pennar case study
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http://www.pennarindia.com/turnaround-story.asp The recession of the ni neties had adverse effects on the Indian economy and al so affect ed glob al businesses. During those tr oubled times, industr ies and refor ms were tested, and so was Pennar. But as they say, when the going gets tough, the tough get going. We also got tougher and embraced the economic chall enge wi th a clear approach and a dedicated team. We adopted a three pronged strategy of business transf ormat ion, financi al restr ucturing and productivity improvements that empowered us to make a remarkable turnaround from the downturn during the economic recession of the nineties to highest ever sales in the year 2005-06. Here is ho w we tackled the recession and managed to tur naround the events in our favour: » The Growth Period We began our industrial journey in 1988 by setting up a Cold R olle d Steel complex on a 26 acre site at Isnapur near Hyderabad with a capacity of 30,000 metric tonnes per annum. In the very first y ear of operation, we achieved cash profits and followed it up with profits and dividend in the second year. Buoyed by continuous growth in turnover and profitability, we expanded our capacity to 50,000 metric tonnes per annum. Liberali zation and glob alization o f the I ndian economy unl eashed competitive forces. We felt that need to have a higher capaci ty to achieve economies of scale and diversified product mix. Consequently, we merged with Nag arjuna Steel pl ant located on a 43 acre site at Patancheru near Hyderabad in 1997. This resulted in increase of production capacity to 142,000 MTPA and a diversified product mix consisting of cold roll ed steel, cold formed prof iles a nd pressed components. » The Downturn Though the merger of Nagarjuna was a sound business decision, it coincided with the recession in the Indian economy and the steel sector in particular from 1998 to 2002. The competition in commodity cold rolled steel intensified with increase i n domestic capacity and due to imports . The finances of the company were al so stressed. The Company's operations and margins were under pressure, r esulting i n the sales turnover decreasing to Rs. 76 C rores in FY'02 from a high of Rs. 320 Cror es achieved in FY '98. » The Turnaround In a span of just four years from 2002 to 2006, we achieved a remarkable turnaround wi th profits in five successive quarters st arting March 2005. Sales zoomed to Rs.647 C rores in the 16-month period endin g 2006 (Annual ized amount Rs.485 Crores). The gross profit (EBIDT) for the period was Rs. 50 C rores and the operating profit was Rs. 26 Crores. After account ing for remission of loan due to financial restructuring mounting to Rs. 23 Crores, the prof it before taxes (PBT) was Rs. 49 Crores. We earned a net pr ofit (PAT) of Rs. 41. 6 Crores resulting in annua lised E arning per Share (Rs. 5/-) of Rs. 3.74. » The T urnaround Strategy A dedicated and committ ed management team craft ed the turnaround by adopting a three- pronged strategy of business restr ucturing, productivity improvements and financial restr ucturing. » Busine ss Restruct urin 1. To reduce the r isk in the business, we shifted focus from commodity cold rolled steel to value-added steel p roducts. The proportion of value-added products to t otal sales w as improved from 20% to 50%.
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Transcript of pennar case study
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http://www.pennarindia.com/turnaround-story.asp
The recession of the nineties had adverse effects on the Indian economy and also affected globalbusinesses. During those troubled times, industries and reforms were tested, and so was Pennar.But as they say, when the going gets tough, the tough get going. We also got tougher andembraced the economic challenge with a clear approach and a dedicated team. We adopted athree pronged strategy of business transformation, financial restructuring and productivityimprovements that empowered us to make a remarkable turnaround from the downturn during the
economic recession of the nineties to highest ever sales in the year 2005-06.
Here is how we tackled the recession and managed to turnaround the events in our favour:
» The Growth Period
We began our industrial journey in 1988 by setting up a Cold Rolled Steel complex on a 26 acresite at Isnapur near Hyderabad with a capacity of 30,000 metric tonnes per annum. In the veryfirst year of operation, we achieved cash profits and followed it up with profits and dividend in thesecond year. Buoyed by continuous growth in turnover and profitability, we expanded our capacity to 50,000 metric tonnes per annum.
Liberalization and globalization of the Indian economy unleashed competitive forces. We felt thatneed to have a higher capacity to achieve economies of scale and diversified product mix.Consequently, we merged with Nagarjuna Steel plant located on a 43 acre site at Patancherunear Hyderabad in 1997.
This resulted in increase of production capacity to 142,000 MTPA and a diversified product mixconsisting of cold rolled steel, cold formed profiles and pressed components.
» The Downturn
Though the merger of Nagarjuna was a sound business decision, it coincided with the recessionin the Indian economy and the steel sector in particular from 1998 to 2002. The competition incommodity cold rolled steel intensified with increase in domestic capacity and due to imports.The finances of the company were also stressed. The Company's operations and margins wereunder pressure, resulting in the sales turnover decreasing to Rs. 76 Crores in FY'02 from a highof Rs. 320 Crores achieved in FY'98.
