Turnaround Wizard

There are no uncles and aunts here. If you are related to me, you aren’t allowed in this company,” Vivek Chaand Sehgal declares categorically. Which is kind of ironical, when you recall that his company started back in 1975 as a silver trading outfit in partnership with his mother and was even named after that — Motherson. But considering that the $9.1-billion Motherson Group of today bears no resemblance to that tiny enterprise of 40-odd years ago, it’s clear that separating management and ownership is just a tiny aspect of the kind of transformation the Delhi-based group has undergone. 

That’s underlined when you try to fix a meeting with Sehgal. As dates are tossed around and changed repeatedly, Sehgal’s communication team explains wryly that the founder and chairman of the auto ancillary conglomerate is out of the head office in Noida for as many as 300 days in a year. He’s raking up frequent flier miles visiting Motherson’s 230 facilities in 33 countries and, probably, hunting for prospective acquisition targets. Finally, a long discussion with Sehgal and top management later, it emerges that it’s hardly a hunt.  

“We don’t go after companies. Carmakers themselves have asked us in the past to solve the problems in component companies by acquiring them. That’s how we keep growing,” says 60-year-old Sehgal. In simple terms, Motherson has acquired troubled (and the occasional not-so-troubled) overseas companies at the behest of its customers (in this case, auto OEMs). Now, 87% of revenue comes from overseas operations, up from zero at the turn of the century. In the past 16 years, the group has acquired 18 companies and signed 26 joint venture agreements, helping it grow from revenue of barely Rs.150 crore in 2000. Motherson is now the largest auto component maker from India (in value and volume), and it has these successful foreign acquisitions to thank. 

The last deal was struck just six months ago, when Motherson paid €571 million for Finnish wiring company PKC, and already rumours abound of the group buying the starter motors and generators division of Bosch. Like the consummate dealmaker he is, Sehgal only smiles noncommittally. “When I buy, you will be the first to know,” is all he says — although his use of “when” rather than “if” speaks for itself. 

Supplier to the world
If you want a detailed overview of the evolution of Motherson, look no further than Pankaj Mittal and GN Gauba. The COO and CFO have been with the company since the late 1980s and have not only witnessed the huge changes here, but they’ve also been active participants. “In 1991, the company’s revenue was Rs.12 crore a year. We used to celebrate when we accomplished Rs.1 crore a month. Then we celebrated at Rs.10 crore [a month]. We had to wait very long to get to Rs.100 crore,” smiles Mittal. A quarter of a century later, the crore-rupee milestones have given way to billion-dollar topline targets. According to the latest five-year plan, the Motherson group aims to become a $26-billion giant by 2020, a 3x leap from its current revenue. “The $26 billion target has both organic and inorganic elements. While our order book gives us enough visibility for the organic growth part, our inorganic growth depends on customers and possible acquisitions. When we leapt from Rs.100 crore to Rs.1,000 crore to $1 billion to $5 billion, they were also out-of-reach targets. It is important that you set your target, set where you want to be,” says Gauba.

Today, Motherson counts the who’s-who of global automakers as its customers. The biggest customer is Audi (accounting for 19.9% of revenue), followed by Daimler (11.1%), Volkswagen (7.8%), Seat (6.7%) and Ford (5.8%). Over half its business comes from manufacturing modules and polymer products (car cockpit products) while rear-view mirrors (28%) and wiring (14%) make up most of the rest. Within these three main categories, the company ensures that a single product doesn’t contribute more than 15%.

Maruti Suzuki brings in just 5.5% of revenue now, but Motherson got its start in the auto component business through this people’s car. Sehgal formed a joint venture with Japan’s Sumitomo Corp in 1986 to supply wire harnesses for Maruti’s vehicles and “there’s been no looking back since,” he says. But as late as the start of the new millennium, Motherson was a strictly homegrown, home market company. 

Sometime in the mid-1990s, the company decided on a new vision for itself — to become a globally preferred solutions provider. Since then, says Mittal, “Motherson has been consistent and stuck to the course.” The first five-year plan — an initiative started at investors’ behest — was set out in 1999. It laid out a target revenue of Rs.1,000 crore by 2005, 30% of which would come from overseas; RoCE targets were also bumped upwards, from 20%-odd to 40%. A new formula for future growth was also adopted at the time, called 3CX15, according to which no customer, country or component should contribute more than 15% to revenue. 

There was a good reason for this de-risking strategy. In 1997-1998, Maruti faced volume issues, explains Mittal, and Motherson depended on the carmaker for 70% of its business. At the same time, other global players had just entered or were entering India. The opportunity was too good to miss and the company very quickly signed a joint venture with Hyundai for the wiring harness business. The decision to look outwards followed from there.

“Customers would ask, ‘Do you make this? Do you make that?’ We wouldn’t say no; we would only say, ‘Not yet’,” recalls Mittal. Two clear objectives were enshrined: increase content per car, and expand geographically. Being satisfied with Motherson in India, soon global OEMs themselves started creating opportunities for it outside India. 

