Kolkata: Giving his group a new identity five years ago, Sanjiv Goenka said he was breaking away from legacies to build new ones.
Less than a year earlier, he and his brother Harsh Goenka, chairman of the RPG Group, had partitioned between themselves a bunch of family-run businesses and personal assets spread across India.
Things were still volatile within the extended Goenka family when in July 2011 Sanjiv Goenka announced the launch of the RP-Sanjiv Goenka Group, creating a new identity for the companies managed by him.
Five years on, as he reflects on the cultural transformation of the group, Goenka says his group has “earned the right” to grow by improving efficiencies. The task was to shift focus from revenue to efficiency, and Goenka turned to consulting firms McKinsey & Co. and Boston Consulting Group for advice on how to lead this transformation. In the process, he ruffled a few feathers within the group. “Father’s long face” notwithstanding, he led the transformation, Sanjiv Goenka said, referring to the late Rama Prasad Goenka, who died in April 2013. Edited excerpts from an interview:
What was the mandate for the consulting firms?
Historically, the undivided RPG Group was focused primarily on revenue and not on operational efficiency. Because previously we operated in a protected environment, efficiency was not as relevant as it is now in a highly competitive environment.
But once the partition happened, we brought in McKinsey & Co. and Boston Consulting Group to advise us on two things: structurally, what we should do to grow and operationally, how to improve efficiencies. The two firms worked across the group.
Internally, at that stage, I took a call that we will not expand unless we could manage the expanded capacity in the most efficient manner by global standards—no growth at all, unless operationally we could make the most of it. So, breaking from tradition, I said we have to earn our right to grow.
It initially took a lot of courage, a lot of self-assurance to take that stand—to say, for instance, that we will not chase ultra-mega power projects—because I was swimming against tide. But it was clear in my mind that we will not add scale only for the sake of scaling up. We will instead focus on how to get our house in order, weeding out inefficiencies.
So, we started to have two review meetings a month for every company: one to discuss operational efficiencies and another to review strategic initiatives. These were unknown in our group previously—people here were rarely asked questions.
How did your employees react?
There was, for the first couple of months, some resistance from within the group. But that was only for about two months or so.
One day, three of our CEOs (chief executive officers) and a CFO (chief financial officer) walked into my room and I immediately realized something was amiss. They said that I had started to act like the owner. So, I asked them if I should not. They said, of course, I should, but at the same time, they said they felt that I had stopped to trust them. By the time I met my father later in the day, they had taken the matter to him. And with a long face, he told me that I had hurt key people in the group and that he wasn’t happy about it at all.
To my mind, these people didn’t resist change because they were incapable of coping with it. They resisted the change because they were being forced out of their comfort zone. The tussle went on for about two months, but after that, everyone rallied around the change.
Today, we are a leaner and more efficient organization of some 52,000 people. The average age of our CEOs now is 50 compared with 65 previously.
How has the group gained from this change?
Traditionally, executing projects ground up—or greenfield ventures—was not our strong suit. But in the last five years, we have executed several projects—two power plants and two carbon black facilities, to name a few—and all of them have been completed on time and within budgets.
Then McKinsey advised us to get into business process outsourcing (BPO), and we came across the Firstsource opportunity. We closed the acquisition within four weeks. We have turned around Firstsource, which was effectively in losses at the time we took it over, to deliver profits in excess of Rs300 crore in three years.
We have pared its indebtedness from Rs2,400 crore at the time of acquisition to Rs600 crore. And we have done all these by scaling up competencies.
As a group, our revenue has jumped from Rs7,800 crore five years ago to Rs18,000 crore. Our gross assets have gone up by Rs20,000 crore to Rs32,000 crore, and if you look at annual cash flows, our Ebidta (earnings before interest, tax, depreciation and amortization) has gone up from Rs1,200 crore to Rs3,500 crore.
And by the end of 2018-19, the group’s net profit is going to go up from Rs1,500 crore to Rs2,200 crore as Spencer’s and the Chandrapur power station starts to turn in profits. It’s been a quiet period, but at the same time, a period of intense growth.
How is Spencer’s doing?
Spencer’s has just turned Ebidta-positive. Every month, it is making enough money to meet all costs except interest on its loans. The outstanding loans aren’t big and very soon we will pay off everything. I am happy that because of Shashwat’s (Goenka) personal intervention, we have managed to pare costs by about Rs300 crore. (Spencer’s Retail Ltd, an arm of CESC Ltd, runs department stores.)
Phillips Carbon Black also appears to have turned around...
Yes, it is now turning in a profit of Rs10 crore a month. We have completely reinvented the business. Whereas previously feedstock used to come from the US sailing for six months, we now source it from other countries which are closer by. The biggest problem with the earlier arrangement was inventory losses. Now, our working capital cycles have shortened, and we don’t have the problem of booking losses even before the feedstock had arrived.
What is the strategy for CESC going forward?
We have decided that we will avoid businesses that are government intervention intensive. So, for CESC, the future lies in distribution. We generate about 2,500MW currently, which we will increase to 3,000MW, but our focus will be on expanding our distribution business. The Chandrapur unit, which had some difficulties earlier on, is coming out of the woods. We now have buyers for almost its entire capacity, which means all our costs are covered, except interest.
It is being transformed into a Mumbai-headquartered production house, generating content for online consumption. With data getting cheaper on every network, we are of the view that the demand for content is only going to grow. So, from being one of the richest repositories of Indian music of different genres, we are turning ourselves into a production house, which will also leverage our strengths from the past. Currently, 14 films are under production by not-so-famous directors—say by people who have assisted award-winning directors. Each has a budget of Rs1-1.5 crore and is to be produced in 2-3 months. I am not saying that they are not to be released in theatres, but the primary aim is to release them online. (Saregama India Ltd was previously known as Gramaphone Co. of India Ltd.)
And what has been your experience like in sports?
Clearly, we have had more success in football than cricket. And we have started to manage this franchise professionally with a CEO at the top, backed by a team of professionals. We are looking to expand in the business of sports, and are weighing various options. In football, we will take at least 2-3 more years to make money. Cricket, to my mind, may not be profitable, but clearly, we can’t do too many things for charity. So, even as we seek ways to grow, we are being cautious.