State Of The Economy 2017

Getting into cruise mode

While demonetisation took away some of the early gains of FY17, companies in Coimbatore hope to bounce back in FY18

RA Chandroo


It was on the day when we were set to travel from Erode to Coimbatore by road that the Jallikattu supporters declared a bandh across Tamil Nadu to protest against the Supreme Court ban on the age-old sport. Much to our surprise, it was an eventless journey till we reached Coimbatore. It was then that we saw thousands of passionate vocal students, from hundreds of educational institutions that the city is famous for, thronging the streets in support of Jallikattu.

D Nandakumar, former president of Chamber of Commerce, can easily relate to the euphoria and adds that it was another set of students who had changed the destiny of the city in the late 1900s. Some of them included GR Damodaran, Textool’s D Balasundaram, Texmo’s R Ramaswamy and GK Sundaram from the Lakshmi group, who were returning from the UK and US after their higher studies and were discussing their future plans. Damodaran had a unique vision and wanted to start an engineering college. His idea gave Coimbatore its first private engineering college — the well-known PSG College of Technology, which was founded in 1951. Similarly, the other three went on to build companies that excelled in textile machinery, engineering and pumps that gave Coimbatore a makeover from being an agricultural economy to one of the largest industrial hubs in South India. Their ideas fostered an entrepreneurial spirit in the city that has led to the formation of many medium and small enterprises.

Today, Coimbatore is home to more than 25,000 SMEs and contributes around Rs.10,000 crore to the government’s coffers through direct and indirect taxes. Despite not having a single public sector enterprise, it is one of the fastest growing cities in terms of industrial activity, second only to Chennai.

Industrious by nature
Coimbatore is also the second largest IT and BPO hub in Tamil Nadu after Chennai. With a cost advantage of around 35% over Chennai, entrepreneurs feel that the city has tremendous possibility of growth, provided they are equipped with adequate connectivity and infrastructure. “Earlier, we did have power problems, but that’s solved now. This is an ideal place to live, work and start a business, as compared to any other city in Tamil Nadu. But, because of the airport, our IT businesses have not picked up yet. People travelling from Europe and US waste one day to get here via Chennai, Cochin or Bangalore,” says Nandakumar. According to him, while there is no dearth of entrepreneurial skills or skilled workforce, the city’s infrastructure or perhaps, the lack of it, does not offer a conducive environment always. “We haven’t seen any flyovers come up in the last 25 years. We have managed with just two flyovers so far. All this is definitely going to affect the business climate of the region,” points out Vanitha Mohan, president, Chamber of Commerce, Coimbatore.

Demonetisation blues
As FY17 comes to a close, despite initial good signs, there isn’t anything great or noteworthy worth mentioning. “We had a good start as the power crisis, which seriously affected the SMEs, was resolved finally. Things seemed positive then. But demonetisation hit us out of the blue. Some units had to shut down due to the cash crunch. It’s going to take a while for things to turn around,” adds Mohan.

The automotive components industry of Coimbatore is comprised of around 275 medium and small units, apart from larger players like Pricol and Elgi Equipments collectively employing over 15,000 people. The industry, with an annual turnover of over Rs.6,000 crore, now seems to be facing a tough time after demonetisation.

“SMEs is a cash-dominated sector, more so because of convenience rather than legality. They deal with a lot of small transactions and have a workforce that prefers cash. Demonetisation struck the SMEs mainly, and since they got affected, it impacted our medium and large enterprises as well,” says Mohan, who is also the executive director of auto components manufacturer, Pricol.

The Coimbatore-based company, which clocks annual turnover of Rs.1,300 crore is the world’s second largest manufacturer of driver information systems and India’s biggest manufacturer of automotive pumps for the two-wheeler segment. With eight manufacturing units, it is present in India, Indonesia, US, Brazil, Germany, Singapore and Japan. Nonetheless the company wasn’t spared from the impact of demonetisation. “Last month we worked only for 22 days since we didn’t have enough orders. This month again, it’s the same story. Since we cater primarily to the two-wheelers segment, our volume took a hit. Cancellations have replaced new orders for the day,” adds Mohan.

It is the same case with the entire industry. “OEMs, especially in the two-wheeler segment, have taken a huge hit since orders are getting cancelled. They also had to deal with attrition, flight of labourers and inventory piling up — all this was a big blow,” explains Mohan, pegging the average losses at 60%.

Vanitha Mohan, Executive director, PricolHowever, S Narayanan, whole time director at Bimetal Bearings is a little more optimistic. While he admits that demonetisation will have a near-term impact on his company’s growth, the long-term outlook still remains positive. Part of Chennai-based Amalgamations Group, Bimetal Bearings manufactures auto components catering to both the domestic and export markets. It also supplies to the Railways and the Ministry of Defence. The company clocks an annual turnover of Rs.170 crore and employs around 550 people. With a 50% share of the OEM market and 38% of the after-market, the company exports around 30% of its products. “While growth was flat last year, this year promises to be better and more profitable,” says Narayanan.

 Catering to the two-wheeler segment, Bimetal Bearings operates across segments which Narayanan feels has helped during the demonetisation time. He says companies who had all their eggs in one basket by focusing on just one or two segments bore the brunt of the cash crunch. “It’s an interesting phase. The cash crunch does impact our working capital but it gives us an opportunity to calibrate ourselves. During the downturn if you have enough financial muscle, then it is an opportunity to invest in those capabilities and capacities that will help you surge ahead once the downward spiral is over,” he explains.

