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Sowmya Krishnan

Mr Satish Tandon, Managing Director, Alfa Laval (India)

DESPITE the general economic slowdown and lack of fresh investments in user industries, Alfa Laval has managed to grow at a steady pace. After a series of restructuring measures initiated by the company in the past few years, the company is all set to capture fresh opportunities and march ahead. In an interview to Business Line, Mr Satish Tandon, Managing Director, spoke about the reasons behind the company's success and growth and its future prospects in India and abroad.

Excerpts from the interview:

The industrial environment has been dull for the past few years. How have you managed to grow despite the tough market conditions?

The industrial scenario has been very competitive from 1994-95 onwards. Though grassroots projects were not coming up due to the slowdown, many companies such as Hindustan Lever and Smithkline Beecham have been expanding. So when they grow, our business thrives. During a slowdown, companies try to restructure, cut costs and make their operations more efficient. We grabbed this opportunity and pushed up our volumes either by installing extra capacities or running the old capacities more efficiently. We provide machinery that save costs and energy. That is how our market expands.

Whatever we do, we do it efficiently so that our costs are lower than that of our competitors. We have the expertise to automate high-capacity plants and improve efficiency at the customer's end. Therefore, it is primarily the expansion market plus our association with some good groups that were expanding that helped us sustain growth in the past few years. We are a bit choosy about our customers now. We take up projects only for established professional groups with whom we have been associated for long. We have burnt our fingers by doing grassroots projects for some not-so-professional groups. The problem is these companies do not tie up the funding for the projects and this results in cash flow problems. So we are a bit wary about working with new customers unless they show us the funding clearly.

In a competitive market, do you face pricing pressures to retain market share? If that is so, how do you maintain margins?

Yes, when there is a slowdown in the economy, there would definitely be some pressure on prices. If we take 1998 as the base, our prices on projects would have fallen by around 10 per cent now. To some extent we tried to compensate for the slump in prices by controlling our costs or by looking at such other factors as increasing volumes or developing new vendors who can be more competitive compared to the original vendors. Though margins were tight, we restructured and became more cost-conscious to overcome the tough conditions. We reduced our staff strength. We were 1,400 in 1998. Today we have 800-900 people.

Second, we utilised our capacities to the maximum so that our overheads are fully absorbed. Strategically, from January to April-May we try to fill in as much volumes as possible so that we can execute those orders during the year. Once the factory is at working at its peak, invoicing becomes easier and there are no fluctuations in production. If the factory is not loaded fully, overheads will not be completely absorbed. These savings in costs add up to the total profit. We are lucky we are able to run the factory on a totally loaded basis and that is one of the reasons for good profits.

Where do you see future growth coming from?

The market for the vegetable oil business and distillery business seems promising in the next couple of years and will be our major growth driver. In the last two-three years, we have developed expertise in the field. We are working with the Alfa Laval group and entering these markets in a big way. Now that interest rates are low and government finance is available for setting up distillery projects, the prospects for this segment appear promising.

Second, our export prospects appear bright. This year we will export equipment worth Rs 50-60 crore to our parent group — around 60 per cent of our total exports. We primarily export decanters and separators — our two core products — to our parent company. We also export to other countries such as Bangladesh, Nepal, Sri Lanka and Nigeria. The biggest upcoming market is Thailand, The Philippines and Vietnam, primarily for distilleries and breweries and vegetable oil plants. We are trying to enter these markets now and in about two months time we plan to open up our own offices in East Africa and Kenya. Moreover, margins are much higher in exports and payments are much easier as we get easy credit through L/C. Overheads are much higher for European companies compared to domestic companies and, therefore, we are more cost-effective. Thus, we can command better margins on our products. It is difficult to enter these markets. But once we penetrated, from the cash flow and profitability points of view, exports are definitely attractive.

Of late you have been focussing on products rather than projects. Why?

We focus on businesses where we can make money. Products give us better margins as we supply our material and get money immediately. Projects carry lot of liabilities. If we are not able to execute the projects correctly and on time, we could make heavy losses. We take up projects only when we are convinced about our capability, competence and resources and are sure of completing them on time. There is so much money locked up and this can be released only when the project is completed. The lead-time is longer and the risk involved higher.

On the other hand, if we concentrate on the product business alone, then we are dependent on contractors to sell our products. We might have to compromise on prices but since the delivery time is lower, the risk is also lower. A right blend of products and projects can give both volumes and margins. The ideal mix would be 50:50. At present, 65 per cent comprises projects and 35 per cent products. That is why we are now looking at opportunities to export components to our group. But if the group gets interested in our components then our ratio would improve. The group is showing a lot of interest. Today, it is picking up around 1,100 separators and 120 decanters. The future appears promising. In the next two years we should touch about 2,000 separators. If we can supply 25 per cent to the group, that would be an ideal situation.

Do you only supply products or do you also take up projects for the group?

We have started taking up projects for the group only now. Legal requirements are more stringent in other countries compared to Asia or Africa. If we put up a project in the US and the project does not work then the whole company could get wiped out. So, we have to be very careful about our technologies and recoveries before entering these areas. Alfa Laval India is the engineering base for many projects. We engineer projects here and they execute the projects. We also supply machinery as we cannot make profits only through engineering.

Market presence and prompt servicing are very essential for success in this business.

How do you achieve this?

We have around 17-18 marketing outlets, 16 offices across the country and about 20 per cent of our total staff strength is in selling and after-market services. Our two biggest strengths are marketing capabilities and presence in the market. In the last 10-15 years we have been developing these offices and have trained sales people. They know the markets well. Anywhere in the country, except the North-East, we can render services within 36 hours. Proximity to the customer is a major advantage. As we are capable of providing service in time, our customers do not mind paying us. So, margins are better in the services business.

You have hived off your food processing division, which earlier contributed 20 per cent of your revenues. How have you made up for the loss of revenues from this division?

We are into biotech now — a relatively new area. We do about Rs 15-20 crore of business in biotech. The distillery business and vegetable oil is growing at a faster pace, making up for the losses in the food processing business. Moreover, Tetra Pack still buys components for its food processing business from us as only we manufacture these components. They are our priority customers and we still do good business with them in terms of components.

What is the future for the biotech segment?

I do not see much growth in the biotech industry. The technology required is very sophisticated and we do not have good R&D facilities in India. The Government has provided incentives to set up biotech parks. But no pilot projects are taking off. We are more into commercial production and would like to take up pilot projects rather than supply equipment to labs. Though we would get some business, no breakthrough has been possible yet. Maybe after two-three years we can expect some growth.

How has Alfa Laval fared in 2001? What kind of growth do you expect for this year?

We are quite happy about our performance for 2001. We achieved a 50 per cent growth in profits at Rs 38-39 crore compared to last year's Rs 25 crore and this was achieved under tough circumstances. This year the performance for the first three months has been good. We will achieve whatever we have budgeted for the current year. Our order book position as on December 2001 was Rs 301 crore. This year there would be tight pressure on prices but volumes will go up. The volumes should make up for the prices. If the blend of projects and products is good, we can maintain the profitability at last year's level. If we get some good export orders, which are in the pipeline, we could do better.

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