State Of The Economy 2020

MSMEs in Aurangabad | Videocon | Bajaj Auto | State of the economy

MSMEs in Aurangabad are seeing divided fortunes. One part is barely running, while the other is flourishing

How can anything compete with millennium-old architectural wonders? Aurangabad is known the world over for the Ajanta and Ellora caves, a tomb built by the Mughal ruler Aurangzeb in memory of a lost love, and a towering temple dedicated to the “lord of compassion” referenced in the Shiva Purana. 

In this city steeped in history, modernity and its allies have to fight tooth, nail and extravagant gestures to be taken seriously. Therefore, in 2010, businessmen and professionals placed an order for 150 Mercedes-Benz on a single day and then for 101 BMWs on another day. That changed the prevailing perception of the City of Gates as a dusty neighbour of the power trio of Mumbai-Pune-Nashik. It showed Aurangabad to be the City of Wealth, with its many big auto, consumer durable and engineering companies.

Ten years on, Aurangabad is in the headlines once more, but not with the same triumphant spirit. Micro, small and medium enterprises (MSMEs) are seeing divided fortunes. One half that is dependent on Videocon for its business is shutting down or waiting anxiously for its dues to be settled, and the other half that supplies to Bajaj Auto is thriving.

What went wrong

A livid security guard at the Videocon factory rushes towards us when he spots us with a camera. “Koi photo nahin yahan pe,” he says wagging his finger. Two others are more polite and request us to go away. This is in Chittegaon, about 17 kilometres from Aurangabad. The massive factory has six gates and there are no more than a handful of people going in and out. The usual humdrum one would associate with an industrial area is conspicuously absent and one employee tells us production has come to a standstill. “Almost zero activity hai, sir,” he says. 

More than a hundred yellow-and-black buses in the compound once ferried Videocon’s workforce to and fro from the factory. It was here that washing machines, refrigerators and television sets were manufactured, but production has almost stopped for over a year now. As Videocon’s debt continued to surge due to its failed telecom business and other investments, the company began losing ground in its flagship consumer durables business. Besides increased competition from global players such as LG and Samsung, the group promoters were also involved in a loan scandal. Videocon Industries and other Venugopal Dhoot-led entities went bankrupt and were sent to the National Company Law Tribunal (NCLT) in 2018, with debt as high as Rs.850 billion, which they owed to banks, vendors and their employees. The huge vacuum that the company has left in the region is distressing. Besides 450 vendors who depended on the company, there were additional 50,000 people who, directly or indirectly, were supported by the erstwhile consumer goods major. That’s not accounting for another 2,000 factory workers who were left jobless when Videocon went bust, an entity that easily contributed Rs.1 billion-1.5 billion to the city’s economy each month. Nandkishore Mantri greets us cheerfully, but his mood instantly changes when you mention Videocon. His factory is just a stone’s throw from Videocon, and in a corner from where we are sitting, we can see a rundown washing machine with the brand’s name. Mantri looks at it and says it was his bread and butter. “We feel let down by them,” he adds, resentment hard to hide.   

His disappointment is warranted. A post graduate by qualification, Mantri set up Shri Venkatesh Polymould in 2013 with an investment of Rs.250 million. Videocon’s large presence meant steady business for his company that primarily manufactured a plastic moulding component in the washing machine. Mantri did not even look for other clients, with the 7-8% margin he made by selling to the Dhoot-owned company. For four years, he was on a roll, but the first signs of trouble began to surface in 2017. From Rs.540 million, Mantri reported a turnover of Rs.350 million in FY18 — a near 40% fall. He had to lay off almost half of his workforce.   

Instead of giving up and bringing down the shutters, Mantri adapted. Today, he serves the likes of Haier and Liebherr, though things are not as great as before. “For Videocon, we manufactured the complete product, but now, it’s only value-addition,” he laments. The volume has spiked, but he had to compromise on his profit margin, which is barely 2-3%. On top of that, he has to send his products to Ranjangaon, where his customers are, approximately 180 kilometres away. “I have been forced to work on opening a plant in Ranjangaon,” he says, adding that it has cost him Rs.150 million. 

When Videocon lost steam, it not only took away jobs or the opportunity to make higher profit margin, it also didn’t clear its dues. Mantri is one among many to whom Videocon owes money, and with the company in the NCLT, the road ahead does not look easy. These are not small amounts for these businessmen; Mantri alone needs to be paid Rs.5.6 million. It has affected his working capital cycle, along with his credit rating, as he defaulted on his own payments. Like other Videocon vendors, each time he goes to the bank, he is charged an interest rate of at least 12% from what was around 9% earlier. And like him, some have been forced to take loans against property.

Mantri is managing reasonably well but smaller entities are barely surviving. RM Rathi, director, Chetak Plasto Electric is one of them, who had been Videocon’s vendor since 2007. Around 40% of his business came from just one client, accounting for Rs.50-60 million annually. From manufacturing 72,000 units of the washing machine’s wall frame each month, the production dropped to 30,000 in FY17 and now stands just at 400-500. He has no idea when Videocon will clear the outstanding of Rs.1.2 million. To add insult to injury was an unsold stock worth Rs.500,000 and another Rs.1.2 million of plastic. “It was all sold as scrap,” he says. Fortunately, his product is used in agricultural implements and the automobile industry as well, through which he makes approximately Rs.230 million each year. He has also thought of Ranjangaon as an option, but he’s been bitten once and says, “We set up base here on a commitment from Videocon.”    

