Monday, March 26, 2012

V-Guard Founder Kochouseph Says Growth Appetite & Financial Discipline are the Keys to Performance: Exclusive Interview

Kerala is not known for its industries. But if the southernmost state will ever have an industrialist for a Brand Ambassador, it is Kochouseph Chittilappilly. From humble beginnings more than three decades back with just two employees, Kochouseph is today the strength behind a business empire that spans the listed V-Guard Industries (BSE: 532953, NSE: VGUARD), and unlisted leaders like amusement park chain Wonderla and apparel maker V-Star. Mainly a manufacturer of electrical home appliances, the Group’s flagship, V-Guard Industries Ltd., has not allowed the consequent low margins as a deterrent for outperformance in the market. Today, V-Guard’s high Return on Equity (RoE) and Return on Assets (RoA) make it a model to follow for other players. Is the secret just its asset-light operations? The key Kochouseph says, is more about a relentless focus on growth as well as strict adherence to financial discipline. The future looks even more promising for the Group with eventual goals like listing of Wonderla and V-Star, and some choosy diversification into real estate. On the personal front, Kochouseph continues to be a newsmaker after his stunning kidney donation, by proposing an alternate plan for strengthening Mullaperiyar Dam, and by taking Leftist trade unions head-on on the ‘Nokkukuli’ issue. Seasonal Magazine in conversation with Kochouseph Chittilappilly, at V-Guard‘s Corporate Office in Kochi:

You do have a unique Corporate Office building. Why so much of a green initiative? What are the highlights?
I thought we should set an example in green technologies, something that can benefit future generations through energy conservation. The main highlight is that a 2-metre wide open veranda is there on the periphery of each of this building's 12 floors. These verandas alone occupy 20% of the total construction area and we grow plants and flowers here. This building also has a totally environment friendly design, complete with energy saving, water saving, material saving, and recycling technologies. We also have a cafeteria that can accommodate 200 people, 4 conference halls of varying capacities from 20 to 200 persons, and a roof-top meeting place that can accommodate about 500 people. This building also has a roof garden, fitness centre, recreation room, library etc. besides extensive open area in all floors, and retiring rooms for guests.

In Q3, when one looks at home appliances makers, the large ones making TVs, refrigerators, washing machines, air-conditioners etc have done quite badly, while smaller ones like V-Guard, Bajaj, Prestige, Havells etc have outperformed. What is the secret? 

I think it is primarily a function of the essential nature of our products. The large or costlier equipments always tend to be non-essential or non-urgent. For example, you can always postpone purchasing that large LED TV, until your finances improve. But can you postpone buying a water pump or fan? So, when consumer demand is down, large appliance manufacturers tend to underperform, while companies like V-Guard maintain growth. In fact, this essential nature is something I always stress when our team suggests new products.

But the fortunes of some of your products like stabilizers are tied with the fortunes of the large appliance makers, isn’t it? 

Yes, but only for a few of our products. One strength in our strategy is that we have a much diversified product range now, so that the seasonal lull in one or two segments is more than made up by the strong demand in other segments.

So, that was a very conscious strategy that was evolved during the last 5 to 10 years?
Maybe even before 10 years. I think it was right there from the start. Close on heels of V-Guard making itself a success in voltage stabilizers for refrigerators, we had come up with different kind of stabilizers for different product segments like stabilizers for TVs, ACs, etc.

We think that was discussed by IIM-A’ s Prof. Abraham Koshy recently in a class on successful strategies at IIT Kharagpur… 

Really? Prof. Koshy had come here long back to study our strategies. Anyway, more than this in-segment diversification, what was more fruitful was our diversification into other segments. That too started long back, maybe more than 10 years back. For example, our diversification into water pumps was very productive for us.

But has too much diversification affected your margins?
It will have a small impact, but then everything is a trade-off. We need to grow volumes and we need to de-risk too.

Maybe the other diversification that analysts note as your strength, geographic diversification, happened more recently? 

Relatively yes, but there too, we had diversified into Kerala’s neighbouring states like Tamilnadu early on, and gradually that became a pan-India spread. Much of that spread had happened by the IPO time, but then there is no limit to geographic spread in a country like India. V-Guard is always improving on that front.

