State Of The Economy 2016

High on hope

There are many opportunities for growth in Vijayawada, but the manufacturing sector needs a helping hand

Photographs: RA Chandroo

Muralikrishna Muthavarapu’s eyes glint when he speaks of opening a discotheque in his hotel. Seated in the coffee shop of Fortune Murali Park, which is part of ITC Hotels, Muthavarapu is a picture of confidence. “It should be ready in six months. I think Vijayawada is ready for it,” the managing director says with a smile.

With a population of just over a million, this city in bifurcated Andhra Pradesh is seeing some frenetic activity. A new capital, Amaravati, which is a 20-minute drive from Vijayawada, is the big story here that is propelling investments. So far, over 25,000 acres have been acquired and the sense of enthusiasm among the industrialists is palpable. “There is clarity now with respect to bifurcation and we can go ahead and make our plans,” says Muthavarapu. 

Vijayawada today is riding big on hope. Among other things, on the anvil is a larger airport. Currently, only 14 flights take off each day and an equal number come in. “The plan is to increase that to at least 20 over the next 3-4 months,” says Madhusudhana Rao, the airport’s director. The combined state has just one international airport (in Hyderabad), which is woefully inadequate to attract more investments, so a new one is being talked about. That’s not surprising as Vijayawada gets all set to take-off on its own.

It’s buzzing
LVS Rajasekhar has not travelled to Hyderabad even once in the past seven months. “There has been no need since the chief minister and his bureaucrats have shifted to Vijayawada. Earlier, it was at least one trip a month,” he says. As managing director of Rs.500-crore Air Costa, he has little reason to complain, with revenues going up 15% over the last year. 

Today, the Vijayawada-based airline flies nine routes and Rajasekhar, who also has power and real estate businesses, is looking to expand it to at least three more routes by the month of June. “We will be in Delhi and Mumbai by then. The plan is to have two more aircraft from the current fleet size of four,” he says. 

Rajasekhar makes no bones about how this optimism will translate to business. “We will see a big offtake from smaller centres and that is our focus area,” he says, explaining his strategy. With a fall in the crude price helping rein in cost, Rajasekhar has seen his load factor increase to 75% today from less than 70% a year ago. “That has been a big boost and we will get aggressive next year,” he adds.

There is a general sense of optimism all around. Muthavarapu himself, who owns four hotels in the city, including the Fortune property, speaks of buoyancy in the hospitality business. “The average room rent for a four-star hotel was Rs.2,600 per day last year, which is now Rs.3,600. Occupancy levels, too, are at 80% today,” he says. At least four large hotels are coming up between Vijayawada and Guntur, which is 40 km away.

Historically, Vijayawada has not had any big industry to boast of. The economy has primarily been driven by agriculture. Fertile land coupled with adequate water from the Krishna river resulted in a lot of wealth flowing in. “We have seen some serious consumerism here over the last year or two. Today, we have a Gold’s Gym and people are spending fancy amounts on a haircut, which was not the case earlier,” laughs D Rama Krishna, managing director, Efftronics Systems, which is a Rs.63-crore company manufacturing railway signalling and monitoring equipment. 

The entertainment industry, which is a huge revenue generator, is thriving as well. Vijayawada’s MG Road, a big shopping destination, houses as many as 18 theatres over a stretch of barely six kilometers and is always buzzing. Eight more theatres are coming up on MG Road itself, most of them in large malls that already play host to high-end brands. “For the city’s size, it has disproportionately large amounts of money,” adds Rama Krishna. 

But besides that old money, it is the anticipation of the new capital that saw real estate prices take off in a big way. On an average, land prices zoomed as much as four times in some parts of the city right after the bifurcation was formalised in mid-2014. “After a lot of hype, it has remained quite lukewarm now. Prices went up even before any infrastructure came up,” says Sudhakar Chigurupati, whose company Indira Associates has completed 15 high-end housing projects over the last 12-15 years. “At the upper end, residential prices hover around Rs.8,000 per square foot. Here, I would say, prices have dropped 15-20% over the last one year,” he points out. “Prices will take-off once people actually migrate to Vijayawada.”

LVS Rajasekhar, Managing director, Air CostaD Rama Krishna, Managing director, Efftronics SystemsKVS Prakash Rao, an Eicher and Piaggio dealer, is now reviving his expansion plans. “We wanted to open more showrooms two years ago, but had put it on hold. Now we are opening two more showrooms at an investment of Rs.10 crore,” he says confidently. Even at a conservative level, Rao, who runs a Rs.200 crore business, expects a growth of at least 15% per annum. “The opportunity is there and it is left to us to capitalise on it,” he says.           

