Spartek Ceramics Case Study:

About the Case:

 Growth Strategy
The focus of the case is on the growth strategy of Spartek Ceramic India Ltd.

 Changing Industry Structure & Merger and Acquisition

It examines the alternative growth strategies open to the Company in the context of
changing Industry structure and increased competition , diversification, expansion, or
merger and acquisition.

 Takeover Target
The case would also expect discussions on possible problems in integrating Neycer with
Spartek and the probability of success with takeover target.

Background of the Company:

• The Company Incorporated in the year 1983 as Public Limited Company in the State of Andhra
Pradesh with authorised Capital of 40 Million. The Company was promoted by Mr.Krishna
Prasad Tripuraneni , a young Electronics Engineer with a MS in Computer Science.
• Objective of the Company was “Manufacturing and dealing in "Ceramic and Stoneware Glazed
and Unglazed Wall and Floor Tiles, Ceramic Capacitates and all types of Ceramic Electronic
components, Ceramic Earthenware and Porcelain Sanitary ware, and Glassware articles of
industrial and domestic application”
• Technical collaboration of the Company was with leading manufacturer in USA – SFT
• Plant of the Company situated at Andhra Pradesh and started With 12,000 TPA ( Third Party
Administrator) Expanded To 26,000 TPA and 40,000 TPA Approved.
• Distribution network concentrated in southern and western India with 150 dealers by 1988.
• In 1989 sales concentration is above 40% south, 30% west (mainly Bombay), 30% north and
east.
• Sourcing of main equipment are done from Italian and German Suppliers.

The five forces are the most important strategy framework to understand a
given industry.
Five Forces is a framework for understanding the competitive forces at work in an industry and
which drive the way economic value is divided among industry actors” The Five Forces can help to
explain the kind of phenomena as well as help to understand your industry of interest and ,
identify opportunities and risks how profits within an industry and will be distributed extrapolate
industry trends & anticipate changing trends .

Porter's Five Forces are:

• Bargaining power of buyers :- (Interpretation ):- As per case study we can say that Bargaining
power of buyers were near to moderate. As per the scenario in case study buyers demand
changing relatively big size tiles where in fashion as customers were making their home look
artistic and giving it a luxurious look. The per capita consumption of Ceramic tiles in India is low
and boom in housing market boosted the demand for the Ceramic tiles.
• Bargaining power of suppliers (Interpretation) :- As per case study we can say that Bargaining
Power of Supplier near to high. Because of their shortage of raw materials were been exported
to other countries as raw material cost were also raising due to this the overall bargaining
power of supplier was higher in the industry.

• Threat of new entrants (Interpretation) :- As per case study we can say that the threats of new
entries in market of Ceramic Industry was slightly higher than the moderate. The present
scenario of the industry tells that the big companies were increasing their market share by
acquisition of the small units and due to high cost have prevented new entries to next few
years no new entries were coming in the market.

• Threat of substitutes (Interpretation):- As per case study we can say that the threat of
substitute product was moderate to high, but the Ceramic tiles are man made and easy to lay
and maintain. They come in various textures and patterns which natural products such as
marbles, stones, granite fails to provide . Natural products require lot of chemical treatment,
cutting, polishing etc. which is very time consuming process. And It is also possible that in long
run there might be scarcity of these natural resources.

• Rivalry among existing competitors (Interpretation);- As per case study we can say that the
rivalry among the existing competitors is moderate to high. As per the scenario in case study the
big companies has merged with top companies and are acquiring the small units to inscrase
their market presence. The Industry had very few competitors and rest of Industry was
fragmented and unorganised Industry in India.
 Financial Performance

Commercial Production: In September 1985, Spartek earned pre-tax profits of about Rs. 12
million on revenues of about Rs. 63 million.

Signing up of new entrants: Most of the new entrants could sign up well-known ceramic tile
producers from Italy, West Germany, Spain or the UK for technical collaboration.

Board of Directors response: Surveying the overall scenario, the Board of Directors of
spartek summed up the company’s response in the following words:

‘the ceramic tiles industry is witnessing entry of new units and competition is getting
intensified. The company being a pioneer in the field and with can solidated distribution network
would be able to face the competition.

