Forbes India 15th Anniversary Special

Harsh Goenka and CEAT: Getting a stronger grip

Even as Ceat outperforms expectations under the leadership of son Anant, other businesses too are gearing up for the next phase of growth, says RPG Enterprises Chairman Harsh Goenka

Samar Srivastava
Published: Oct 20, 2015 06:48:36 AM IST
Updated: Oct 13, 2015 02:59:21 PM IST
Harsh Goenka and CEAT: Getting a stronger grip
Image: Vikas Khot
Harsh Goenka, chairman, RPG Enterprises. Goenka does not get involved in the day-to-day functioning of his companies and has given his managers a free hand

When Forbes India met Harsh Goenka in July, Ceat Ltd, run by son Anant Goenka had delivered a stellar performance. At about Rs 2,500 crore (as on July 2015), its market cap, in the last two years, had risen five-fold and Anant Goenka spoke passionately about how the best was still to come. The company had made its mark in the two-wheeler tyre market and was on its way to giving a tougher fight to market leader MRF in the truck tyre space. Group companies KEC, which lays power transmission lines, and Zensar Technologies, a mid-tier IT services and infrastructure services provider, were also doing well. Still, what happened in the next two months surprised even the most seasoned market watchers and analysts.

Harsh Goenka and CEAT: Getting a stronger grip
On July 22, when Ceat announced its quarterly results, it more than met forecasts. Aided by a fall in rubber and crude oil prices, quarterly profit surged 134 percent year-on-year to Rs 121 crore. The markets were quick to take note. In the next two months, Ceat’s stock doubled, taking the market cap to Rs 5,000 crore from Rs 500 crore in September 2013. Certainly, reason to celebrate.

But an overt display of achievement is hardly Harsh Goenka’s style. When Forbes India met the chairman of RPG Enterprises again in mid-September—he has risen from rank 82 ($1.18 billion) in 2014 to 79 ($1.51 billion) on the 2015 Forbes India Rich List—there was none of the triumph that some promoters are prone to. Goenka, a seasoned entrepreneur, has been through several ups and downs in his career. His response, therefore, was tempered with calm and pragmatism. “No, I am not surprised by Ceat’s performance,” he told us. “The fall in raw materials made things easier but operationally I expected this outcome.” 

The transformational process has been two-fold. On the one hand, Goenka has worked on turning around group flagship Ceat, on making KEC more operationally efficient and hand-holding Zensar so that it can potentially rise above the ‘mid-tier’ IT company tag. On the other, he also realises that the new order is ruthless. A frank Goenka admits, “Operationally a lot of the processes in our companies were not up to scratch.” Consultants were brought in to recommend specific fixes, he says.

What has also helped is that he shares the boundless enthusiasm about India’s future that a majority of the business community has. “We’re extremely bullish about India,” says the 57-year-old Goenka. And he has put his money where his mouth is: He had earlier planned to take 50 percent of his business outside the country, up from the present 42 percent. Those plans have been scrapped in favour of more business in India.

The boss’s energy seems to have permeated the organisation, too. Enter the Ceat office in Mumbai, and there is a noticeable, understandable spring in the step of employees. Here, Anant, 34, can claim some of the credit. He has, after all, been at the vanguard of a successful and methodical turnaround.

Among Anant’s first realisations on taking over as managing director of Ceat in 2012 was that the company had nothing new to offer in the truck segment, a category which contributed to two-thirds of its sales. “When truck tyre sales were down, it really affected the morale of employees,” says Arnab Banerjee, whole-time director at Ceat. Moreover, it was up against MRF and JK Tyre, two formidable competitors with whom dealers had long-term arrangements. Ceat, typically, filled in the elastic demand.

So, dealers preferred MRF and JK Tyre for big sales commitments and also paid them higher prices. In periods of high demand for tyres, there would be enough room for Ceat to compete but when times were bad, Ceat was the first to lose its share as well as pricing power. “This led to considerable volatility in the business and did not allow us to plan well,” recounts Anant.

That was when Ceat decided to focus on the market for two-wheeler tyres, where competition was more diffused, with MRF, Falcon (Dunlop) and TVS being the three competing brands. Also, at the time, Ceat was ranked third in the two-wheeler tyre segment and as a result had no pricing power. Its tyres were often priced 15 percent lower than competition. If Ceat could send a clear marketing message to the customer, there was a chance to break in, the management reasoned. Further, market surveys revealed that on-road grip was of great importance to two-wheeler customers. The company came up with a tyre, the design of which looked like a rope placed on the tread.

Catering to the two-wheeler market also meant that Ceat would have to establish a new distribution network. In doing so, they decided to go the asset-light way and not recruit hundreds of sales staff. Instead, they set up a model similar to that of consumer product companies—with distributors and sub-dealers. This instantly took the company to 550 of India’s 600-odd districts. Ceat also outsourced the manufacturing of its tyres, resulting in no additional investment.

At the same time, surveys showed that when customers replaced tyres, 25 percent usually went with the Original Equipment Manufacturer (OEM). With a weak position among OEMs, the company went about mending relationships with vehicle manufacturers. It is now a supplier to Honda Motorcycle and Scooter India, Bajaj Auto and Hero MotoCorp.

