Image: Amit Verma
Gurbachan (left) and Kuldip Singh Dhingra
Everybody wants to be in the paint industry, or so it seems when Kuldip Singh Dhingra, chairman of Berger Paints, rattles off a long list of competitors who’ve fumbled. They all belonged to reputed houses too: Think Tata-owned Goodlass Nerolac, Kirloskar-owned Kirloskar Paints or Thapar-owned Thapar Paints. “You name the business house and I will tell you the paint company they owned,” quips Kuldip. But, though in jest, he is making a serious point. The paint industry has proved to be a stumbling block for many established corporate houses that have made it big in a host of other industries.
In contrast, the Delhi-based Dhingras, who are originally from Amritsar, Punjab, have been paint sellers for the last five generations. And the two brothers, Kuldip (69) and Gurbachan Singh Dhingra (66), have drawn on that experience to take Berger Paints to the position of India’s number two paint company.
When the duo acquired Berger Paints in 1991 from United Breweries chairman Vijay Mallya, its financial position was precarious. It was, at the time, the country’s smallest paint company and hadn’t made money in years. But Gurbachan estimates that since 1991, the market cap of Berger Paints has risen 2,200 times to Rs 18,072 crore as of May 3, 2016. The company, established in 1923, is favoured by both domestic and foreign institutional investors who have taken its stock price up from Rs 44 on March 31, 2011 to Rs 244.5 on March 31, 2016—a compounded annual growth rate of 41 percent.
Apart from 20 factories across India, Berger Paints also operates in Bangladesh and Nepal. So committed are the Dhingras to the paint business that, through the years, they’ve taken their shareholding to 75 percent, the maximum allowed under Indian law. (When they bought it from Mallya, they owned 32 percent.) They also own 95 percent of Berger Paints Bangladesh Ltd.
It is noteworthy, then, that the owners who are so close to the company they have built, are able to distance themselves when it matters. And that separation has proven to be the first key to Berger Paints’s success, maintain the Dhingras.
Separation of Ownership and Management
In the 1980s, the Dhingras had a thriving paint business under Rajdoot Paints which was sold in India. They had also started exporting to the Soviet Union. Kuldip would handle sales and marketing while Gurbachan was in charge of the factories. Given the tax incentives, the brothers discovered that exporting was far more lucrative—they also started dabbling in soaps and detergent exports. But with the collapse of the Soviet Union, that business went bust and they were left with only the domestic market.
Around that time, Berger Paints came on the block. The brothers bid for it and, in 1991, the company was theirs. The business, however, was based in Calcutta (now Kolkata) while the Dhingras had spent all their lives in Delhi. How were they going to handle the management, in that context?
Now, delegating and hiring professionals had proved successful for them in Rajdoot Paints. “We realised pretty early on that if we had to grow, we had to get in professionals,” says Kuldip. It was this principle they decided to apply to Berger Paints. While the brothers have steadfastly stuck to this, some would argue they’ve taken the principle too far. They only travel to Kolkata for board meetings and for the board committees they chair. They don’t interfere in the day-to-day functioning. Even dealers they know are encouraged to deal directly with the company.
“This degree of separation of ownership and management in Berger Paints is rare compared to other companies,” says Abhijit Roy, MD and CEO, Berger Paints. He explains that while the promoters take care of broad strategic issues like partnerships and joint ventures, they are not involved in the day-to-day running of the company.
The Dhingra next-gen works in the company but they will eventually not hold any operational responsibilities. (Kuldip’s daughter Rishma Kaur, 43, is national business development manager–retail and Gurbachan’s son Kanwardip Singh Dhingra, 33, is national business development manager–industrial; they are both directors on the board as well.)
The succession planning may not include the traditional family-owned business concept, but it is still a critical area of focus for them. They are clear that the chief executive of the company must have a sales and marketing background. The business can survive anything but not sloppy marketing. Current CEO Roy was the marketing director and chief operating officer of the company before his elevation.
The brothers are closely involved in identifying key talent. Board members also play a key role in advising them. Gurcharan Das, a former CEO of Procter & Gamble India and a former independent director, was instrumental in helping them shape their thoughts on how to go about this. He worked on identifying candidates and persuaded them to get a proper succession plan in place.