» The Turnaround
In a span of just four years from 2002 to 2006, we achieved a remarkable turnaround with profitsin five successive quarters starting March 2005. Sales zoomed to Rs.647 Crores in the 16-month
period ending 2006 (Annualized amount Rs.485 Crores). The gross profit (EBIDT) for the periodwas Rs. 50 Crores and the operating profit was Rs. 26 Crores. After accounting for remission of loan due to financial restructuring mounting to Rs. 23 Crores, the profit before taxes (PBT) wasRs. 49 Crores. We earned a net profit (PAT) of Rs. 41.6 Crores resulting in annualised Earningper Share (Rs. 5/-) of Rs. 3.74.
» The Turnaround Strategy
A dedicated and committed management team crafted the turnaround by adopting a three-pronged strategy of business restructuring, productivity improvements and financial restructuring.
» Business Restructurin
1. To reduce the risk in the business, we shifted focus from commodity cold rolled steel tovalue-added steel products. The proportion of value-added products to total sales wasimproved from 20% to 50%.
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2. New business segments were developed including Electrostatic Precipitators (ESP), Pre-Engineered Building Systems, Tube products, Road Safety Systems, Railway CoachProfiles.
3. We began exporting products as Pennar was selected as a global source for F.L.Smidth,Denmark and Hammon Research & Cotrell of Belgium for the steel profiles used in ElectroStatic Precipitators.
4. We also set up fabrication facilities for supplies to Industrial buildings, ESP's and seedprocessing plants.
5. Special efforts were made to develop manufacture of components for the Auto and WhiteGoods Sectors.
6. Focused marketing efforts - strong relationships were forged with prestigious customers likeTata Motors, Ashok Leyland, ICF, BEML, L&T, Thermax, ABB, and ACC who are givingcontinuous business to Pennar.
» Productivity Improvements
1. Improvement in manufacturing operations resulted in productivity increases across many of the areas. Yield improved from 87% to 92%. The power consumption was reduced resultingin energy savings. Machine utilization was improved significantly.
2. Improved quality with ISO 9001:2000 certifications for the rolling forming and componentsdivisions.
3. Post-merger, manpower was rationalized and productivity was improved. Training impartedin various technical and operational areas. Manpower motivation and commitment wasalways high and IIM, Ahmedabad has made a Case Study of the company's restructuringwith the full cooperation of the workforce.
4. Improved management of inventories and receivables resulted in better productivity of working capital.
» Financial Restructuring
In early 2004, the Corporate Debt Restructuring Forum (CDR) approved a restructuring schemewhich resulted in reduction of interest rates and also reduced debt through a one-time settlementwith some banks. Induction of additional equity further reduced the leverage. Even though theCompany successfully implemented the CDR Scheme, we still had large amount of long-termdebt and the solution lay in replacing it with a combination of equity and debt. Accordingly, inJuly 2006, we restructured the debt for a second time with the induction of foreign investors whobrought in Rs. 122.4 Crores. This amount was used to retire the long-term debt and for capitalexpenditure required for the new plant near Chennai.
» Environment
The company conforms to all the norms with regard to water and air pollution. We have also putup a waste water recycling plant to conserve water resources. In addition to maintaining excellentemployee relations and industrial harmony, we have given a helping hand to the neighbouringvillage of Bandalaguda in the setting up of a primary school and a place of worship.
» Expansion/Diversification
Even during the revival period, Pennar was open to new opportunities and acquired the PressMetal profiles division of the Tube Investments Group (TI). This plant located at Tarapur near Bombay was helpful in sourcing supplies to Tata Motors and Eicher Motors. In order to servicethe growing auto sector and the Rail Coach Factory based in Chennai, our fourth facility is being
set up on a 35 acre site near Chennai. The new plant will produce value-added profiles andcomponents for the automobile and railway sectors.
» Outlook for the Future
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With the fundamentals of the economy remaining strong and the requirement for materials in the Auto industry, Railways and Building Industries expected to increase, the outlook for the demandfor our products is very encouraging. In view of the financial restructuring undertaken by us andwith the strategic association of foreign investors, we intend to diversify further in the domesticmarkets while also forging international linkages to take Pennar beyond the Indian shores. Theoverall strategy to increase turnover as well as profitability is as follows:
Increase the proportion of value added niche steel products and reduce the quantum of
commodity cold rolled steelFocus on heavy engineering products through the enhanced manufacture of wider range of products for railway wagons and coachesManufacture of auto componentsIncrease the quantum of exports for which a beginning has been doneInorganic growth through acquisitions of companies in all ied fieldsFocus on pre-engineered steel buildings which have high potential due to large scaleinvestments in infrastructure
