Chennai: Yet another city-based company has marched into China - Carborundam Universal Limited (CUMI), part of the $1.5-billion Murugappa group.
CUMI has opened a sales office in Beijing, and has plans to put up a bonded abrasive plant in China. However, the company is not in a hurry as its China plans will be implemented in phases.
While discussions are on with potential partners, CUMI's production operations in China, according to K Srinivasan, president and whole-time director, will be in two phases. "The first phase, to be in 2006- will be relatively small in scale. Once the operations are up to our expectations, we will scale it up in the phase two."
Different operational possibilities are being considered in China - starting a greenfield joint venture or leasing an existing plant. "In any case, Cumi will have the majority holding in the Chinese outfit," he adds.
The rationale behind the entry into China is to have a plant there to cater to the global market rather than import just the raw materials to cut the production costs here. "A plant in China gives us around 25 per cent cost advantage over Indian costs." However the China plant will not phase out any of the production lines here.
For Cumi, China is one part of the strategy to increase its footprint as it is considering a plant in Dubai. In addition the company is constantly on the look out for acquisitions overseas.
An active acquirer of companies in the '90s, CUMI remained held back from acquisitions for nearly a decade. "We are always on the look out for organic and inorganic growth opportunities within and outside India," adds chairman, M M Murugappan.
The three criteria that the company looks at in a target company are - the availability of niche products or operations in a niche market (b) either it should have extremely popular brands or a strong distribution network and (c) potential to expand market share after the acquisition.
In recent years CUMI conducted due diligence on two foreign companies but the deal did not materialise.
A major player in the domestic mid-market abrasives market, CUMI is interested in companies that operate in the premium product segments. "Seventy-five per cent of the abrasives market falls under the mid-market segment while the premium-priced and low-priced segments share the rest of the market equally," Srinivasan adds.
Overseas plans apart, CUMI has drawn up a Rs75-crore capex programme for this fiscal. A part of the amount is for setting up a new plant for coated abrasives at an outlay of Rs46 crore at Sriperumbudur near Chennai.
"The plant would have the capacity to produce abrasives worth around Rs100 crore. This would effectively double our coated abrasives production," says N Kishore, vice president, manufacturing and technology (abrasives). In addition the company will consolidate production of coated abrasives in one or two plants, now manufactured at plants in Chennai and Kolkata.
"We are yet to decide on the plant that would take the additional production. The consolidation will result in right sizing of plants," he adds.
Last fiscal, the company modernised its Tiruvottiyur and Pallikaranai abrasives plants in Chennai and the industrial ceramics plant in Hosur and Ranipet at an outlay of Rs36crore.
The investments were made out of internal accruals, which in turn kept the working capital down. The company also implemented an initiative called `sweat cash', which optimised its cash management. The constant benchmarking helped to source funds at cheap rates.
As a result, the total interest cost in FY 2004 went down to Rs3 crore from Rs4.3 crore the previous year. As a result of all these measures, the company's after-tax profit grew by 21 per cent to Rs38.4 crore during FY 2004, as compared to FY 2003. The company also made a bonus share allotment in the ratio of 1:1, which increased its equity to Rs18.67 crore.
Last year, CUMI's Rs357-crore turnover came from three divisions - abrasives (turnover Rs273.4 crore), industrial ceramics and super refractories (Rs58 crore) and electrominerals (Rs54 crore).
The abrasives division saw a strong Rs35.9 crore sales growth due to good demand from fabrication segment, chemicals and pharma equipment manufacturers. Exports, too, went up by 20 per cent to Rs20 crore.
In order to consolidate and expand its market, last year the company embarked on a direct marketing programme for selected products to reduce the end-user's cost. The company is in the process of setting up outlets under the `CUMI World' brand with a standardised ambience of all its outlets. In addition, automatic vending machines are being installed to vend abrasives. This apart, CUMI has also strengthened its logistics arrangements.
On the other hand, the increase in input costs of alumina caused sever cost ptressures on the industrial ceramics and super refractories division - operating profit slid by Rs1.7 crore to Rs7.1 crore, compared to FY 2003. Moreover, production also slowed down due a closure to instal new kilns at the Hosur and Ranipet plants.
More than offsetting that slide, was the performance of the electrominerals division that posted an operating profit of Rs9.4 crore as against Rs2.8 crore during FY 2004. This was due to improved sales realisation and a better product mix. Process improvements resulted in productivity going up by 25 per cent.
FY 2005 has started on a heartening note for CUMI. For the first quarter ended June 30, 2005, the company's sales increased 16 per cent to Rs88 crore, of which exports accounted for Rs10 crore. The improved sales coupled with cost control measures have resulted in an operating margin to 15 per cent. The after- tax profit for the first quarter stands at Rs8.9 crore
While the abrasives division logged a modest 6 per cent growth (sales Rs62.2 per cent) over the first quarter of FY 2004 the industrial ceramics and super refractories division and the electrominerals division registered good growth with a turnover of Rs18 crore (37 per cent growth) and Rs15.8 crore (32 per cent) respectively.
According to the company, at the abrasives dealer market, sales were dampened by traders' anxieties over the uncertainty of the actual impact of value-added tax (VAT) and the rationalisation of prices that resulted from the withdrawal of special discounts and schemes. AS a result the larger dealers used up their exsiting stocks to meet market demand and reduced their orders in Q1.
However, with the economy remaining buoyant officials expect to better the performance in the coming quarters.