SH Limited: The Strategic Decision Dilemma

On 10th November 2022, the Steering Committee, headed by Mr. Rao, MD of SH Limited, a
leading Seamless Tube manufacturer, was engaged in devising a strategy to decide on the future
course of its 100% subsidiary based out of a Scandinavian country considering that the business
has been tottering at an annual turnover of INR 30 crores with an effective negative bottom
line of INR 5 crores.

SH Limited
SH Limited, with a production facility in Sweden, is among Europe's leading suppliers of tubes
and engineering products for the hydraulic cylinder industry. It has more than 400 years’
experience in the field of iron and steel processing. Its product range includes cold drawn
seamless tubes, cold drawn welded tubes, roller burnished cylinder tubes, cold formed tubes
and components. The product selection covers a wide and comprehensive range of dimensions.
The company is managed by a professional team. It receives its raw material majorly (cold
drawn seamless tubes) from its group company based out of India at competitive prices with
longer lead time. However, the internal/own sourcing of raw material helps in procuring even
in odd quantities which may not be possible otherwise due to minimum order quantity
requirement.

SH Limited is the only player in the Scandinavian region manufacturing seamless hydraulic
cylinder tubes. The company is capable of manufacturing larger diameter cylinders (lowest up
to 273 mm) which is its unique selling proposition. SH Limited is dependent on the availability
of stock of tubes of various diameters. The facility to draw lower diameter tubes is not available
at the premises. Since the company’s major volume is derived from under 140 mm tubes, a
higher inventory carrying cost may need to be incurred to take up orders. The company’s
product mix includes selling random length/cut to size seamless tubes, which requires no value
addition. Currently the company has five white collar employees and eleven blue collar
employees. Refer Exhibit 1 for details of the company's assets.
Customer profile of SH limited
● Manufacturers of contracting machines, forestry and agricultural machines
● Cylinder manufacturers for various applications
● Wholesalers and distributors
Product Groups
● Skived and burnished tubes for hydraulic cylinders
● Cut tubes
● Components for hydraulic cylinders

The dilemma
The decline in sales and the threat of a closure prematurely announced in 2017 has resulted in
marquee OEMs like leading construction equipment companies and commercial vehicle
manufacturers to switch to alternate sources thereby eliminating the dependence on SH
Limited. Opportunities to get these businesses back are limited and time consuming. The
business presently is predominantly dependent on a higher volume of cut length tube business
with very low contribution but is helping to keep the company survive. (Exhibit 2)
With the on-going war and the recession in Europe, the performance of FY23 would take a hit
and performance likely to be at FY20 levels. (Exhibit 3)
It is evident that the company has been draining resources from its parent and will need
continued support to keep it going. The business is also not that significant in terms of its size
and nature that the parent company can afford to invest in resources including management
time.

The options before the company are (but not limited to):

● Aggressively pursue and regain lost business of hydraulic tubes from major equipment
suppliers which is likely to take 3 to 4 years to mature into a sizeable volume and
surpass turnover of Rs.100 Cr

● Reduce the number of employees (blue and white collars) and achieve EBIDTA break-
even while in parallel scaling up the business without further addition of manpower

● Sell-off this business

● Close down the business (would cost substantial sum in terms of Environment and
employee lay-off cost) and convert the plant into a resort/picnic spot

● Any other possible solution

It is expected that the solution/s suggested or proposed captures the merits, de-merits and
mitigation plans besides the costs and profitability workings to enable Mr. Rao to take an
informed decision.

Exhibits:
Exhibit 1: Assets of SH Limited

1. Industrial land and building including Office – 1 Land Area: 74,700 Sq. Mts. Building Area:
about 23,755 sq. Mts
2. Office building -2 and Guest House Land Area: 5,003 Sq. Mts. Building Area: about 1,289
sq. Mts
3. Archive: Land Area: 500 Sq. Mts. Building Area: about 140 sq. Mts
4. Skiving & Roller Burnishing Machines – 4 Nos. (Sierra: 2 Nos., TMT: 1 Nos., M2: 1 Nos)
5. Tube Cutting Machines – 7 Nos. (Behringer)
6. Lathes – CNC – 7 Nos. (Doosan, Voest Alpine, Mazak, Puma, Storebro, Heyligenstaedt)
7. Welding Robot – 3 Nos. (ABB, Cloos, Keempi)
8. Component Skiving Machines – 2 Nos.
9. Overhead Cranes – 8 Nos.
10. Mechanical testing equipment for tensile and Impact testing
11. 3D Testing facility for component Shop
12. Storage facilities for cylinder tubes and components

Exhibit 2: The capacities (MT/Year) and performance in each of the product group:
Product Capacity FY20 FY21 FY22 FY23 Plan
Skived and
10,000 1,993 4,163 3,325 3,491
Burnished
Components 4,500 2,462 3,511 1,174 1,232
Cut Length
4,500 3,558 6,163 4,956 5,197
Tubes
Total 19,000 8,012 13,837 9,449 9,921
Exhibit 3: The Revenue, Cost & EBITDA of SH Limited:
Year FY20 Act FY21 Act FY22 Act FY23 Plan
Sales (Rs. Mn) 385.80 227.80 353.90 400.30
RM Cost % 66.22 63.91 67.13 64.90
Contribution % 25.11 23.48 31.39 28.60
Employee Cost % 25.9 38.7 51.7 33.6
Total Fixed Cost 200.80 160.00 163.40 168.80
(Rs, Mn)
EBITDA % -18.50 -43.72 -9.88 -9.81