Once Bitten, Twice Smart

Compared to how they reacted to the 2008 slowdown, Indian companies have been more alive to cut costs this time around. These six companies started paring costs early and with purpose
Kausik Datta

As dips in business go, this one has come quickly. But if theres a silver lining, its this: several companies, with a context of the sudden and brutal 2008 slowdown, are more prepared and alive to take defensive action. Companies dont have a choice. A slowing economy is stifl ing revenue growth, even as rising prices and high interest rates pad up costs. An ETIG study projects the operating margin of the 50 companies that make up the Nifty stock index to drop to 24.7% in the quarter to December 2011, against 26.3% in the corresponding 2010 quarter. With limited control over revenues, many companies are attacking costs. They are trying to reduce costs by 5-15%, says Sunil Chandiramani, partner and national director-advisory services at Ernst & Young. Sunny Banerjea of KPMG India, which is helping a few companies become more effi cient, says what is happening today is an extension of 2008, with a crucial difference. That was (in 2008) more knee-jerk. Now, they are taking longterm measures to become more costcompetitive, says Banerjea, partner and head-management consulting. The only similarity among them is that they all are working hard to retain and improve their workforce, says Chandiramani. Otherwise, they are taking a horsesfor-courses approach. For example, cement makers are tapping captive power, petrochemical companies are adding capacity that can run on both naphtha and gas, adds Ajay DSouza, head of Crisil Research. Elsewhere, companies have reduced raw material imports to offset a falling rupee. Noncore assets are being sold. Group synergies are being explored. Harsh Goenka says his 10,000 crore group will save at least 15 crore a year through centralised printing that comes under the newly-created centre of excellence on material purchase one of fi ve such. The six stories below illustrate the nature of cost-cutting that a part of India Inc is engaging with. These six companies are not cost leaders, but they have done their bit in the 12-month period to September. Some of it to stay alive, some with an eye on life beyond this slowdown.

RAW MATERIAL COST Whirlpool For a maker of consumer durables, cost of metals is the big deal. For example, metals account for roughly 85% of the manufacturing cost of an air-conditioner. Of the metal cost, steel accounts for about 60% and copper 35%. During our period of study October 1, 2010, to September 30, 2011 the price of steel was up 14% and copper 24% on the London Metal Exchange. Yet, Whirlpool of India managed to lower its raw material cost by 8.5% in absolute terms; even in relative terms, it spent less on raw material for every rupee of revenue earned (see table). This was partly because it raised prices 5-7% and partly because of active cost management. We fell back on our 2008-09 experience, says Vikram Handa, vice-president procurement (Asia), Whirlpool. The focus was on short-term tactical actions without disturbing the long-term strategy. The 2008-09 strategy was internally called winning in uncertain times. The company revived this in the second half of 2010, when its procurement team, who work closely with their counterparts in the US headquarters, flagged a possible slowdown amid rising commodity prices. The company has been doing a lot of re-engineering in product design and components, and making structural changes. Company officials declined to give specifics, but an industry expert, speaking on the condition of anonymity, said this would include using alternate materials and reconfiguring body parts of durables. Shantanu DasGupta, VP (corporate affairs and strategy), Whirlpool, says these are fundamental alterations that will outlive the ongoing slowdown. Because of its parents global presence, Whirlpool has global sourcing arrangements some of its suppliers have facilities in India and abroad. With the rupee falling against the dollar, which makes imports costlier, the Indian company has increased domestic sourcing. Writankar Mukherjee

EMPLOYEE COST India Infoline For the 26,000 employees of this Mumbaibased broking house, the decline in trading volumes in stock markets have hurt them where they really feel it: their paychecks. Salaries are the largest cost head for brokerages. More so for India Infoline, which spent 25.4% of its revenues paying its employees in the 12-month period to September 2011. This is more than its peers like Edelweiss (15.6%) and JM Financial (19.2%). But for India Infoline, this was lower than the 29.8% it posted in the corresponding period of 2010, primarily because of higher revenues. And it could drop further in the coming quarters, as the company has cut salaries by 10-20%, across the board, Pallab Mukherji, presidenthuman resources, says in an email response. Mukherji declined to reveal when the cuts came into effect, but a senior official who did not want to be named says it happened in the September to December quarter, the results for which the company board will take up on February 4. According to Mukherji, the cuts are graded poor-performers took a greater hit than the good ones. ...performers would continue to get their just rewards, says Mukherji, adding that business heads were consulted on the exercise. While admitting that the cuts caused resentment, Mukherji puts another spin on it: (But) a lot of employees were grateful they had a second lease (of life) in the companyIt makes one wonder what a little jolt from time to time can do in propelling performance focus. Mukherji adds the company continues to hire in key businesses and niche talent segments, like adding 1,500 employees in gold loans last quarter. India Infoline maintains a large branch network because of its retail-lending, says an analyst, not wanting to be named. They can cut staff cost only to a certain extent as the branches still need to run. Instead, they need to take a call on the markets and restructure their whole business. Nihar Gokhale