Going global
The first test of Motherson’s ability to perform in the international arena came almost immediately, in 2001. It took over an Irish wiring harness company, Wexford Electronics and, since the plant was not part of the deal, shifted its manufacturing to Sharjah within just 70 days. “It is still operational and doing well,” says Sehgal. Over the next eight years, the company went on to make seven more international acquisitions — all at the behest of its customers and none hostile — until 2009, when Motherson completed its first major overseas buy. “We had done several acquisitions earlier. Those were smaller, but gave us experience in being in many different situations and regions of the world,” says Mittal.

In 2008, a group of 12 carmakers approached Sehgal with a prospective target — leading German rear-view manufacturer, Visiocorp, which was in financial distress at the time — and offered to help if Motherson bought it. This was at the height of the subprime crisis and Motherson took four months to study the company before acquiring it on 6 March 2009, paying Rs.143 crore for Visiocorp, which had sales of Rs.4,290 crore at the time. “On March 9, markets started moving up finally, so the timing was really good,” says Sehgal.

Renamed SMR (Samvardhana Motherson Reflectec), by the end of the first year of acquisition itself it became PAT positive — only one plant was closed, while another 17 were transferred to Motherson. One of the first steps Sehgal’s team took was to get rid of all the consultants — since Visiocorp was being managed by a hedge fund at the time of the sale, there were plenty of consultants on board. “We started depending on local people. Consultants are brilliant but when they offer solutions to an operations guy, the latter thinks, ‘Am I no good?’” explains Mittal. Motherson also invested in the plants, upgrading paint shops and replacing machinery where required. 

The investment paid off very quickly. Orders started coming in within six months of the acquisition. So much so that in the year 2011-2012, Motherson set up SMR’s biggest factory, in Hungary, to execute new orders. “SMR is very solid now and has grown 3x in the past seven years,” says Sehgal. Last year, SMR contributed €1.575 billion to the group kitty, up from €755 million in FY12; Ebitda has risen from 5% to 10.9% in the same period. Even before that happened, though, Motherson was upping the ante.

Synergy gains
Sehgal doesn’t like Motherson’s overseas gambits to be referred to as “bets”. “That makes me a gambler,” he laughs. Rather, all potential acquisitions are thoroughly analysed and pursued only if they are RoCE-accretive. That’s how the Peguform deal came about, just two years after Visiocorp and one of Motherson’s biggest buyouts so far. In 2011, Motherson paid Rs.890 crore to acquire the German car cockpit maker, which had sales of €1.37 billion at the time.

Vinnie Mehta, executive director, Automotive Component Manufacturers Association (ACMA) of India, is all praise for Sehgal and his aggressive but calculative style. “His managing style is empowering — he gives a free hand to local management. And because Motherson enjoys a great degree of support from customers, it has been very successful with the companies it has acquired,” he says. 

That’s a thought echoed by Suman Jagdev, senior director, Alvarez & Marsal Group, an American consultancy specialising in turnaround and performance improvement. Says he, “Identifying synergies, in terms of technologies and capabilities, has helped Motherson understand and evaluate acquisition targets with greater clarity. Subsequent realisation of synergies in a time bound manner is critical in acquisitions. An understanding of the market context and effective deployment of the acquired company’s technology has helped Motherson create differentiation.”

Like Visiocorp and most of Motherson’s other takeovers, Peguform was in the doldrums when it was put on the block. And, as in the other cases, Motherson turned the company around once it came on board. Net sales have moved up from €677 million in FY12 to €2.99 billion in FY17, while Ebitda is up from 1.3% to 7.3% over the same period. “In essence, we are like doctors. In every unit, we sit down and understand what is wrong; then we try to change that. We are very good at that analysis and finding out what kind of help is needed from the carmakers. There is no way we can solve the problem without carmakers,” explains Sehgal.

At the time of the takeover, SMP (as Peguform is now called) was catering to the Volkswagen group for Audi cars, but had not been able to demonstrate its capability to Daimler. Gauba credits the buyout for Daimler becoming a customer in 2011. “Now, one plant has been set up in Schierling, Germany for Daimler and two more are being set up in Tuscaloosa, US and Kecskemet, Hungary. Daimler is today the second-largest customer for SMP as well as the group,” he adds.

As with Visiocorp/SMR, Motherson tackled the Peguform turnaround plant by plant, empowering local teams to execute the new strategy. “We don’t send people from India to run these plants. The problem with each plant is unique. For instance, with Peguform, there were problems with plants in Brazil and Spain but for different reasons: in Spain, the paint shop needed replacement whereas in Brazil, demand was slowing down. In each case, our approach is to align with the market,” says Gauba.

That alignment with market requirements has paid off for Motherson. Auto components is a highly commoditised market with low differentiation but, as Jagdev points out, the company’s efforts at becoming full system provider has worked out very well. “As you become an end-to-end solutions provider, margins start to improve with participation in higher value-added segments. The content per vehicle increases, and a company starts to make the shift from being a component to a system supplier and giving customers stability in supply. This strategic shift has helped Motherson achieve scale and become a one-stop shop for OEMs,” he adds. 