You are mentioning the marketing spread, but what about the production?
I was mentioning both. Production spread just follows marketing spread. For example, over the years, Delhi had emerged as a key hub for us, both as a market and as a distribution point. So, it made sense to have production facilities close to Delhi. Our Uttarakhand factory caters to that need. We are just six hours away from New Delhi. Yet, we get multiple tax benefits as the area is backward. So, geographical spread for production made much sense.

And what about your spread into Tamilnadu for production?
Early on, it was a de-risking strategy against the culture of strikes and trade-unionism in Kerala. We were a victim of that. But more recent production units in Tamilnadu hubs like Coimbatore are also driven by market demand and logistical advantages.

When one looks closely at your financial performance, a lot is due to your unique asset-light structure. Can you elaborate on what led to this?

Yes, our real innovation has been in our asset-light operations. We are a products company, and we stick to what we do best or where our best efforts should be – R&D, innovation, quality-control, branding, distribution, marketing etc. We outsource all other tasks, including production, packaging etc. In fact, as soon as we are sure that we have developed a viable product, we outsource it. Because of this, 80% of our workforce is made up of indirect employees through Self Help Groups.

Your diversification into electrical cable business stands as a contrast to this strategy. The performance of that division is also said to be a drag on your overall performance…

Well, I agree that it is a different strategy. We have our own factories for cables. But then, not all kind of manufacturing can be outsourced. Coming to the second part of your question, it is not right to think of it as a drag on the overall numbers. Margins are lower than some other outsourced segments, but cables deliver significant volumes for us. Also, there are distinct advantages like cables requiring no after-sales service, unlike almost all of our other products.
Do you think that V-Guard missed the bus in some products like Induction Cookers, where comparable companies like Prestige has made big gains?

No, I don't think so. We are closely following the developments in products like Induction Cookers, and once a decision is made, we can develop and market a better induction cooker within a short span of time. We went slow on that because the initial technology and performance was not satisfactory. But in recent months, better technologies have evolved, and we will be definitely looking at induction cookers too. Specifically, we will be looking to deliver a better induction cooker with high quality that will find its own niche under the V-Guard brand. As far as possible, we avoid potential false starts, to protect the reliability of the brand.

Despite the essential nature of your products that you mentioned, analysts have pointed out that continuous marketing thrust is still required for the success of V-Guard…

It is a given in this industry. It is not specific to V-Guard. And that requirement will always be there. A lot will depend on how well we communicate with our consumers, how well we price our products, how well we distribute them, how well we support our distribution partners etc. But at the end of the day, none of this will work, unless we deliver high-quality, hassle-free products. So, in a nutshell the strategy is this – produce quality products and market it with high quality too.

Your stock had outperformed from the 2008 IPO days, sometimes going beyond 3X gains. How do you view it?

Well, I don’t worry too much over market lows or market highs. My philosophy is that we should stick with improving our fundamental performance, and that the market would reward it accordingly.

Why haven’t more companies gone in for public listing from Kerala?

I think many are not comfortable with the valuations they can get. Some of them are also not comfortable with the intense scrutiny that a public listing brings in. In our case I was content with both aspects and that is why it could happen for us. I think scrutiny makes our work more focused and easier. We have good corporate governance practices like an independent non-executive Chairman and a professional Joint Managing Director, both from outside the promoter group. Our Chairman PGR Prasad, was MD & CEO of SBI Mutual Fund. He is a mechanical engineer as well as a Chartered Financial Analyst and Certified Financial Planner. Our Joint Managing Director is Dr. George Sleeba, former Chairman & MD of FACT Ltd, who is credited with its impressive turnaround. He is a postgraduate engineer from IIT Chennai and a doctorate holder in social sciences from CUSAT. Our other independent directors are also of high repute and track-record like CJ George, MD of Geojit BNP Paribas, and AK Nair, former MD of KSIDC and Nitta Gelatin India Ltd.

What according to you is fundamental to your success as an entrepreneur as well as the success of your companies like V-Guard, Wonderla, V-Star etc?

I put great emphasis on growth. We are never content with what we have achieved. The day I decide enough is enough, our decline will start. Business is always like that. We can’t ever hope to remain steady. We have to grow or otherwise the only alternative is that we will wither away. Secondly, the key to sustainable growth is financial discipline. Every rupee counts. Even if it is charity, every rupee should be put to effective use. One can make grand plans, and spend grandly on those, but at the end of the day, what counts for all stakeholders are only the volumes and margins. Without financial discipline maintaining them is impossible.