Monsanto The Indian subsidiary of the worlds largest seed company has adopted a threepronged strategy to cut costs. Over the last year, it has consolidated its manufacturing operations for greater economies of scale, reduced inventory and chopped discretionary expenditure like travel. Its most decisive step was to shut two of its three small seed-producing factories, in Eluru and Bellary, in Andhra Pradesh. Its entire operations are now at one factory, in Hyderabad, which has helped the company reduce the peripheral costs of running multiple units. The core idea is to have a larger team, larger storage capacity and all systems located at

one plant so that no time is lost in decision-making, says Amitabh Jaipuria, managing director of Monsanto India. We have dedicated units for contract manufacturing when the need arises. According to Jaipuria, in the fourth quarter of last fiscal (January to March 2011), Monsanto wrote off 11 crore towards the sub-optimal assets. From this year (2011-12), we will save on overheads and administration costs, he adds. Its second step was to reduce inventoriesa common issue for agribusinesses, which see seasonal sales by selling its slowmoving products. Jaipuria says inventory reduced by about 35%, yielding it 44 crore. Keeping inventories low is a long-term goal for the company. We have tasked ourselves to do business with much less capital, says Jaipuria. There is a stricter sense of discipline when the marketing team places orders. If they ask for 100 tonnes of seed, they have to ensure almost all of it is sold. Its third step has been to review discretionary expenses. For example, in travel, employees are encouraged to book online, plan in advance and search for the cheapest options. Jaipuria says most of these steps are for the long haul and will change the way Monsanto does business. Our teams are looking at our entire business model and trying to re-engineer core processes for greater efficiency. Nidhi Nath Srinivas

Godrej Industries We dont wait for a slowdown to do this, says chairman Adi Godrej of the steps the company is taking to trim costs. If anything, as the economic conditions have became tougher, the maker of chemicals, edible oils and baking fats has intensified its cost-cutting initiatives. Adi Godrej says the company hopes to cut costs by at least 5% every year to stay competitive in a tough market. Besides ongoing processes like comparing input and output metrics across factories to identify areas where it can do better, in the past few months, Godrej has done a few things of significance in the past few months to cut costs. The main focus is raw material costs, which have grown at a slower pace (26%) than revenues (35%) in the 12 months to September 2011. It reviewed how and from where it sources raw materials. (We have) changed sourcing, made import substitution, strengthened hedging mechanisms and even considered alternate raw materials, says V Srinivasan, chief financial officer. To explain, all the companys plants are in India, but half its revenues come from exports. Although India accounts for the other half of revenues, the company was importing 80% of the raw materials for this geography. As a result, it had to buy in advance (to factor in shipping time) and in bulk, and deal with a falling rupee. Godrej now buys more of raw material from India, especially in vegetable oil byproducts. This is faster and cheaper. Right now, domestic sources are about 5% cheaper, says Srinivasan. Our aim

was to dodge volatility in currency movementwe hedge risks by being as close to the sales point as possible. Srinivasan says capital employed has reduced by about 80 crore over the last six quarters. It is a focused, long-term plan," he says. Rahul Sachitanand

MARKETING AND SELLING COST Dabur India Like every consumer goods company, the past 12 months for Dabur have been about tradeoffs. On the one hand, it wanted to launch more products and increase revenues, for which it needed to advertise. On the other, it wanted to cut costs, and selling expenses -- a significant spend at 10-20% of revenues for large companies - would draw the axe. Dabur has fared well: it has increase dsales by 27% in the 12-month period to September 2011, while spending just 3.5% more on selling. We spaced out our new product launches last year, which resulted in lower ad spends, explains Jude Magima, senior executive director-operations. A few things the company institutionalised in recent years have helped it during this time of fiscal prudence. One, it has its own media-planning agency to decide where it will deploy its advertising money. This helps it save some of the 20-25% commission a third-party agency would otherwise take and gives it flexibility to match spending with needs. Two, says Magima: Special tie-ups with media houses have helped us lower our ad buying costs. Rather than buying with individual publications, Dabur has been buying space across a media groups publications. It is also co-partnering media houses in its promotional activities, in return for free advertising. This doesnt reflect in our financials as costs. Analysts, though, are concerned. In a recent note to investors, Anand Mour of Ambit Capital wrote: Such an advertisement spend pullback appears myopic to us as it not only hits future growth, but also impacts the pipeline of new products. Magima says its not like that. Our media spends as a proportion to sales have come back to around 14% in the past few months, he says. And we dont sense any demand slowdown for our products. Sagar Malviya

POWER COST India Cements Cement manufacturers are battling on many fronts: a combative marketplace where cement supply exceeds demand, high interest rates and rising prices of raw materials. It is challenging them to find solutions to be profitable. More so for those based in South India, where excess capacity has shackled profitability. At Chennai-based India Cements, paring costs has been a continuous process, says a senior company official who did not to be named. For example, in the last six months, the company operated below capacity, which tends to increase the per unit cost of production. Yet, its operating margin improved to 23% in the first half (April to September) of 2011-12, from 9% in the comparable period last year. The official attributes this to higher cement prices and cost control. For example, India Cements reduced its power consumption to 90 units a tonne, from 93 units. However, this is still higher than the 87 units a tonne it achieved about three years ago, when its units were working at capacity. Power costs, which account for about one-fourth of its total costs, is a focus area for India Cements. It is setting up a 48 mw thermal power plant, which, the official says, will help it save at least 60-70 paise per unit, or 25 crore; and it could add revenues if the company sells surplus power. India Cements has captive coal mines in Indonesia. By the month end, it will finish building infrastructure to connect the mines to a nearby jetty, and start shipping this coal to India. This will ensure availability of coal, for use both in the power plant and cement operations, and a lower cost of production. For a cement manufacturer, 70% cost is incurred up to the clinker stage. In the last six months, India Cements has reduced costs till this stage by 2% and it is trying to cut more. Another way to reduce costs is by increasing the blended cement portion, which India Cements has done by 3% this year. These are all cost savings, says the official. Satish John