S Narayanan, Whole time director, Bimetal BearingsNarayanan feels that there are bigger challenges than demonetisation, which the industry needs to tackle. “The industry is highly dependent on agriculture and monsoon, which affects the movement of goods. Another challenge is high corporate taxes; it should come down.” According to him, GST could be the lone change-inducing force that could take the industry forward but a lot hinges on its implementation. “By April this year, we have to move to BS-IV emission norms. That’s a major step since the cost of vehicles will go up. GST will help in partly neutralising the increase in costs.”

Dry spell
Coimbatore, which introduced the first electric motor and water pump of India, has around 300 pump manufacturers. The industry, with an annual turnover of around Rs.6,000 crore including exports of around Rs.500 crore, employs about 200,000 people. Despite losing market share to low-cost manufacturers, Coimbatore still produces 45% of the total pumps in the country.

Mahendra Ramdas, Managing director, Mahendra Pumps“We had deficit monsoons over the past two years. This year, we were expecting to do good business in October and November. But demonetisation changed everything since 40% of the business in this industry is transacted through cash. However, the cash crunch is temporary and things should get better in the first quarter of FY18,” thinks Mahendra Ramdas, managing director of Mahendra Pumps.

Established in 1960, Mahendra Pumps exports its pumps to different countries across the globe. The company witnessed an 8-10% growth this fiscal so far, with the first eight months seeing a 10% growth, followed by the months of November and December, where growth was flat.

Ramdas believes that it is a problem of plenty for the pump industry. “Too many players entering the industry and difficulty in getting skilled workers are the primary causes, and both these are internal issues.” He believes that bringing down tax rates would help increase compliance. “GST should not be postponed further and labour reforms should be taken up. Tax rates need to come down to increase compliance. We are one of the sectors affected by the grey market. Demonetisation has only partly dealt with it,” he explains.

K Selvaraju, Secretary general, SIMAAs Tamil Nadu, along with other South Indian states, heads towards a serious drought, the general perception is that it would lead to higher pump sales. “There is a feeling that a drought is good for the pump industry. Traditionally it would be; but currently, the entire farm sector is facing a crisis. So, it wouldn’t be an ideal scenario when one more drought sets in,” says Ramdas.

KK Rajan, president, Southern India Engineering Manufacturers’ Association (SIEMA), explains it further. “With water levels receding, farmers need to replace their existing ones with more powerful pumps. But, they don’t have enough money to invest,” he elaborates, pegging the cumulative loss due to demonetisation and drought at 40%. However, pump manufacturers are hopeful that once the cash crunch settles down, farmers would be in a better position to make investments. They are also hoping that with a modest price increase, the first in three years, growth will return to normalcy in the coming year.

Steady hope 
In contrast, Adwaith Lakshmi Industries seems to be quite a happy place. There are signboards to guide you towards the factory where employees move on custom-built scooters wearing headsets. “The scooter saves them from walking almost 16 km on an average, and the music makes work enjoyable, besides protecting their ears from loud noise. It makes a huge difference on productivity,” says Ravi Sam, managing director, Adwaith Lakshmi group of companies.

Catering mostly to textile machinery manufacturers, the company also has its own textile division and clocks an annual turnover of Rs.200 crore and is growing at 20% every year. Employing 250 people directly and 500 indirectly, the company supplies to Bhel, LMW, Amara Raja, Ashok Leyland vendors, L&T Coimbatore, Pricol and Saint-Gobain to name a few, and enjoys market share of 9-12%.

Being a labour-intensive industry has its own set of problems, but Sam takes it in his stride. “In the long term, we need to address the availability of skilled labour and improve their productivity. Continued support from the government would go a long way in achieving those goals. It works to their advantage as well since this is the only industry where the government can create jobs considering the kind of numbers they want. Even if the centre wants to generate 2 million jobs, the textile industry can provide it.”

 The textile industry of Coimbatore has around 1,000 mills accounting for 40% of the units and 25% of yarn production in Tamil Nadu. It employs around 200,000 people directly and indirectly, but is susceptible to extreme fluctuations in cotton prices and demand of yarn across the world. One kg of cotton, which costs Rs.33,000 at the beginning of the season in October, skyrocketed to Rs.51,000 during the off-season last year.

According to K Selvaraju, secretary general of Southern India Mills Association (SIMA), the industry hasn’t seen a comeback since 2014 after the recession. Demonetisation, too, took a toll on an already ailing industry. “80% of the business comprises of SMEs that manage with cash. While exports have not been affected, the domestic business was affected by 30-40%. Retail sales came down by almost 90% during the initial weeks. Capacity utilisation has come down considerably making some of the assets unviable to operate. All this is worse than what we faced during the recession. Considering the strain the industry is already in, the government should not touch anything in the existing tax structure while introducing GST,” he says.

Sam expects things to improve from mid-2017. “We are keeping our fingers crossed. We lost two monsoons. Cotton crop estimates have come down, prices of cotton are ruling high. Let’s hope this year there is economic viability across the entire textile chain — right from cotton farming to garment finishing,” he adds. He also believes that farmers getting good prices for their cotton would benefit the local economy.

The lull in the previous fiscal hasn’t brought down the spirits of businessmen in Coimbatore. Ready to step into another financial year, the industry players are hoping for some light at the end of the tunnel. And who knows, a few years from now on a few of those rallies, participants might be the ones who will give a facelift to the city.