The brothers are also unambiguous about the fact that they will not overshadow the CEO once he is picked. “Stepping back from the day-to-day affairs is very hard but it has to be done for the health of the company,” says Kuldip. They continue to be involved in charting the future course of the business and in forming joint ventures.Capital allocation
There’s little doubt that the Dhingras are dedicated to the paint business. And over the years they’ve put their money where their mouth is.
When they took over Berger Paints, the morale was down and there was no money to even pay salaries. “At one time, the company asked us for a Rs 10 crore loan. In those days, that was a lot of money. But we made it available at short notice. In addition, we had to agree to a lower interest rate as well as a moratorium on payments for five years,” recalls Kuldip. Tough ask, but they were determined to make Berger Paints a force to reckon with.
Equally important, the family has never invested in anything except Berger Paints. In the initial years, even dividends were ploughed back. When Berger Paints did a preferential allotment in 2008, the brothers agreed to put in Rs 100 crore. Meanwhile, market regulator Securities and Exchange Board of India (Sebi) stipulated that promoter holding in all private sector listed companies be brought down to below 75 percent. Soon, the Lehman crisis broke and Berger Paints’ share price—along with the rest of the market—collapsed. But the family still subscribed to the issue at Rs 50 a share even though the market price was Rs 38 a share.
Currently, they are faced with a peculiar problem. “While we are ready to put in more money into the company, capital requirements have reduced over the years,” says Kuldip. That’s a good problem to have.
Improving market share and margins
The numbers provide the validation they need. “The markets are probably valuing us at the same level as the market leader [Asian Paints] as they see more scope for margin increase both through a mix of products as well as geographical expansion,” says Roy. In 2011, Ebitda margins were at 12.02 percent, in 2015 it was 13.39 percent. The company has also steadily expanded market share and matched Asian Paints in revenue growth over the last five years. Kuldip refuses to let on too much except to say that he would like market share and margins to improve by 0.5 percentage points every year.
“Berger Paints’ margin expansion could continue for three reasons. Berger Paints was known for lower-end paints, but with better branding and products their margins could continue to rise. Second, their plant in Andhra Pradesh will help them reduce freight costs in servicing southern markets. Painters, who form a key sales channel, recommend products and Berger Paints has been working with them,” says Ravi Shenoy, an analyst at Motilal Oswal.Automation
Expansion is also a function of having the desired products, and at the required time. After all, in an industry that has as many as 5,000 different colour shades, having the right systems and processes in place is critical. This can only happen through automation at the factories, an effort that has been driven by Gurbachan.
Berger Paints’ new plant at Anantapur district in Andhra Pradesh is completely automated: Paint tubs are filled, automatically sealed and then robots stack them on shelves. This is a far cry from the labour intensive plants that the industry had just a decade ago.
“While lowering the cost of production, automation allows us to get the desired level of consistency in the manufacturing process,” explains Roy. The Dhingras have also diversified their plant locations so as to not give the labour unions much clout in one place.IT Systems
Demand forecasting also plays a key role in this business. Earlier, Berger Paints had been hamstrung by the lack of an IT system that allowed them to do this. In December 2012, Roy had said, “We lose some amount of sales on account of our inability to supply the right material on time. It is one area we are working on.”
Recognition of this problem was the first step. The company has since worked on running various packages on an enterprise resource planning (ERP) system, provided by Oracle, to help it forecast demand correctly.Relentless focus on costs
The other hurdle faced by the industry is graft. “Corruption is a disease that afflicts not only the government but also the private sector,” says Kuldip. He narrates examples of how suppliers short-change the company by charging more and providing faulty material.
To combat this, the brothers went so far as to set up their own packaging unit to supply to the company. This was done so that they can get a clear idea of costs and quality, which Berger Paints can then use as a benchmark when it buys from other suppliers.
Wastage has reduced significantly as also the price charged. Quality is up and costs are down, words every promoter wants to hear.
The relentless focus on the business, costs and non-interference has created a powerful cocktail to propel Berger Paints to where it is today. As has the brothers’ attitude—polite to a fault and refreshingly devoted to the company.
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(This story appears in the 27 May, 2016 issue of Forbes India. To visit our Archives, click here.)