Industrial grief
It is a bit of an effort to reach the Liners India factory in the city’s Auto Nagar industrial area, which houses about 500 manufacturing units. “The roads are quite bad here and it is not easy to bring people from other countries to visit my factory,” says S Ganesh, chairman and managing director of the Rs.110-crore company that manufactures auto components like centrifugally cast cylinder liners for diesel automotive engines. For that kind of size, he employs as many as 500 people and before you can react, Ganesh bluntly says he needs no more than 200. “The unions are very strong here and there is not much we can do.” All manufacturing units in and around Vijayawada, especially the auto components and textiles ones, are under pressure from labour unions, and are forced to keep excess staff even when business is bad. “Wages for traditional units thus tend to be around 15% of sales which is quite high by general industry standards,” says Ganesh. 

KVS Prakash Rao, Eicher and Piaggio dealerSudhakar Chowdhary Vallabhaneni, Chairman, Mohan SpintexThe going has been extremely difficult for manufacturers and there appears to be little reason for joy. But there is a perverse benefit emanating from the Chinese slowdown. According to Ganesh, Chinese factories are typically huge and the minimum order quantity is at least 20 times more than that of India. “In a weak business environment, this becomes an opportunity for small players like us,” says Ganesh.  Besides, it is far easier to close a factory in China as compared to India. “A potential client, therefore, faces uncertainty and will be more comfortable dealing with India,” adds Ganesh. This has meant brisk business for Liners India, which clocked an export growth of 15 % last year. But Ganesh has his complaints. “Our cost of capital is high and the return on investment is not attractive. There is very little reason to make fresh investments at a time like this.” 

Getting money from banks has not been easy and they constantly offer high NPAs as an excuse,” says a livid Sudhakar Chowdhary Vallabhaneni. A first generation entrepreneur, he started Mohan Spintex, a vertically integrated textile company in 2005. It has grown into a Rs.500 crore company today, with a total capacity of 1.2 lakh spindles. But the last 12 months have been difficult for Mohan Spintex. The culprits are other countries like Bangladesh, Pakistan, Vietnam and Cambodia that are eating into its business. “Labour is so much cheaper there, with their governments offering many incentives. What have we got here?” he says without really expecting an answer. Vallabhaneni also rues that labour costs have gone through the roof eating into margins. Three years ago, his net margin was at 8-9% and it is down to barely 5% currently. “After agriculture, the textile industry employs the most number of people in the state – we need a better export policy,” he points out, barely managing a smile while posing for pictures. For now, he is going ahead with his Rs.90 crore capex in weaving, even though his worries about an uncertain future are all too visible. “The weaving industry is in better shape and the problem is in spinning where there is overcapacity. So we are investing more in weaving, where scale is required.” 

Muralikrishna Muthavarapu, MD, Fortune Murali ParkS Ganesh, Chairman and managing director, Liners IndiaOne consolation for manufacturers across the board is that power is no longer a big problem. “Electricity is not an issue but it comes at a very high price,” says Pardha Saradhi, president of the local small-scale industry association. He points out that it costs as much as Rs.11 per unit in the state compared to Rs.7 in Karnataka. A manufacturer of steel and non-ferrous castings to some of Bhel’s plants, his Rs.15 crore turnover is looking perilously close to dropping by at least 30%, which is as much as it has dropped during the last fiscal as well. “At least 70% of the units that supply these products to Bhel in this region have closed down anyway and the mood is very pessimistic,” he says. At least 1,200 units depend on Bhel for business. For Bhel itself, business has been bad and the company has reported a loss for Q3 of the current fiscal. Saradhi does not expect business to look up for at least two years.

While manufacturing continues to struggle, Vijayawada is gearing up for a complete transformation from largely an agri-dependent economy to one that will bring in industry. Among its advantages are access to the port town of Machilipatnam, a little over 60 kms away, proximity to large centres like Vishakapatnam and rail connectivity. All this can be leveraged to convert Vijayawada into a vibrant industrial hub, but this will entail bringing in big-ticket investments and attracting a skilled workforce. Needless to say, “Infrastructure is what will make the difference and we have to get that in place,” says Muthavarapu. He echoes the thoughts of all businessmen in the country who are fervently hoping that infrastructure bottlenecks are done away with.