State Of The Economy 2016

Pragmatic ventures

Erode has staved off the downturn by building regional brands and adhering to price discipline 

I went to an internet café and came away with the name Milky Mist, which I thought had universal appeal,” laughs managing director Sathish Kumar. For someone who left school when he was just 16 years old to join his father’s milk business, Kumar’s innate curiosity has been behind the firm’s diversification. “For the first two years after I joined, we were not making any profit. But one of our customers was buying milk from us to make paneer. He wouldn’t disclose the method, but I figured it out and after several attempts got the consistency right.” Thereafter, Kumar started supplying paneer to hotels and restaurants. In 1995, he completely switched over to paneer and stopped selling milk. Two years later, when he decided to foray into the retail segment, brand Milky Mist was born. 

Once retail operations picked up across Tamil Nadu, Kumar forayed into curd and cheese. Today, the company has about 110 stock keeping units. Paneer contributes about 30%, curd about 40%, cheese 25% and rest of the products 5%. The company’s revenue, too, has increased from Rs.13.7 crore in FY08 to Rs.196 crore in FY15. With 250 distributors across South India, the plant currently processes 2 lakh litres of milk a day. It is also setting up a greenfield plant to meet increasing demand. “We are setting up a plant at an investment of Rs.170 crore, which will be operational by 2018, and will process 7 lakh litres of milk and 30,000 tonnes of whey powder.” The company is also looking to enter Bhubaneswar, Cuttack, Kolkata, Mumbai and Pune.

The dairy industry where Milky Mist has made its fortune, is one of the several industries Erode hosts. It is Erode’s multi-dimensional nature that differentiates it from other clusters — both agri-based industries and manufacturing and services units thrive here, making for a local economy that is fairly stable and robust. Besides being home to the textile industry, food processing, construction and animal feed industries, Erode is also one of the largest turmeric processing centres in the country. 

 Wide spectrum
If Milky Mist has made its way through most retail chains in the South, Nani Agro Foods has managed to spread wings overseas, namely the US and UK. The company, which manufactures Aditya Masala is the largest wholesaler of turmeric in Erode. It supplies to major retail chains such as Walmart, SPAR and Tesco overseas and Metro India, Star Bazaar in the country. 

Erode constitutes about 25% of the total turmeric production and 30% of the total turmeric trade in India. Nani, which processes 210 tonnes of turmeric daily, has chosen to grow through private label packaging rather than investing in a brand. “We see a lot of growth in private label packaging. Metro India has 20 wholesale stores across the country and we sell through them. To build a brand, we would need to build a network. Also, while established brands are growing well in India, new entrants are finding it difficult to grow,” says Abhishek Poddar, managing director, Nani Agro Foods, explaining his rationale. According to him, while margins may be lower in private label packaging, payment is assured if retailers are picked carefully. Nani, which employs 200 workers, has seen a growth of 10-15% over the last couple of years, with Rs.600-crore-worth of business. Turmeric constitutes 95% of the total revenues for Nani while rest of the spices make up the balance 5%. 

Another company that has put Erode on the world map is SKM Egg Products. The company produces egg powder, liquid egg and bakery mix used in baking, noodles, pasta, sauces and biscuits. Its state-of-the-art plant has the capacity to crush 1.8 million eggs daily and produce 7,250 tonnes of egg powder. SKM gets 65% of its revenues from Japan and Europe and has started making inroads in Russia and Vietnam. It counts Mondelez, Heinz, Unilever and many Japanese companies as its clients. 

With its plant working at almost full capacity, SKM was looking at expansion but has put the plan on hold for the next six months. “We were considering organic and inorganic growth options but they are on hold since the market is slowing down. The demand is there but there is pressure on pricing. Timing is important, it is better to invest after seeing some recovery rather than when the industry is facing a downturn,” says Shree Shivkumar, CEO, SKM Egg Products. While the company grew 30% in the past three years, it expects revenues to be flat at Rs.270 crore, the same as last year. Despite the short-term pressure on revenues, Shivkumar remains optimistic about the company’s revenue growth in the next 3-5 years.  

Also battling lower demand from European markets is leather tanning firm, KKSK International, which processes raw hide into leather. After Ambur, Erode is the second largest leather processing centre in Tamil Nadu. The company caters to clients in Vietnam, Indonesia, China and Europe, who in turn make bags, shoes and leather garments for brands like Marc Jacobs, Michael Kors and several others. About 80% of sales for KKSK come from exports.  “Over the past 7-8 months, given the slowdown in Europe, demand from clients has been waning,” says Rafiq, CEO, KKSK International. Besides the global downturn, capacity expansion here is restricted due to water usage. As it takes about 40,000 litres to tan one tonne of raw hide, there is restriction on how much water a tannery can use. This means revenues have remained stagnant at Rs.120 crore for the past couple of years. “We can only grow by acquiring other assets or moving up the value chain,” he adds. 

