Tightening the hold

In September 2008, one of the stores of kidswear brand, Lilliput, in Vashi on the outskirts of Mumbai, had a rather unusual walk-in. It was a day when Sanjeev Narula, proprietor of Lilliput, happened to be at the Vashi store. Narula recounts how the visitor advised him to change the display of clothes according to various themes and colours. He also suggested that Narula introduce an affordable range of clothing. This perhaps wasn’t the first time Narula has received such advice of the unsolicited kind. On this occasion, however, he had little choice but to take it. The visitor to his store was one Kishore Biyani, Founder of the Future Group, and creator of such successful retailing brands as Pantaloon and Big Bazaar.

Now Biyani isn’t known for gallivanting around town, striding into random stores and proffering counsel (although he’s known to hang about his own retail formats on weekends, keenly taking in consumer behaviour). Biyani had some solid reasons for visiting the Lilliput store, and more than a few of them are strategic. Indivision Capital, a private equity (PE) firm that’s a part of the Future Group, had picked up a stake in Narula’s firm; Biyani was doing his bit to ensure a return on that investment.

Not too many promoters of the profile of Biyani would go to such an extent to back their PE ventures, but the message in this tale is that PE firms are pulling out all stops to get closer to their investee companies. And there’s ample reason for that. Along with investment banks, insurance firms and hedge funds, another class of investors that took a battering in the wake of the sub-prime crisis in the US is PE. That’s because many of the companies they’ve invested in—often on the back of huge leverage—have little cash coming out of them, and more than a few are at the doorstep of bankruptcy.

Back home, too, the PE brigade stands the risk of portfolio companies going under—and taking along with them precious PE capital—courtesy of the economic downturn. One way to attempt to keep these companies afloat is by the PE managers themselves lending a helping hand to sputtering Indian businesses. For promoters, a cost-effective and simpler option to calling in the management consultants or investment bankers is to step into their own backyard and tap on the shoulders of the investors who’ve bought into their companies.

Private equity by nature is—or is at least perceived to be—a pure financial transaction, with the investing firm picking up a stake by putting cash on the table. But it doesn’t have to be that way—not when economic growth is slowing down, demand is softening and earnings are under pressure. That’s when the pedigree and the wealth of experience of the PE player become vital, allowing him to get involved in strategic evaluations at the portfolio company. Decisions involving cost reductions, vendor development, disinvestments and cost-effective sourcing are increasingly being blessed—and in a few cases even dictated—by the PE partners.

In recent quarters, senior team members of PEfunds have been known to park themselves in their investee company offices, run marathon meetings to take stock of the financial position and devise strategies to ease the pain of the economic slowdown. For instance, Nitin Deshmukh, CEO, Kotak Private Equity, had started screening the cash flows of his 15 portfolio companies as early as in April 2008. It wasn’t long before cost control assumed more importance. The first sign of stress became visible when banks refused to disburse sanctioned loans and customers who had paid up 75 per cent of the price of goods booked refused to pick up the inventory. Satish Mandhana, Executive Director, IDFC Private Equity, recounts how foreign banks had withdrawn credit lines to some of their portfolio companies and the immediate challenge for his team was to secure a line of credit from the domestic banks.

V MART, a value retail chain

Promoter: Lalit Agarwal

PE investor: Aditya Birla PE picked up a 25 per cent stake in July 2008 for Rs 60-70 crore

Contribution so far: Re-strategising the expansion plan; sourcing products via Aditya Birla Group firms; helping negotiate rent and reduce inventory to cut costs

LILLIPUT KIDSWEAR, a kidswear manufacturer and a retailer

Promoter: Sanjeev Narula

PE investor: Indivision Capital Management (Future Group) picked up a 24 per cent stake in Nov. 2006 for Rs 45 crore

Contribution so far: Re-strategising production facilities in Gurgaon; aggressive discounting and marketing to avoid inventory pile-up; rigorous monitoring of costs, inventory and shelf space in Future Group stores

DELHI ASSAM ROADWAYS CORPORATION, a logistics company

Promoter: K.K. Agarwal

PE investor: IDFC PE took a 31.75 per cent stake for Rs 44 crore in February 2008

Contribution so far: Introductions to other portfolio companies for new business generation; helped streamline the vendor development strategy; improved human resource operations by making employees accountable

BVG INDIA, a facilities management firm

Promoter: Hanumant Rao Gaikwad

PE investor: Kotak Private Equity took a 12 per cent stake in 2008 for Rs 40 crore

Contribution so far: Re-organised core activities into business units; professionalised finance operations by hiring a CFO; implemented biometric-based systems to trace employee productivity across its 300 locations

To be sure PE managers have been busy. Deshmukh’s team has been on overdrive, advising portfolio companies to sell unproductive assets, including unused office spaces; to refuse big orders that needed a mountain of working capital; to ask for more advance payments from customers; and to form clusters of people to chase receivables aggressively. One company where Kotak PE has made a difference is BVG India, a Pune-based facilities management company promoted by Hanumant Rao Gaikwad. Gaikwad, who kicked up a job at Tata Motors in Pune to start BVG and who today boasts clients like Tata Motors and the office of the President, employs 16,000 employees, many of whom come from Gaikwad’s hometown in Satara in Maharashtra.