Gauba agrees, pointing out how Motherson has been increasing its portfolio from its initial days as a wiring harness manufacturer. “The nature of our product is such that content per car is going up. You will have to add wiring to support sensors or applications if you add any new feature to a car. Today, for instance, mirrors have side indicators, power folding feature, LED side indicators, actuator to adjust mirrors and so on, and so the value of the mirrors per se has gone up,” he points out. 

The focus on wiring harness hasn’t diminished, even with the new additions to the product portfolio. In January, Motherson bought out Finnish wiring company PKC, which Mittal calls a perfect fit. “PKC is focused on the non-passenger car business such as commercial vehicles (CV), construction and off-road vehicles. It is a leader in CV in the US as well as Europe. Our presence is more in Asia: we supply to Japan and Thailand. So, there is minimal overlap,” he shares. 

More bang for the buck
How has Motherson’s shopping spree impacted its books? ACMA’s Mehta cautions, “Companies need to do thorough due diligence, and not get saddled with unmanageable debt. Cultural integration and sensitivity to talent can also be critical.” For his part, CFO Gauba is unconcerned, pointing out that all effort has gone towards generating internal cash and ensuring a 40% RoCE. “Prior to the Qualified Institutional Placement (QIP) [in 2016-17, raising Rs.1,993 crore], the only money we had raised from the market was €51 million, in 2005. Before that, the IPO in 1993 was for less than Rs.20 crore,” he adds.

According to Gauba, Motherson’s growth has been almost entirely funded from internal accruals, and the group has been consistently generating cashflow. “We have followed strict financial discipline. When we raised €51 million in 2005, bankers showed us many avenues [to spend], but we conserved money and used it when the Visiocorp opportunity came in 2009. With Peguform, we took on some debt but the company has been very conservative. We don’t let our borrowings exceed net debt to 2.5x Ebitda. Currently, we are at 1.1x.” 

Even the QIP last year was, strictly speaking, not required. “But the board felt the company had not raised capital for 10 years and there is the 2020 goal to achieve. So, it may be a good idea to augment the capital side of the balance sheet,” Gauba explains. “Our debt is long term and Moody’s has given us an investment grade rating recently.”

Still, the five-year-plan prescribed RoCE of 40% hasn’t been achieved at a group level, because of the multiple acquisitions. “It would be in the 20-something range at the consolidated level. In our existing businesses, we have maintained a 40% RoCE. In SMR (Visiocorp) we are at 40% now, but it has taken six years. SMP (Peguform) is at 14-15% RoCE and will also take time, because we are doing large capex there,” concedes Gauba. At present, 9 new plants belonging to various group companies are under construction. “Sixty percent of our capex goes into building growth,” Gauba adds. 

Motherson recorded its best-ever quarterly revenue in Q4FY17 and its order book currently stands at Rs.94,900 crore. The company posted quarterly consolidated revenue of Rs.11,100 crore, up 15% over the previous quarter and consolidated quarterly after tax profit of Rs.475 crore, a 12% improvement over Q3. Consolidated revenue for the past 12 months stood at Rs.41,985 crore, 15% more than the previous year. Gauba says FY17 was a year of consolidation, and attributes the better-than-market growth and Ebitda improvement to a religious focus on operating performance. “We are 100% OEM suppliers; for most part, we are exclusive suppliers. That means we do exactly what the customer needs. We breathe with the market,” he adds. 

But where SMR has improved in terms of doubling Ebitda margins, Peguform has been slower, say analysts. “Peguform has more plants but it’s been a bit slower than our initial expectations,” says Rohan Korde, analyst, Prabhudas Lilladher. Still, unlike domestic market players, Motherson’s margins are quite high at around 18-20%, he adds.

Stretch target
What does the road ahead look like for Motherson? Five year plans may not have worked for the Indian economy but Sehgal and his team swear by them. And what’s worked for four five-year stretches should be good enough for the next half decade too, seems to be the current thinking. Is the aimed-for mega growth in topline to $26 billion by 2020, a stretch target? Not necessarily, says Korde. “Revenue target will be dependent on inorganic growth; if something fits with the portfolio and has good customer base, they will acquire that company. From that perspective, 2020 seems achievable. The challenge lies in  timely turnaround of the acquired companies. And when you are a global player, you never know how global events can affect you,” he adds.

The Motherson management believes that the 3CX15 strategy will be its hedge against any global mishaps. Even the recent VW emission controversy didn’t really have a fallout on the company, since “our parts are agnostic to powertrain,” says Gauba. The 3CX15 rule isn’t being followed to the letter at present, though. Post Peguform, Audi’s contribution to group revenue has climbed to 19.9%, since it is Peguform’s biggest buyer. But Motherson is addressing that by consciously seeking new customers.

Clearly, Motherson’s relationships with its customers is most cordial, which is why they seek it out to ensure business goes on seamlessly. But Sehgal is all too aware that acquisitions can be double-edged swords — which means that although all acquisitions have been at customers’ behest, there are as many and more opportunities that Motherson has let go because it was not RoCE-accretive. “It can cut both, inside and outside. We have a strike rate of just 5%, which means we don’t take 95% of the opportunities that come our way,” he reveals. In business, then, the decisions you don’t make can be as important as the ones you make.