPIC’s debt and supply operating capital to run its plant. “This way, the promoters have pumped in Rs 150 crore,” the Tidco official said.
“Working capital was required mainly to service IOC (Indian Oil Corp. Ltd), and we’ve made an arrangement with the fertilizer ministry to supply their subsidies towards that.”
A veteran SPIC executive explained how the plant was restarted. “On the guarantee given by the fertilizer ministry, some banks opened their letter of credit again; our dues in payment of electricity and water bills were waived. The railways, which demands instant payment for freight carriage, has agreed to give us 10-15 days credit.”
“The government is also keen on increasing supply of fertilizer due to increasing demand for food crops today,” Muthiah said. “Now, we have decided to focus on fertilisers. There is demand for that now, and that’s what the next generation in the family, Ashwin, wants to do as well,” he said. “We wanted the company to be a conglomerate when all the business world was into diversification. Now, when everybody’s talking about focus, we are also doing that. It was only external factors which pulled us down.”
An investment manager who declined to be identified blames the troubles of the firm on poor management. “Fertilizer is a process industry that doesn’t require much technical expertise or innovations at the daily operational level. For the kind of manufacturing plant and market base that SPIC had built, all that was required to run the company well was sound management practices at the fundamental level. Even that was lacking in this group,” said the investment manager. “By 2014, SPIC may have fully recovered. But I’m not sure it’ll still be a family business.”
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First Published: Tue, Apr 26 2011. 10 56 PM IST