In June 2008, Gaikwad reluctantly asked his 16,000 employees to leave their thumb impressions in a biometric machine to confirm their daily attendance. Gaikwad wouldn’t have dreamt of such an initiative—his PE investor, Kotak, proposed the idea, which has its merits. BVG has been able to lower manpower costs by a couple of percentage points since he began this initiative.

Clearly, during a downturn, cost reduction is paramount, and often promoters have nary a clue on how to go about the task in an effective manner. That’s when PE players can step in with strategic inputs that not only trim expenditure but also increase offtake. Consider the Delhi-based V Mart Retail, in which Aditya Birla Private Equity (ABPE) has bought a 25 per cent stake. Lalit Agarwal, Chairman of V Mart—and also brother of Ram Chandra Agarwal, Chairman of Vishal Retail—had big plans to take his discount retail chain from 23 to 75 stores across India. He had a reason to dream big as he was flush with funds received from ABPE— around Rs 60-70 crore.

Just before Agarwal could go ahead with the blueprint for the nationwide launch, he had one more task to complete: To revisit the drawing board, this time with Bharat Banka, Managing Director & CEO, ABPE, in tow. Banka suggested a clustered approach of increasing store presence within existing states instead of spreading wings across all regions and states. That proved to be a crucial tweak in the launch game plan. “Our over-aggressiveness was curtailed. We started penetrating into cities within existing states rather than spreading out everywhere,” admits Agarwal. Today, his company has managed to more than double the number of stores to 53—but just across 10 states as against a presence in eight states pre-expansion. And that seems to have worked, at least on the sales front.

Turnover was up 50 per cent last fiscal over a year ago, capital expenditure was trimmed by 40 per cent, and savings on advertisements and manpower costs were utilised on researching regional tastes in the states where V Mart has a presence. It also shifted three unprofitable stores and negotiated lease rents at stores where sales were sluggish. While Agarwal is hesitant to share actual numbers, the cost of operations due to these consolidated efforts has come down by 20 per cent since the beginning of this year. “V-Mart was an early follower of the clustered approach, and it is reaping the benefits now,” says Banka.

If there are PE investors who are in a position to help companies make strategic shifts, it’s because they are able to build competencies in certain sectors. Take, for instance, IDFC PE. One of the sectors it focuses on is logistics and transportation. Its portfolio companies include Sical Logistics, Seaways Shipping and Delhi Assam Roadways Corporation Ltd (DARCL). Satish Mandhana, Executive Director, IDFC PE, points out that having investee companies in allied sectors throws up opportunities to exploit synergies. Mandhana introduced DARCL, which operates at least 4,000 trucks on any given day, to these companies. And there was plenty to learn: Like buying trucks directly from truck manufacturers instead of visiting dealers; the art of effective communication between zonal offices via conference calls; and the importance of a professional senior management team.

Businesses backed by PE from large conglomerates can gain plenty from the latter’s expertise in a particular sector. V Mart can access apparel from Aditya Birla Group outfit Madura Garments and financial products from its insurance subsidiary, Birla Sun Life Insurance, at competitive rates. Narula of Lilliput learnt a hard lesson in inventory management from Indivision. Its PE managers alerted Narula about an impending slowdown and an inventory pile-up in July 2008.

As demand tapered off from malls, the promoter began spending more time with Jaspal Singh Sabharwal, Managing Director at Indivision, and his team. The mission was to reduce an inventory pile-up after Diwali. What started then was a combative move to ensure co-ordination between stores, warehouses and factories, almost a daily track of sales at each store, as well as text message updates about sales and dispatch of finished items from warehouses.

The result was an inventory reduction from 30 per cent level in November to an average 10-15 per cent by February 2009. What started as a one-off exercise has now become a regular practice at Lilliput, which has 210 stores in India and 18 in eight foreign countries. “Through every week of the clearance (of inventory), we were with the Lilliput team analysing data, picking up trends and suggesting corrective actions,” says Sabharwal.

PE managers often find themselves playing the role of investment bankers—that many of them have advisory backgrounds or are a part of a larger financial services group helps. That explains why Kotak PE is able to help BVG’s Gaikwad evaluate acquisition opportunities, besides doing a strategic review of the company’s organisational structure. For BVG, it’s clearly a win-win situation: Along with funds, he’s also getting advice that management consultants and investment bankers would charge a small fortune to part with.

IDFC, for its part, is doing its bit to help professionalise the family-run DARCL, which has three brothers at the helm. Along with putting in place a senior management team and bringing in a human resource expert as an independent director, IDFC’s Mandhana is also playing an unusual role of managing personal relationships amongst family members. Now, that gives the term “relationship manager” a new meaning!