In quest of the right market chemistry

Veeshal Bakshi

R V Kanoria, Vice chairman & MD, KCI

Barely five years ago, Rs 328 crore Kanoria Chemicals & Industries Ltd (KCI) was up against all the odds which can push a company to the brink of business. These included a basket of commodity products with virtually no unique selling proposition (USP), competition from cheap imports, high production costs due to expensive power and to top it all, a remote manufacturing location in eastern Uttar Pradesh which was neither close to the source of raw material nor to customers of its products. It was a sure route for the business and company to take a nosedive into oblivion.

But today Kanoria Chemicals is one of those traditionally-focused, business family group companies which has been able to take advantage of the reforms agenda and more liberal policies. This despite the fact that there was intense competition which came along its way.

Admits KCI vice chairman and managing director RV Kanoria, “ We would have been a loss making company today but for the 25
mega watt (MW) captive power plant which was commissioned in 1997 with an investment of Rs 120 crore after government permitted
private investment in power sector as the power supplied by the state government is over three times more expensive.” The power plant has resulted in savings of Rs 36 crore. KCI also embarked upon a series of other measures to bounce back.

Financial re-engineering
The company pursued a one point mantra to improve profitability in an otherwise highly competitive and import sensitive commodity business: continuously cut costs and improve efficiency.

Mr Kanoria pursued a strategy which not many Indian promoters are comfortable with. He took the risk of making large, long term capital investments provided they resulted in lowering running and maintenance costs. He took another risk by financing these investments through loans instead of mobilising the money from capital market.

“As long as you have debt paying capacity, you should not hesitate to borrow. But at the same time, borrowing is contingent upon your capacity to generate positive cash flows,” says Mr Kanoria.

The strategy paid off. Interest cost has started receding as loans are being repaid. During the year ended March 2001, interest cost came down to Rs 23.84 crore from Rs 27.08 crore in the previous year.

Net profit has improved to Rs 7.77 crore from Rs 6.09 crore and though Mr Kanoria does not want to hazard a guess, analysts say that the first six months performance points towards doubling of
the profit during the year ending March 2002 but turnover is likely to remain around the previous year’s figure of Rs 327 crore.

Mr Kanoria’s strategy was driven by the nature of the company’s business — commodity products, high power requirement and little USP. Kanoria Chemicals business can be essentially split into two — chlor alkali and alco-chemicals. The chlor alkali business at Renukoot in Uttar Pradesh primarily produces caustic soda and chlorine and contributes over two-third of the total turnover of Rs 327 crore.

Chlorinated derivatives are produced from chlorine. These include stable bleaching powder, aluminium chloride, lindane and chlorinated parafins, commonly known as chlorinated parafin wax. Hydrogen liberated during the process of making caustic soda is bottled and sold to vanaspati ghee and oil manufacturers. KCI also produces the raw materials — salt and power — required for in-house caustic soda consumption.

Juggling product portfolio
With dozens of companies manufacturing similar products in India, KCI then went to set some ground rules to face competition effectively. These included conforming to good environment practices, focus on quality, keep running costs as low as possible and provide best service to customers.

The aluminium chloride business was set up in 1997 to cash in on easy availability of aluminium in Renukoot from nearby plant of Aditya Birla group company, Hindalco, and to avoid the high cost involved in transportation of chlorine. “We had to look for a high value product and we settled for aluminium chloride as it sells eight to ten times higher than the price we get for chlorine,” says Mr Kanoria.

The unit at Ankleshwar in Gujarat manufactures pentaerythritol which is used as a raw material by paint industry. Formaldehyde and acetaldehyde, the raw materials used in production of pentaerythritol, are produced in-house. KCI also sells formaldehyde in the open market and is today the largest producer in the country. The company also produces ethanol, a raw material for production of acetaldehyde, in-house from a distillery.

Mr Kanoria chose a radically different technology for manufacture of formaldehyde from that of other plants in India even though
it was three times more expensive. “ Though the company faced initial hiccups in stabilising the technology, it ultimately paid off as we are today perhaps the most profitable producer of formaldehyde in the country,” says Mr Kanoria.

Methane is recovered from effluent discharged by the distillery. After removing sulphur from methane, it is directly fed into engines, without steam generation, for producing power. KCI’s distillery is the only one in India to adopt this technology which results in annual cost reduction of around Rs 3 crore.

Instilling culture change
Despite some of the initial changes, Mr Kanoria was not satisfied with the pace of cost reduction generated through in-house efforts and roped in Accenture (then Andersen Consulting) to implement a strategic cost reduction exercise.

“ The costs came down by a further Rs 3.50 crore but even more significant was Andersen Consulting’s contribution to the change in mindset of workers as the consultancy firm’s officials worked with employees at all levels,” said Mr Kanoria. This exercise also helped the company to sharply reduce the number of contract workers.
Mr Kanoria said the restructuring suggested by the consultancy has also helped infuse a new work culture in the company which has resulted in evolvement of a 7-point blueprint which each employee is encouraged to pursue. These are: avoid experimenting, have no hesitation in speaking out one’s mind, continuously endeavour to improve, have a pride of ownership, foster a research-oriented culture, think out of box and finally have an eye on cost management.

An initiative currently under way is the implementation of enterprise resource planning (ERP) system which would provide ‘desk top’ flow of information of high quality at high speed. Mr Kanoria says when finally operational in mid-2002, it will reduce costs and radically modernise the functioning of the management.

Times ahead
Group company KPL International Ltd, formerly known as Kanoria Petro Ltd, will focus on marketing services after restructuring. The company brings together customers in India and suppliers from abroad. It seed markets products of foreign companies. Mr Kanoria believes that this business has a promising future as Indian market open up more and more to foreign goods. The company has so far focussed on specialised industrial products.

KPL has 27 agencies of foreign companies in these products which are centred around chemicals and plastics business. It recently opened a new engineering products division and has a office in Shanghai.

“This business is developing rapidly. We have already handled a business worth Rs 200 crore. Last year we made a net profit of Rs 1.40 crore,” says Mr Kanoria.

“Uptil now, we were pursuing a survival strategy. Now is time to generate growth. The real advantages have started emerging. The bottomline should be much better in the years to come even if there is not a major improvement in the sales revenue,” says Mr Kanoria.

Despite the gung-ho mood, the future growth prospects is not absolutely certain. KCI’s biggest disadvantages still remain the location of its Renukoot plant and the constant threat of cheap imports. KCI is into difficult businesses with intense competition which is not helped by high cost of transportation of raw materials and finished goods. The Ankleshwar plant has been facing adverse market conditions with both demand and margins under pressure.

So where does KCI go from here? “ I have been asking this question to myself as well,” says Mr Kanoria’s candidly. He believes that the company needs to concentrate on building the product base through development, expansion, and technology and strategic alliances over the next few years. But with the global and domestic economic environment changing constantly and KCI’s presence in the highly import sensitive and competitive commodity business, the company will have to tread cautiously.