Cultural fit is core to his business thinking. He lays much store by doing business the ethical way. In this candid interview, A. Vellayan, chairman of the Chennai-based Murugappa group, shares his views on a variety of topics. Excerpt
How do you view the economy in the context of lower GDP growth numbers and recent ratings by global agencies?
At a macro level, we have to separate the issues of job creation and economy. Three trends are happening now. One, there is anti-globalisation... there is economic nationalism ... not only in the U.S… in the U.K. and India also. The whole ‘Make in India’ theme is in line with this. The WTO (World Trade Organisation) and all ... have become [things of] the past.
That will have its impact around the world. Secondly, there is a big move towards digitisation and artificial intelligence. As a consequence, there will be job losses. The third trend is around disruptive technologies and investment models. The lifecycle of a product is cut short.
In business models also, the whole retail format is changing. The GST and demonetisation have unleashed different kinds of disruption. These trends will affect all countries. There is a general sense that investment is not happening. Therefore, employment is not happening. So, things are [looking] down. End of last year, our bottomline improved 30%. By the first-half this year, it improved by an annualised 30% over the previous year. Our group is present in agriculture, engineering and financial services... fairly representative of different sectors of the economy.
To be competitive, I have to make my value chain competitive. I may have to outsource some [parts] and get rid of some others. I may be expanding in areas where Make in India may be in my favour. I need to balance. For a corporate group like ours, there are healthy signs.
There is a fairly robust credit rating system. For good borrowers, cost of funds has come down. With the SARFAESI Act, the methodology of recovery has improved. In insurance, penetration has improved.
In the farm field, money is moving away from vanilla subsidy to crop insurance. In the agriculture sector ... on the input side ... we are pushing towards making in India. I reckon in four to five years, import of fertilizer will come down to nil.
How is that possible?
When the government brought in neem-coated urea, it cut consumption by 2.5 million tonnes. With the DBT (direct benefit transfer), they will bring down another 3.5 million tonnes. Ultimately, the soil health card will determine how much they will buy. So, 6 million tonnes are gone. The total import is around 10 million tonnes. The Chambal and Matix plants are coming up. Ramagundum and Talchar plants are now revived. So, four million tonnes will come up. So, in four-to-five years, there won’t be any import.
When urea import stops, it will have a huge impact internationally. From urea to ammonia, prices will come down. India imports ammonia to make DAP. We are constantly looking at value addition from assets that we have. When that happens, four million tonnes will come up between the east and west coasts, and all of us will participate. India will become self-sufficient.
But the distribution will have to take the retail route. You cannot play the DBT game without going retail since you will be selling in bags and getting subsidy. We have set up over 1,000 retail stores. We are now expanding this. All these will create employment in a different way.
Are policies heading in the right direction?
Yes, at least for those relevant to sectors we are in. In every idea, there could be a few tweaks. When they implemented GST, there was a mismatch between the input and output GST. But there is a mechanism ... there is a fitment committee. They [made corrections] in the case of sulphur.
Isn’t job generation an issue?
Take farm mechanisation... it is disruptive. One machine does many functions and replaces 31 workers. Labour forms the highest cost in farming. The issue is about productivity and gainful employment.
With the IBC and developments in banking, will firms continue to depend on bank funding?
Our situation is slightly different because our debt-equity ratio is low. Our dependence on bank funding is only to the extent of working capital because our ratings are good and we can also borrow in the money market. If you see our half-yearly results, there is a substantial drop in interest cost.
Is there a demand problem?
Our results don’t reflect that. Investment cycle will begin once we cross the 90% capacity hump. The monsoon is good. The rupee is strong. Imports are down. The government is also doing its bit.
What are the trouble spots in the economy?
The frequency of initiatives... such as demonetisation, GST and DBT in our sector ... they did not give time for the retail, wholesale and the industry to settle down. So, there was disruption. People who are a bit weak financially are hurt ... without cash flow you can’t do business.
Second, there is mismatch in allocation in the infrastructure space. Where is the need to create new ports when existing ones are in trouble? Coal import is reducing. Iron ore export is going down.
Capacity use is a problem. Similarly, there is a weakness in the power sector. You have gone in for reverse auction. You are shouting from roof-tops that you have achieved something when it is not viable... be it wind or solar.. it is not viable.. You have rendered a whole sector and its supplier base an NPA. The same thing is happening in coal and gas-based power.
How do you look at the bankruptcy code?
You don’t look at it in isolation. Bankruptcy code, SARFAESI and the reconstruction, like what Kotak and others have done ... it is a combination. It is good. If you don’t allow the same guy … who let it become bankrupt … to bid ...we should [look at] that.
There is a visible move to check-mate China’s clout in the global business environment. How is the China factor playing out for India?
China clearly is very strategic in its approach. They have invested in African and Latin American countries for raw materials. They have created infrastructure in those countries to control the raw material. They have built up huge reserves. Wherever we can avoid dependency on china, we should. Take rare earth [materials]. China is the only source. The U.S. is consciously making attempts to make batteries without rare earth as they are worried that the whole area could be disruptive.
As a group, where is Murugappa now?
Our play is largely domestic. There is a shift in the middle class. Demand for certain types of products — insurance, better cars, vegetable and fruits — is increasing. We don’t see any problem in growing in the financial sector at an annual average of 30% and at about 10-15% in agri and engineering sectors. We have to sanitise our business to ensure that we are not [affected] by other disruptive models and technologies.
Do you still look at banking space?
Part of our success is because of what we did not do rather than what we did. We did not go into gold loan, telecom and the banking industry. It is not in our DNA to deal with gold. It is a different game. In payments bank, you have to wait long to see the light of the day. I neither have deep pockets nor patience like some [do]. We consciously stayed away from urea. We had a very good opportunity to get into defence. We were told that we were among the possible candidates to set up drone manufacturing. Culturally, it did not fit us. Though our partner pushed us to get into life insurance, we did not.
Do you think too much of competition is making things go bad? Do we need a regulated competition?
We need viable competition. Sustainability is the key. There should be floor profitability.