The change in strategy is visible in the altered revenue sources. In 2015, 42 percent of Ceat’s revenue came from truck tyres while 58 percent came from car and two-wheeler tyres, compared to 58 percent and 42 percent respectively in 2011.

Next, Ceat’s plan is to enter the off-highway tyre segment that has the market most excited. These are tyres for tractors, threshers, go-karts and all-terrain vehicles. In short, they come in all shapes and sizes and manufacturing them can be a logistical and planning nightmare. Further, unlike other segments, orders in the off-highway segment could be as low as ten tyres for a customer. In addition, customers are distributed across the globe and that makes marketing and logistics an additional challenge. But at 20 percent Ebitda, margins are far higher in this category. India has given rise to two world-class companies in this space—Balkrishna Industries and Alliance Tire Group.

Anoop Bhaskar, head-equity at UTI Asset Management Company, attributes Ceat’s entry into off-highway tyres—and focus on two-wheelers—to necessity. “With truck tyres moving to radials, a lot of spare capacity has been created. Companies are therefore moving to the off-highway tyre space,” he says. “For Ceat, utilising this spare capacity was a challenge and getting in the off-highway tyre space is a smart move.” However, he adds that execution will be key.

At KEC, a similar exercise took place. Bidding is a critical function for a company that competes for turnkey projects: It lays transmission lines to carry electricity and also does engineering procurement and construction (EPC) contracts. But, as Vimal Kejriwal, chief executive of KEC, explains, “A lot of the internal processes that went in preparing these bids were not up to scratch.” Several questions needed clear-cut answers before entering the process: For instance, how much does the company bid? How much time does one allocate per project? Also, what made the task more complex was that the company operates in 61 countries.

For a company like KEC, a wrong bid can result in it not making money. Fixing the fundamentals was important. To that end, KEC has spent the last two years paying special emphasis to getting the bidding process right. This was done by bringing in consultants who helped set up a system that allows the company to take a quick call on whether a project is worth bidding for and, thereafter, prepare a robust bid.

What has also helped is that transmission lines, which are the company’s mainstay, have seen increased traction from state governments across India. As a result, its order book has swelled to Rs 10,600 crore in 2015; the revenue has gone up from Rs 5,534 crore in 2010 to Rs 8,574 crore in March 2015.

KEC has tapped into growth areas of the future as well. For one, it has a fledgling railway business. Earlier, laying railway lines was not a viable business as contract orders were small and suitable only for unorganised players. As a result, the business didn’t do too well. It has been a steep learning curve but Kejriwal draws hope from the fact that the size of railway contracts is set to increase, making it more feasible for larger players to bid.

In addition, Harsh Goenka also believes that KEC has a chance in the sewage treatment and desalination business—two growth areas in the years to come.

While KEC seems to be taking steps in the right direction, it is the Rs 2,676-crore Zensar that continues to be a work-in-progress. “My biggest disappointment is that it is still a mid-tier IT company,” he says. This is despite the fact that it has almost doubled in revenues in the last five years. But Goenka is looking beyond these numbers. The positioning of the company as a front-runner in its category is still not established. To fix this, Goenka has had to refocus the company’s operations. Zensar has embarked on an ambitious 3x3x3 strategy and defined that it will focus on the European, American and South African markets. It will provide services in the manufacturing, retail and insurance verticals and focus on Oracle, digital and the cloud. One area that will gain prominence is infrastructure services management, where rival HCL has carved out a niche. “I see our infrastructure services management business scaling up significantly in the next 2-3 years,” says Ganesh Natarajan, chief executive of Zensar. With this strategy in place, Goenka believes Zensar is positioned to grow a lot faster.

At his headquarters in Worli’s RPG House in Mumbai, Goenka plays the role of a pater familias. He’s clear that he doesn’t want to get involved in the day-to-day functioning of his companies. He takes responsibility for strategic direction and acquisitions but other than that he gives his managers a long rope. This operational freedom is unusual for owner-led companies, say senior executives.

Not surprisingly, human resource issues are what keep Goenka busiest. He often meets young managers from group companies and mentors them. RPG Enterprises has worked hard to get Day Zero slots at recruitments at the Indian Institutes of Management, Goenka says. Finally, all senior-level hiring must pass through Goenka. There have been some softer touches to attract talent as well. For instance, offices have been spruced up to make them look more youthful. Goenka, an art aficionado, has paintings that adorn the offices at RPG House.

Goenka has also brought in Sachin Nandgaonkar from Boston Consulting Group to look at new growth initiatives. Nandgaonkar, who is president and chief executive, specialty sector, looks after RPG Life Sciences, Raychem RPG and Harrisons Malayalam. His most interesting mandate is to look for new businesses to incubate. The aim is to have at least another Ceat or KEC in the next ten years. It is an ambitious target and Nandgaonkar admits, “For this to succeed, we will have to try our hand in at least ten different opportunities out of which one or two may succeed.” What makes it doubly hard is that these businesses also have to have an exponential growth rate i.e. they must be businesses of the future to succeed. In effect, it is almost like founding a private equity cell within the company. This holds the potential to launch the next big thing in Goenka’s Rs 12,500-crore market cap empire. And with that, RPG Enterprises would have a healthy blend of old legacy businesses and new futuristic growth opportunities.

(This story appears in the 29 October, 2015 issue of Forbes India. To visit our Archives, click here.)