What would be your advice for young entrepreneurs?
I don’t know whether I am capable enough to advice. Anyway, since you asked, here it is: Never be content with what you have achieved. You can achieve a lot more for yourself and others if you aim for growth, always. And never forget the importance of financial discipline. More businesses have perished due to these two reasons more than anything else. When I recollect, many of the big names in business that were there in this city 35 years back, are no more today, due to failures on these two fronts.

Are you a micromanager or delegation specialist?
I am fanatical about delegation. I shun micromanaging more than anything else, and resort to it only when absolutely necessary. In fact, on a personal front, I think much of my success is due to successful delegation and I stress that for other managers too. If you have noticed, I have been talking with you for over two and a half hours now, right in my workplace, and have I been interrupted more than a couple of times? Delegation is very much possible. It is not widespread because some leaders fear it unwittingly. Without delegation, meaningful growth is impossible.

What prompted you to donate a kidney? It seems like an epitome of personal sacrifice. Are you spiritually motivated? Or is it just human compassion? 

I am a science student. Not just in the literal sense, but that I am always a student of science. I had studied kidney donation in detail, and was convinced that there are no bad effects on health. I am not spiritually motivated in the classic sense of the phrase. But yes, an element of compassion is there, maybe something I learned from my parents. But more than that why I did kidney donation was to set an example that anyone could do kidney donation safely and save another human being’s life.

How do you divide the responsibilities among your family members? What is your philosophy as the head of a business family? 

As you know, I am the Managing Director here, at V-Guard Industries Ltd. My wife Sheela is in charge of V-Star Creations as its MD. Our elder son Arun is in charge of Wonderla as its Executive Director. Arun is a Masters in Industrial Engineering from Industrial Research Institute of Swinburne University, Melbourne, Australia. My younger son, Mithun is also here in V-Guard Industries as the Executive Director. Mithun is a post graduate in Finance from University of Melbourne, Australia. Our daughter-in-laws are also involved in Group companies, with Arun’s wife Priya helping him in Wonderla, and Mithun’s wife Joshna helping my wife in V-Star. Regarding my philosophy as the family head, it is simple - lead by example. Nobody follows preaching or advices, but everyone follows our actions.

What all are the immediate business plans for the Group? Will you be taking Wonderla and V-Star public? Both seem to have their own strengths, with Wonderla having a 31% profit margin as well as a high entry barrier for competitors, and V-Star having a benchmark in Jockey‘s parent Page Industries (BSE: 532827, NSE: PAGEIND)… 

All that is true, and it is also right that I do have such aims on my horizon. But we are in no hurry. They will be eventually listed, most probably Wonderla will come first, but as of now it is premature to be talking about it. Wonderla is expanding soon to Hyderabad, and then to Chennai, and maybe after that we will think on those lines. Wonderla has also soft launched its hospitality division inside the Bangalore park with 84 rooms of 3-star facility. It is experiencing good traction as even 2% of the visitors opting for the overnight stays are enough. We also plan to do some hospitality projects outside of the parks. V-Star is more focused now having exited the women’s apparel business and putting its full might behind lingerie brand Vanessa and men’s innerwear brand, Valero.

Any other diversification plans right now?
We have started a small real estate development division, Veegaland Developers. The first two projects are in the planning stage now, both residential and at Kochi, using our own lands. One will be coming up in a 1-acre land at Kaloor, using a three-block design, while the other is a more premium project with just one apartment to a floor.

You have selectively engaged public attention on social issues like Nokkukuli (a traditional extortionist wage demanded by Kerala’s Leftist trade unions) and Mullaperiyar. What prompts you to go for these?

V-Star was a victim of Nokkukuli, and when our staff protested, they beat one of our staff. Now, such goondaism is something I won’t tolerate ever, and that is why I took their threats head on, and prevailed. I got more public support on this issue more than anything else, including kidney donation. I submitted an alternate plan for strengthening Mullaperiyar Dam after consulting with some of the most renowned experts, and I believe that it is the only viable and timely alternative to safeguard the safety of lakhs of people under risk from a dam-burst. If this project is implemented, the authorities will also get Rs. 5.5 crore from my personal funds, which is 10% of the project cost. I have already given a signed cheque for this amount to the people concerned.

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