Expansion & Diversification

Spartek’s management indication: The potential is so vast that we are making
necessary arrangements for doubling the capacity shortly with managerial investments on
balancing equipments.

Expansion VS Diversification: A confounding variable in the expansion vs.

diversification decision was the one relating to the mode of entry.

Diversification of risk: If a company is diversifying, and that they are doing a merger &
acquisition, then it is a bad motive. At shareholder level, the shareholder can diversify &
reduce the risk. The company shall not do that as solely the reason.

Opportunities: For expansion Spartek should mainly concentrate on its own industry. It
can be diversifying into other products.

Growth
As the main focus of this case study is growth strategy of Spartek Ceramics India Ltd.
In the spaces of production/Technology/Skill sets/Market Growth is very important factor.
Growth can be Organic and Inorganic.

Organic Growth: If company is growing on its own is called as organic growth. It is

possible, but is would take time and because of that threat of competition will take away to
the market. Also, it needs capital expenditure.

Inorganic Growth: If company will grow via acquisition, it will be inorganic growth. It
saves time & efforts to establish. Also, its cost will be higher.
Competitors:
Somany Pilkingtons Limited
 

Plants in both Gujarat and Haryana with capacity of 12000 MT and 21600 MT
respectively

Expansion plan and new units for increasing capacity by 30400MT in Gujarat and
Haryana

Has a significant presence in sanitary ware sector

It is a veteran in the tile industry

Has shares trading at Rs 100 in May 1988

Has acquired Orient Ceramics Limited (OCL) which has acapacity of 5000 TPA

Long term borrowing = 10.34 million

Earnings After Tax = 20.57 million

D/E = 0.1

Enterprise Value = 45.91

Enterprise value/sales = 0.2

( measure of a company's total value)

Neyveli Ceramics and Refractories Limited (Neycer)

 

Plant in Pondicherry with a capacity of 10000 MT

In the business of manufacturing sanitary ware, ceramic ware, stoneware pipes etc.

Strong brand image and excellent retail visibility

Shares trading at face value of Rs 10 in May 1988

Long term borrowings = 129.66 million

Earnings After Tax = (18.94) million

D/E = 4.15

Enterprise Value = 144.28

Enterprise value/sales = 1.06

Bell ceramics:
Bell, a Baroda based company, was implementing a 20,000 TPA tile plant in Bharuch District, Gujarat,
in technical collaboration with Societa Impianti (SITI SpA), Italy. Bell has been promoted by two non-
resident Indians (NRIs), RK Jatia and RCN Swamy. The former was one of the promoters of the Asian
Hotels Ltd. which owns Hyatt Regency hotel. New Delhi. The project cost of Rs 147.8 million was to
be financed mainly through equity capital of Rs 54.1 million and Rs 90.2 million of institutional loans.
Bell's products would be in the market by mid-1988. Bell was reportedly installing, for the first time
in India, 'single fast firing double deck roller hearth kiln,' which would facilitate simultaneous
production of two main products. Bell was also planning to use cheaper natural gas as fuel; this was
a major factor in the location of plant in Bharuch. In view of the highly automated facilities, the
manpower strength would be kept at about 100. Bell also has an export obligation of 25% of annual
production for a period of 5 years. Bell has already indicated that it has plans to expand its plant
capacity to 35,000 TPA, later.

Conclusion:

 Spartek has had an excellent start and a meteoric rise. It has shown core capabilities in
financial engineering/strategy, speedy project implementation, and building brand equity
with state-of-the-art techniques in advertising and communication. Now, it should
concentrate on growing faster by building on these advantages as well as by bold radical
expansion.
 While initiating steps to implement the first phase of expansion, Spartek management' had,
during 1986/87, sought and obtained government registration for further increase in
capacity to 40,000 TPA.
 For a start-up venture which went into production in September 1985, the Company had
done extremely well, declaring a maiden dividend (12.5%) in the very first year of operation,
followed by 20% in the succeeding year. However, the company management does not
seem to have any long-term. vision or objectives.
 After nearly two years of operation, Spartek the overwhelming market response to the
product, the Company had launched many new colours, designs and sizes to offer more
wider choice and to cater to individual tastes.
 , Spartek has the necessary expertise in the ceramic tile industry where as Neycer is
experiencing large cost and turnover-runs.