Regional focus
By sticking to individual home owners,  Agni Steel has managed to build a strong regional brand, Agni TMT. The company, which manufacturers rods and angles, has a capacity of 6,000 tonnes. “We stayed away from builders and have been supplying only to home owners through our extensive dealer network. This has helped maintain price discipline and negotiate the cyclical downturns better,” says M Chinnasami, director, Agni Steels. 

The company employs 1,000 people and has a network of about 280 dealers across Tamil Nadu, Kerala and Karnataka. “Now apart from China, we have to compete with larger domestic companies. Earlier, larger companies were mostly making sheets and plates; rods and bars formed only 5%. Now, over the past 4-5 years, as growth has been hard to come by, they have entered this segment. We can’t compete with them on costs as players like Tata Steel and JSW have their own iron ore mines,” says Chinnasami. While the company expects volumes to remain stable, revenues may fall below the Rs.400-crore mark they managed to generate in FY15. Chinnasami is hoping that the government increases its investment in roads and infrastructure projects to help the industry. 

Ramamoorthy Sundaram also talks about how building a brand, Kamadhenu, has helped his animal feed business. Once Sundaram joined the family business in 2006, he repositioned RG Sundar & Co as an animal health supplement business, adding organic products to the mix. From 600 tonnes in 2008, the company now sells 1,750 metric tonnes of feed in Tamil Nadu per month. It sells another 500 tonnes per month in other parts of South India through its 356 dealers. 

The company’s revenues have increased from Rs.5-6 crore in 2008 to Rs.28 crore now. In 2013, Sundaram set up a fully automated plant on the outskirts of Erode to meet growing demand for its products. “There is huge demand for animal feed since multinational dairy companies are now entering India and farmers are realising that better quality products mean better yields for them,” says Sundaram. 

It is not as if entrepreneurs are looking out for just themselves. D Venkateswaran’s Ulavan Producer was set up to help turmeric farmers realise a better price. “We realised that farmers were not getting a fair price since there was no proper grading and storage system. Prices were arbitrarily fixed in a closed quote system. We not only clean, process and pack the turmeric but also store it along with the farmer’s name.” Around 2,179 farmers have benefitted from this system so far, with the company holding stock worth Rs.7.5 crore. 

The company has also tied up with banks, who provide lending facilities to farmers against the stock held. Loans worth Rs.3.54 crore have been disbursed to 826 farmers till date and Venkateswaran believes that the company would help make turmeric trading more standardised in the coming years. 

Textile roots
This attempt towards modernisation is also being seen in the textile segment. Erode is an old textile trading market, with over 8,000 traders, who have been in the business for several decades. The daily wholesale textile market has an annual turnover of Rs.4,000 crore and the weekly local market Rs.200 crore. To improve marketing of textile products, a Rs.400-crore project called TexValley that houses a B2B market, a weekly market and an international convention centre to host trade shows was built in 2014. The main market has about 1,650 showrooms where traders can market their product to large domestic and international clients while the weekly market can accommodate 4,000 small textile producers. “The mall will open up a huge market for the traders and producers both nationally and internationally, enabling them to get better prices,” says C Devarajan who is the co-promoter of the project. He owns 27% in Erode Textile Mall Company that owns TexValley. P Rajasekhar, whose family owns the Lotus Group that has diversified business interests, is the managing director of Erode Textile Mall Company, and holds the balance. While the weekly market has commenced operations, the daily main market is likely to commence operations in a year’s time. In the first three years, the company expects the main market turnover to increase to Rs.6,000 crore and that of the weekly market to Rs.1,000 crore.

Devarajan also runs one of the largest construction companies out of Erode, URC Construction. The company, incorporated in 1956, used to build dams and canals. It went on to build houses for government officials, sugar factories, spinning mills and textile parks. URC is currently working on the metro rail project in Chennai and some of its clients include Tata Realty, Reliance, ITC and Alstom. Even amid the downturn in construction activities, URC is growing. After clocking Rs.600 crore in revenue in FY15, the company expects to generate Rs.750 crore in FY16. The secret, Devarajan says, is working more with corporate clients and undertaking shorter duration projects. This, he adds, helps control costs and keep debt manageable. “The reason we have been doing well is because we have been conservative with costs and borrowings besides sticking to shorter duration projects,” Devarajan points out.

It is this pragmatism that has worked for entrepreneurs in this region. While companies in the industrial segment are bearing the brunt of a weak economy, those in other segments continue to do well. By building regional brands, several companies have managed to stay away from pricing wars with national players. It is no wonder then that Erode is one cluster where businesses are continuing to thrive. Entrepreneurs in Erode are everything that venture capitalists look for, but maybe they are this way because venture capitalists haven’t got to them yet.