Renuka Sugars and risk inherent in chasing rapid growth
Growth, often cited as the main goal of business, may not always be the best way to sustain it specially when growth isn’t matched by a corresponding increase in return on invested capital
The rush for scale in business can sometimes turn fatal. Narendra Murkumbi, once considered among India’s most promising entrepreneurs, discovered it the hard way. Last week, his stake in Renuka Sugars, the company he set up in 1998 when he bought his first loss-making sugar mill, came down to just 13% after divesting additional stake to Wilmar Sugar Holdings Pvt. Ltd (WSH), Singapore. With that, the man who once vied to be the sugar king of India, was forced by sustained losses and unsustainable debts to relinquish control over his own start up (WSH’s stake in the company will eventually go up to 38%). Murkumbi’s error was that he wanted to grow too fast, too soon.
In pursuit of his goal, he expanded into Brazil in 2010, buying up two loss-making firms at a time when the global economy was still recovering from the financial meltdown. His investment of Rs1,900 crore in the two acquisitions in the world’s leading sugar producing market didn’t seem excessive at that point. After all, at home, Renuka was a financially sound, well-run company though small in size. In 2008-09, it reported a net profit of Rs223 crore on total income of Rs2,822 crore. Over the next seven years, as Brazil’s promise faded alarmingly and the vagaries of the sugar cycle kicked in, Renuka stumbled, floundered from one debt to the other, and finally collapsed under the weight of its own ambitions. While its top line swelled, losses too grew alarmingly.
Indeed, growth, often cited as the main goal of business, may not always be the best way to sustain it specially when growth isn’t matched by a corresponding increase in return on invested capital. What’s more, the irrational and leveraged pursuit of size can turn out to be the kiss of death. As author Ed Hess who wrote Smart Growth: Building an Enduring Business by Managing the Risks of Growth, warned, “If you aren’t careful, you can grow your company to death.”
It isn’t a fate unknown to lesser mortals than Murkumbi. In the late 1980s, Vinay Rai was a MIT-trained scion of an influential business family. His aspirations though far exceeded his abilities as he forayed into steel, infotech and telecom, raising funds through mega IPOs and bank loans. Among the companies he set up were Usha Ispat, Malvika Steels, Usha Microprocess Controls, Information Technologies India Ltd and Koshika Telecom as he sought ever-increasing size and stature in the Indian business world. It was too good to last and the end for all of them came swiftly amidst messy defaults.
Orkay Industries Ltd in the 1980s was a mid-size polyester firm with a reasonable bottom line and healthy prospects. However, bitten by the size bug, it decided to take on Reliance Industries which was also assembling vast capacities at that point. It was an uneven and eventually deadly battle. In 1999, the Bombay high court issued winding up orders for Orkay Silk Mills, the rump form of Orkay Industries Ltd.
It isn’t just Indian companies that have tripped up in the quest for scale. US telecom giant WorldCom developed an insatiable urge to grow through the 1990s using the acquisition route. Eventually and inevitably, it over-reached. In October 1997, it paid $30 billion in an all-stock deal to acquire MCI Communications Corp. It was the trigger for the collapse of WorldCom’s carelessly constructed empire and five years later, the company went into bankruptcy even as its once high-flying stock traded for pennies. More recently, Hanjin Shipping of South Korea, which took a massive gamble of increasing its fleet with lease agreements even after the global economic meltdown had sent the Baltic Index crashing to an all-time low, collapsed last year under the weight of the debt it had piled on even as it grew.
Significantly, in 2010 when auto giant Toyota Motor Corp. found itself beset with problems following the recall of over 8 million automobiles and over 60 class action lawsuits filed against it, the company’s president Akio Toyoda admitted that the auto maker may have grown too quickly.
The problem of course is knowing when growth is toxic and when it is essential. Kingfisher Airlines’ growth spiral, including its purchase of Deccan Aviation in 2007, eventually turned deadly, but IndiGo (owned by InterGlobe Enterprises) has successfully used scale to gain competitive advantage.
Perhaps it isn’t growth that is the problem but how companies go about it, which is why Ed Hess’s 3 Ps for growth are worth heeding: Plan for growth; Prioritize the processes and controls needed to accommodate the growth and Pace growth so as not to outstrip capabilities, processes, and controls.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.
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