State Of The Economy 2017

Times Are Changing

Despite a turbulent year at work, businesses at Erode believe the worst is over

RA Chandroo


Shri Pariyur Amman Kraft Papers, based at the SIPCOT industrial park near Gobichettipalayam, is more than 30 km away from Erode. “If you ask why I started my mill here, I would say simply because this is my native land, so it’s convenient for me,” smiles KM Shanmugaperumal, the founder and MD of the Rs.25 crore company.

Shanmugaperumal started as a corrugated box manufacturing five years ago. An electronics engineer with an MBA degree, Shanmugaperumal learnt to adapt quickly. “Three years back, I was running the entire factory on UPS. In fact, I was the only one to run a paper mill on a battery,” he laughs. But then he had no choice. Those were the days when 10-12 power cuts in a day was the norm. “Half hour of power cut meant one-and-half-hour of production lost. But with UPS, the unit was running 24x7 without any such breaks. It was a risk, but it became a huge success,” says Shanmugaperumal, adding that he hasn’t disposed the UPS yet although he is not using it now.

But there were bigger challenges than power outages to deal with. Realising that corrugated boxes alone might not be able to fetch a decent margin, he, literally, thought out of the box. After two years of research involving an investment of around Rs.20 lakh, Shanmugaperumal has now come up with a kraft paper that can be a substitute for copier papers. “We will be launching our own brand of notebooks, scribblers, calendars, invoices and others in kraft paper. Once the retail business starts, our margins should improve by 20-30%,” he says.

While 95% of the company’s revenue still comes from corrugated boxes, Shanmugaperumal believes increasing contribution of retail business will be a game-changer. “Copier paper is usually made from fine wood and uses up a lot of water,” he points to my notepad. “Why not think of an alternative? Why go white when we can go green? For finer details, we need white, but for others it’s not a must. What we are doing here involves zero water discharge and recycling of 100% old waste paper. If I can sell 50 tonne on a monthly basis, I can save about 20 lakh litres of water and 100 tonne of wood,” Shanmugaperumal drives home his point. The company is also planning to go public in two years. “I see good potential for the recycled segment. Only 25% of paper is recycled in India now,” explains Shanmugaperumal.

Erode currently has 15 mills, with an average production capacity of 50 tonne, of which 10 would be kraft paper mills. But the small town is home to over 25,000 small units comprising cotton textiles, edible oil mills, rice mills, food products, leather, non-metallic minerals, dairy and so forth. Like Shanmugaperumal, it is the willingness of entrepreneurs here to adapt and take timely action that has kept the region thriving.

Knotty affair
Textile is one of the oldest and biggest industries in Erode. Of the 46 medium and large scale units, 36 are spinning units, one is a composite unit, seven are engaged in textile processing activities and two are knitting units. 

As the largest employers in the district, this year, has been a mixed bag for textiles. “It was not a great year thanks to volatile prices. One, we don’t have the right data on demand-supply, and, hence, most prices are driven up by rumours. Two, commodity exchanges were supposed to be used as a hedge against any volatility, but they are now a gambling place. Traders keep buying and selling just to create volatility. Neither the industry nor the end-users benefit from it,” says Karthikeyan Thangavel of Powerloom Development & Export Promotion Council. He points out how huge arrivals were expected last season and most mills expected availability till end of season. “Suddenly in between there was a huge shortage of cotton in India as most of it was procured by MNCs. We had to buy it from them at a higher cost. While the export price was Rs.90/kg, we had to buy it for Rs.120-125 /kg. Within a span of four months, we had lost out on cheap cotton available and had to buy it at a higher price,” he says.

For P Elango, MD at SSM Processing Mills, work starts every day with a walk around the unit. He goes around the unit at least four times a day chatting with workers and understanding their woes. And that has worked. The mill, unlike most, has no history of labour unrest. The company with an annual turnover of Rs.28 crore has 275 workers on its rolls. SSM initially experimented with embroidery before completely switching to processing. “We have been around for 46 years. As and when the market requires us to change, we have evolved accordingly. Textiles is not a stable market. Even the quality of the cloth we process varies on a day-to-day basis. Only if you are able to meet the requirements of buyers in terms of quality and volume consistently, you will be successful in this business,” says Elango, who is also the president of South India Textile Processors Association.

KM Shanmugaperumal, CEO, Shri Pariyur Amman Kraft Papers

What is bothering textile mills the most is the fact that effluent treatment plants are no longer eligible for subsidy under the Technology Upgradation Fund (TUF). This has put processing units in a bit of a fix. “Effluent treatment is an important part of our industry. So, when the government insists on zero discharge, we are investing a lot of money towards achieving it. If the total plant cost is around Rs.10 crore, setting up the effluent treatment plant would cost around Rs.6 crore. The plant is both a capital investment and a recurring expense for textile processing companies. If they no longer get subsidy, then people will start discharging water without treating it and that, in turn, will pollute the environment,” says KPE Ravindran of Superfine Bleaching Company.