Hamara Bajaj  

The Videocon saga has unfolded badly for many in Aurangabad, but there’s another story at play as well. Anyone working with two-wheeler major, Bajaj Auto, laughs off the slowdown like it’s a dreamed-up monster. This interesting paradox stands out as we chat with Ajit Soundalgikar, VC and MD, Marathwada Auto Compo. 

With 95% domestic market share in steering columns, his company grew by over 20% two years ago. In FY19, revenue dropped by 10%, but Soundalgikar is still all smiles. “It is no more than a correction. An extended monsoon and a reduction in permits for three-wheelers have been the reasons,” he says.  

Initially, Bajaj was the source of all his business, but over time that has fallen to 40%. Soundalgikar has been hedging his bets and today, TVS Motor and Piaggio also contribute a major chunk to his Rs.2 billion turnover. “We have a healthy 60:40 revenue mix between three and two wheelers,” he says. This slowdown has also given him the opportunity to buy one of the key raw materials at a cheaper price. For instance, he has been paying 8-10% less for seamless pipes. “We are also in the midst of setting up a plant (for Rs.35 million) in Hosur to be close to TVS Motor. A slowdown is a great time to look for newer ways to reorient the business,” he adds and says that, with the launch of Bajaj Chetak, his business is only set to soar further.

If you work with Bajaj Auto, irrespective of the size of your business, life is certain to be fortunate, according to Ravindra Vaidya, MD, Shree Ganesh Press-n-Coat, a company that manufactures the cushion on the auto driver’s seat in addition to carrying out job work in sheet metal fabrication and surface treatment. “90% of our revenue comes from Bajaj. Our growth has come from the auto major’s thrust in export markets,” says Vaidya, whose company has a turnover of over Rs.2 billion. But what if Bajaj experiences something like Videocon did? Vaidya isn’t worried yet, neither are other vendors of the company. They are confident that a boom in both two and three-wheeler autos will drive growth.

Even for not-so-lucky businessmen such as Prasad Kokil, managing director of Sanjay Group, Bajaj Auto has been the only stable business, which contributes 25% to his revenue. The company that makes plastic seat base for three-wheelers has been hit due to the auto slowdown, but that’s because of his work with passenger car companies such as Tata Motors and Mahindra. What worries Kokil is the shutdown announced by Volkswagen. “We set up a plant in Ranjangaon in 2004 to diversify into the four-wheeler business. The slowdown in this sector has been a huge challenge,” he says in a measured tone. Of late, he has been spending a lot of time there to tide over this crisis. However, it looks anything but easy. “I have never seen such a difficult phase in four-wheelers. The uncertainty is what we find tough to deal with,” he points out. Revenue from the Ranjangaon plant has dropped 20%, with more pain likely to follow.

Navigating potholes

Bajaj is one of the few outliers in the otherwise stressed sector and just like the 75-year-old institution, there are vendors who believe that they can craft their destiny. Take Ashok Kale, MD of Clad Metal India, which does Rs.2 billion in revenue. He remains optimistic despite the Videocon bust. In fact, he believes industry in the region can take care of itself. 

A mid-sized player in the refrigerator cooling parts business (including evaporator), Kale did not even experience Goods and Services Tax (GST) pain. “Post GST, we opened three plants. There is no shortage of demand if you can manufacture the relevant product,” says the entrepreneur who counts LG, Haier and Whirlpool as his major clients. Even the delay in GST refunds has not been an irritant for players like him. His view is echoed by Soundalgikar, who thinks the industry has to move ahead of these issues. “The story is about being in touch with the market and figuring out the trends. In our case, we think shared mobility is a trend and backing three-wheelers seems like a smart thing to do,” he says. 

What irks Kale is the untapped potential in Aurangabad. “We are willing to do a lot more but face many challenges. Take connectivity for instance. There is still only one flight a day to Mumbai with road travel not being an option at all,” he adds. The stretch to Nashik is known to be poor and it frustrates the entrepreneur here. 

The need to be more aligned with the changing market can hardly be overstated and the transition in many cases had a bearing on revenue. Bhogale Automotive is one instance where, till mid-2018, things looked steady. The core business was manufacturing carburetors for two-wheelers and growth was not a concern. Its director, Ramachandra Bhogale, says the government’s decision to move two-wheelers to fuel injection systems as a part of BS-VI transition was difficult for the business. This meant the company had to stop focusing on carburetors and boost manufacturing of fuel injection engine. But Bhogale has overcome that hurdle by quickly accepting the change. “Sales numbers did drop, but it will eventually stabilise as long as we understand the nature of the change,” he maintains. Bhogale Automotive’s revenue fell 10% in FY19, over the previous fiscal, and its owner believes it is just a temporary phase. He says, “Those who overinvested are the ones in trouble.” 

It is the city that invented the Panchakki, an engineering marvel in medieval times that stands tall to this day. Just as that mill draws water from an underground canal from miles away, the determined business community of Aurangabad will continue to draw inspiration from its bright past.