Sylvania in Latin means forest land and it incidentally also happens to be the name of the European company that the Guptas of Havells acquired in 2007. And true to its name, the $300 million buyout — a value that was one and a half times the size of Havells operations back then — led the Guptas into a wilderness that they had never encountered before.
Havells is a first-generation company founded by Qimat Rai Gupta in the 1970s. From its early days as an electrical goods trader in Delhi’s Bhagirath Place, over the years the company managed to create a niche for itself across four key verticals — switchgears, lighting fixtures, consumer durables and cables & wires. Through the ’90s, Havells expanded its distribution reach, and went in for foreign collaborations and product additions through a string of acquisitions: Towers and Transformers (1983), Electric Control & Switchboards (1997) and Duke Arnics Electronics (2000). The strategy saw Havells emerge as a Rs 1,000-crore company by 2006, but the Guptas were thirsting for more.
The honeymoon was over for the existing management as the Guptas decided to take drastic steps. “We depended too much on the existing team and that was a mistake,” says the 75-year-old Qimat Rai Gupta, chairman and managing director of Havells India. As expected, heads rolled.
As per a restructuring plan agreed upon with the bankers, the management embarked on a two-phased restructuring strategy named: Project Phoenix (January-September 2009) and Project Prakram (September 2009 to December 2010).
Under Project Phoenix, three plants were shut down. The second phase focused on reducing fixed costs and trimming workforce at senior levels. While there was some degree of overlap, in the first phase the focus was more on consolidating the supply chain and scaling down of operations, while changes in product mix and better price management dominated the latter part of the turnaround strategy. More importantly, at the end of the exercise the workforce strength was down by 1,500. The management also renegotiated with the company’s lenders to push the debt payback from 2009 to 2011, giving them much-needed operational headroom.
However, the first three months of calendar 2009 were the toughest as it was not easy to convince employees that the business could be turned around. “We explained to the employees how the business was doing and where we were losing money,” says Rajiv Goel, president, Sylvania Global. The approach clicked, as it was the local team that led the whole implementation exercise. To drive down costs, Sylvania has started sourcing a bulk of its products from low-cost markets in Asia. As part of the outsourcing strategy, Havells entered into a joint venture with a Chinese company to make lighting products for Sylvania. Analysts point out, going forward, this will not only lower the cost of sourcing for Sylvania but also help it cater to demand in the Chinese market. “We believe that to be a global player merely focusing on exports is not a sustainable model; one should also have localised operations,” adds Goel.
Besides outsourcing, the Guptas have also made the organisational structure leaner by cutting layers of decision-making. The regional structure was done away with and now a dedicated team at Havells’ corporate headquarters in Noida is overseeing the strategic business units. Though the management is not strictly following a hands-on approach, there are sub-committees — comprising professionals — advising the core management on key product and pricing decisions. “It is not that every decision is now being taken at the promoter level,” says Goel, who heads a 40-person team overseeing Sylvania’s operations.
The phased restructuring paid off as Havells managed to turn around Sylvania in FY11 with profit after tax of €2.5 million and has since stayed profitable well into the current fiscal. For the nine months ended December 2011, profit after tax stood at €9.3 million.
Interestingly, the brush with turning around the global operations of its subsidiary has left an impact on the parent too. “We are now a combination of Indian jugaad with European systems,” points out Anil Gupta. European engineers from Sylvania have been closely involved in setting up new lighting equipment manufacturing plants in India. “We have picked up best practices from Sylvania and are applying them across the group,” adds Goel. Another key learning from the Sylvania experience has been the need to professionalise Havells’ businesses, and not run them just on entrepreneurial guts and instincts. “The current team at Sylvania has given comfort to the organisation that businesses can be run by professionals,” explains Goel. Such is the drive that Havells’ top management now wants to accelerate the process of professionalising each of its verticals.
The road ahead
For Anil Gupta, the biggest takeaway from the Sylvania experience has been overcoming the fear of managing a global company. “We now have the bandwidth to manage similar acquisitions and build on them.” Little wonder, then, that the management is open to the idea of inorganic expansion — albeit with small strategic buyouts in key markets — to push Sylvania’s growth. That the opportunity for the domestic business far outweighs that of Sylvania is evident when Anil Gupta says Havells has the capacity to grow at a CAGR of 15-20% over the next three-four years compared with 7-8% for Sylvania.
Though currently emerging markets account for 39% of revenues, the management hopes these markets will account for 50% of Sylvania’s earnings over the next couple of years. According to analyst Venugopal Garre of Credit Suisse, what would work in favour of the company is that margins in Latin America and Asia tend to be higher than those in Europe. Further, the company is also looking at leveraging the parent’s product lines on Sylvania’s network. Havells switchgear is the first product that will ride Sylvania’s network in the UK, followed by Belgium, Italy, Turkey, Thailand and Argentina. The Havells brand has already been launched in Mexico and the US. A team has been hired in South Africa to push sales in Africa, while Indonesia, Malaysia, the Philippines and Vietnam are being positioned as the new focus markets in Asia. The management’s plan is to widen the group’s presence to 50 countries — from the 40-odd now — over the next two years.
While analysts are playing it safe, Anil Gupta is gung-ho. “Sylvania is now the global platform for the next leap of growth at Havells,” he quips. Perhaps that’s why the three-day global summit — attended by around 80 managers from 38 countries — in January at the headquarters in Noida had a prominent tagline — Dream, Dare, Deliver.