What has hit the industry, of late, is demonetisation as more than 50% of the sector is unorganised. “Since most companies and buyers work on a cash basis, the liquidity crunch affected the entire supply chain. As banks were unwilling to increase working capital limits, several units had to stay shut for two months,” says PE Eswar, who is part of SSM’s management. Thankfully, things are coming back to normal with limits being increased gradually.

P Elango MD, SSM Processing Mills

Win some, lose some
For SKM Egg Products, demonetisation had its benefits. The company, which produces egg powder, liquid egg and bakery mix used in baking, making noodles, pasta, sauces and biscuits, gained from the fall in egg prices.“Normally, during this period, egg prices are Rs.4-4.5 but now it is around Rs.3. It works well for us since eggs are our main raw material,” explains Shree Shivkumar, CEO, SKM Egg Products. Established in 1996, SKM clocked a turnover of Rs.280 crore last fiscal. Its state-of-the-art plant can crush 1.8 million eggs daily and produce 7,250 tonne of egg powder. The company counts Kraft-Heinz, Mondelēz, Unilever and a whole host of Japanese companies as its clients.

Shivkumar notes that the industry is going through a tough time. “A slump is quite normal in any industry, but in the past even during the bad times, we have been able to maintain our exports in value terms. In 2016, our exports declined both in volume and value as demand fell, creating an excess supply situation,” says Shivkumar. He expects demand to revive after June this year. “Bird flu in South Korea resulted in a surge in demand. This should take care of the surplus in the US. So, the balance should be restored in six months,” he says. The company, which gets 65% of its revenue from exports, has made inroads into Russia and hopes to increase its presence in this new market. Besides, the reinstatement of 5% subsidy for egg whites from 2% has also come as a relief for the industry.

Shree Shivkumar, CEO, SKM Egg Products

Water bearers
Things are also looking up for Saral Waters. When S Ganeshan decided to start his company in 2003, everyone tried to dissuade him saying that no one would buy water. But he still decided to go ahead with his plan. Saral started with a production capacity of 1,500 litres an hour. In Ganeshan’s words, nature gave it a helping hand the next year. “It was a drought year and the water in Erode was getting polluted. Suddenly, there was a growing need for our product and our business has been growing since,” he says with a smile. The company, which has four factories and 100 employees, today has a capacity of 9,000 litres/hour.

It has not been an easy journey though. “In the can market, we were able to survive because of our local knowledge and influence. However, when it came to bottles it was a challenge. People suggested it won’t be fruitful because of MNCs and their dominance. But, for us, even small purchases were an encouragement. Luckily, we bagged a contract from Indian Railways and that got us good exposure for our product,” says Ganeshan.

C Devarajan, Vice-chairman, CII Erode

There are around 1,500 bottled water units in Tamil Nadu today. According to Ganeshan, the industry, which has been growing steadily over the past 15 years, now has a collective annual turnover of Rs.3,000 crore. He believes the introduction of GST will give companies like his a better footing to take on MNCs since the existing tax structure casts a heavier burden on them. Unlike most businesses, he is probably the one who is happy when weathermen predict an oncoming drought. “Our industry depends on the forces of nature. If there is a drought, it means good revenues for us. This year should be better,” he signs off on a hopeful note.

Together we can
Force of nature aside, CII is putting its best foot forward to help budding entrepreneurs. “Erode has a well-built eco-system. We have all the research facilities and social infrastructure. While we have successfully fostered the entrepreneurial spirit, new-age entrepreneurs need a forum to address their concerns, guidance on creating viable ventures and on how to create a brand,” says C Devarajan, vice-chairman, CII Erode. Devarajan, who also heads URC Construction, notes that businessmen here sometimes tend to have a laidback approach which leads them to be content with smaller ventures. This, according to him, tends to put Erode behind clusters such as Chennai and Coimbatore. He believes that some of the new-age entrepreneurs will change that in the coming years.

URC Construction builds sugar factories, spinning mills and textile parks. It is currently working on the metro rail project in Chennai, and also has Tata Realty, Reliance, ITC and Alstom among its clients. Erode wasn’t spared from the slowdown triggered by demonetisation. But the sentiment is largely positive in the cluster with most awaiting a better financial year. The Rs.750 crore URC Construction did face problems on account of delayed payments. “We look at things in a positive way. Good projects are coming up, so we are hopeful,” says Devarajan, who feels the slowdown across industries is almost over. “Tamil Nadu, under a new CM, will see growth coming back on track in the next six months,” he sums up.