State of the Economy 2019

Engineered for gains

Coimbatore, the MSME hub of South India, is banking on improving internal efficiencies for a better FY20

With over 12,000 small and medium manufacturers, Coimbatore is definitely a hub for MSMEs in South India. Catering to various industries such as textiles, automobiles, engineering and pumps among others, the MSMEs provide employment to 1.4 million people. Entrepreneurship is the default choice in Coimbatore where people often choose to start their own business after a few years of work experience. But for the past couple of years, MSMEs have been battling one storm after the other. First it was demonetisation, then came GST. While both managed to dent overall business sentiment, MSMEs are now working on making their business models more resilient to external shocks. 

For instance, while spinning mills have been the mainstay of Coimbatore, a lot of the textile manufacturers are moving into technical textiles and apparels which give them an opportunity to improve on their margins. Given the excess capacity in spinning and rising costs of cotton and other input costs, many textile mills have gone out of business and the ones that are in business fight a daily battle to stay profitable. So entrepreneurs are now looking to break the cycle and move up the value chain. Take the case of SK Sundararaman, managing director, Shiva Texyarn, which not only does conventional textile spinning but also manufactures innovative technical textiles for consumers and the military. In fact, out of its overall revenue of Rs.4 billion, about 40% comes from technical textiles. The company which started to focus on technical textiles seven years ago makes quick-dry sheets for infants, and high-altitude gear and uniform apart from specialised military suits for chemical warfare. 

Make Do

Sundararaman expects this year to be lackluster for spinning mills in Coimbatore. “Globally, demand looks muted and there is excess capacity both in the international as well as domestic markets. Since it is an election year, cotton prices are on the rise as the minimum support price has been increased and we are not sure we will be able to pass on the increase in costs.” The company is now targeting single use plastic products such as disposable diapers and PVC flexible which it believes can be replaced by its products. Sundararaman believes that instead of getting capital subsidies, companies would be better off if the government provides better infrastructure and labour norms. “I would prefer that the government creates an ecosystem that allows me to be the most competitive over the long-term with better power, tax implications and labour norms,” he says. 

Even as Sundararaman is hoping for a supportive ecosystem, Manoj Kumar Jhajharia, joint managing director, Salona Cotspin, says textile mills in Coimbatore are not the most cost-efficient in the country or in the international markets. “My competition is not the neighbouring countries of Vietnam, Cambodia or Bangladesh. I am unable to compete with the prices offered by Gujarat and Andhra Pradesh, and only a few discerning buyers who know of the better quality that Coimbatore mills offer prefer to source from us.” With rising cotton prices and unavailability of skilled labour pushing up costs, Jhajharia says automatisation and increasing the share of value-added products is the only way for mills to stay in business. While he has upgraded his facilities to produce compressed yarn, which fetches higher prices, he has also forayed into garments and launched a womenswear brand which now brings 10% of its overall revenue of Rs.2 billion. Jhajharia is confident that garments will be a significant contributor to revenue over the next three-four years.

Jhajharia’s confidence apart, Prabhu Damodaran, secretary, Indian Texpreneurs Federation, says that there are no new investments coming into the textiles sector and all incremental investments are going towards modernisation. Most entrepreneurs have realised that in an industry where margins are wafer-thin and demand cyclical, investing in technology to become process- and cost-efficient is their best option. “We have to create our own path and identify new opportunities, improve our manufacturing efficiency and financial discipline rather than look for help from outside,” he says. The federation which has around 510 members sends coaches to all its members’ facilities to observe and learn best practices and they, in turn, educate the others about adopting them. The members also collectively buy cotton and power to reduce overall costs. While textile mills are looking for working capital support from banks, Damodaran says that some of the larger and fully integrated mills are looking at IPOs in the next two years as a cheaper source of funding. 

Double Whammy

While larger players have been able to manage the transition better – be it demonetisation or GST or even volatility in the macro environment, MSMEs have been the worst hit by the curveballs thrown at them by the government. R Ramamurthy, who is the president of Coimbatore District Small Industries Association (Codissia) that has about 10,000 MSMEs as its members, says GST has put many of them in a pickle. Many of the MSMEs are often Tier-II or Tier-III suppliers to OEMs and the payment often comes in 90-120 days even as they have to make monthly GST payments. “Smaller players will go out of business because they are unable to fund their working capital needs. Most of them operate on wafer-thin margins and often their business is the only source of income. If doing business becomes unviable, most of them will have to look for jobs,” points out Ramamurthy. Earlier units with a turnover of less than Rs.15 million enjoyed an excise duty exemption but now units with over a turnover of Rs.2 million have to register under GST. Smaller units are usually a one-man show and now there is additional expenditure to ensure all the filings are in place. “You can’t have the same norms for them as you do for larger companies,” he says.

Most of the MSMEs customers, at least in the automobile industry, are also under constant pricing and margin pressure and in turn are asking their suppliers to reduce prices every year. “There is no respite for MSMEs who are getting squeezed at both ends and there is no growth potential for smaller firms because there is an expectation to bring down costs by 5% every year”, says V Sundaram, former president of Codissia and CEO of Thunder Auto. His company manufactures car lifts for service workshops. While his order flow is steady for the next year since Maruti’s Nexa workshops have made it mandatory to have their car lifts, Sundaram says individual workshop owners are holding back investments even when installing car lifts improves overall efficiency by 20-30%. He believes that adding a couple of verticals rather than focusing on one industry will improve the fortunes of MSMEs. 

Pumping It Up

Given its prowess in engineering, it is no surprise that the first motor to be manufactured in India came from a small engineering shop in Coimbatore. Over the years, the city has become as well known for its pumps as it has for its textiles. Over 1,000 MSMEs make 45% of the country’s pumpsets. Two years ago, demonetisation hit the industry particularly hard because nearly 40% of the transactions were done in cash. While the industry recovered from it in FY18 thanks to good demand from South, in FY19, demand has been more from the North but only players with a pan-India presence were able to take advantage of it. The pump business is seasonal since it is dependent on the monsoon making it a volatile business to be in if you are a player focused on one region. Aquasub Engineering, which clocks revenue of Rs.13 billion, has no such problem with 1,100 dealers across the country. “When there is a drought there is more demand for submersible pumps and if the monsoons are good, the lakes and ponds are filled, so the demand for surface pumps is higher. But given the seasonality of the business, it becomes very difficult for smaller players to manage cash flows,” says V Krishnakumar, vice president of Aquasub Engineering and president of Southern India Engineering Manufacturers Association. 

Overall receding water levels are leading to higher demand for more powerful pumps, so submersive pumps contribute about 70% of the company’s overall revenue. “Government’s agriculture policy has a significant impact on the industry. Apart from subsidies, the government is also buying pumps for distribution. While the government tends to go for the lowest cost manufacturer, the quality is not always the best. The government must leave the choice to the farmer who can commit additional money to buy the pump that best suits his requirement,” he says. 

While cheaper Chinese pumps have been invading the market, he says they are not built to handle the voltage fluctuations or the heterogeneous weather and water levels in India. “You can’t sell the same pump that you sell in South India in other parts of the country because the water levels vary significantly. When it comes to quality, we are still way ahead of the Chinese. So we don’t really see them as a threat,” says Krishnakumar. He says some of the smaller units are looking to supply to larger players which assures a steady order flow and it is a win-win since larger players don’t have to invest in additional capacity.

Forged In Fire

Besides pumps, the cluster has over 50,000 units making high quality castings and forgings. The automotive components industry in Coimbatore clocks a turnover of around Rs.70 billion and has over 275 SMEs and employs over 15,000 people. Vikram Mohan, managing director, Pricol, says the quality of castings made in Coimbatore is the best in the country. The company, which has plants across the country in Manesar, Pune and Rudrapur apart from Coimbatore, is the world’s second largest manufacturer of driver information systems and India’s biggest manufacturer of automotive pumps for the two-wheeler segment and rakes in a revenue of around Rs.15 billion. “While the business demands that we are based close to our clients, the engineering capabilities available in Coimbatore remain unparalleled. The cost they are able to offer the quality is so competitive that we transport all our casting requirements from here,” says Mohan. The company plans to invest around Rs.2.25 billion in new plant and machinery to expand its overall capacity. But it has been grappling with labour issues with over 300 of its permanent employees recently ending a 100 day strike. According to the management, jobs had to be shifted to other plants in Pune, Uttarakhand and the newly commissioned plant in Andhra Pradesh to meet its client requirements. 

While Coimbatore may not have any large PSUs to its credit, it can definitely boast of some globally competitive companies operating out of here. Take the case of Elgi Equipments, which is now aiming to become the second-largest player in the global air compressor market by 2027. The company is currently seventh in the world and second in the domestic market. Apart from working on improving the efficiency of its compressors, Elgi is focusing on launching innovative products such as oil-free compressors. While companies have been battling with the unavailability of skilled labour, Elgi has taken the automatisation route to meet the skill gap and is also encouraging its workforce to move up the value chain. 

“We constantly encourage our workers to think of ways to make their jobs redundant. We assure them they won’t lose their jobs and work together on co-creation of products and services with better features rather than doing routine work,” says Jairam Varadaraj, managing director, Elgi Equipments. The company, which clocked FY18 revenue of Rs.16.22 billion, is targeting revenue of $500 million in the next five years by increasing its presence in the developed markets. “The global opportunity for us is about $15 billion and the domestic opportunity is about $700 million. The developing markets are often volatile and building a business model that can handle that volatility can be challenging,” he explains. 

Coimbatore is also home to one of the largest foundry clusters in India with over 700 units. Sandfits Foundries is one of the largest players clocking a turnover of Rs.1.85 billion, supplying castings to leading automobile and heavy engineering manufacturers such as Ashok Leyland, TAFE, Hyundai, Caterpillar and Daimler-Benz. It has been a good year for the company with capacity utilisation improving from 50% to 80% over the past year “Higher infrastructure spending by the government led to higher demand for our castings,” says R Saravanan, managing director. With customers now preferring to do business with larger suppliers post GST implementation, things have been looking up for larger players like Sandfits but finding skilled labour to keep up with the orders has been a challenge. “We are looking to increase our capacity next year but there is definite shortage of skilled labour which means we have to ramp up slower than we want to”, says Saravanan.   

While the MSMEs in Coimbatore are still grappling with the aftermath of GST, the larger players have made the transition rather well. But given the entrepreneurial spirit that continues to thrive in Coimbatore most of the MSMEs are confident they will be back on their feet next year by either finding new avenues to grow. Times are not great but they want to rise up to the challenge.