Bata IndiaBata India seems finally to have managed a turnaround. Volume driven sales aided by capital restructuring and cordial industrial relations helped boost net profits by 300 per cent to Rs 16.64 crore in 1997 from Rs 4.15 crore in 1996. The company's repositioning of products in the mass market segment have helped increase volumes. This increase has been in the range of 10-12 per cent for leather, rubber and plastic footwear.
Capital restructuring has played a major role in improving the bottomline of the company. The rights issue in late 1996, and retiring of costly debt in 1997 has changed the capital structure of the company from a debt to equity of 1.89:1 in 1996 to 0.37:1 in 1997. Interest charges have fallen by 25 per cent to Rs 14 crore this fiscal from Rs 19 crore in 1996. Payments of past dues improved the working capital of the company.
The cost of production was the same as last year and operating margins increased only slightly from 5.2 per cent in 1996 to 6.00 per cent in1997. Raw materials and labour constitute approximately 70 per cent of the cost of sales. Raw materials account for 50 per cent, while labour accounts for 20 per cent of the cost of production. The reduction in the price of raw materials such as leather, rubber and plastics were offset by higher labour cost.
The company signed a new wage agreement with union for three years, which increased the wage bill of the company. The company presently has a work force of 6,300 employees of which 2,193 employees are working in retail outlets of Bata India Ltd. The fact they are in a high volume-low margin business means that every drop in labour cost substantially increases operating margins. Reports indicate that this year the company has stopped the VRS scheme, as it feels the reduction of around 500 employees every year through normal retirement in next three years would be enough to bring down its cost per employee.
The management of finished inventory is an area where the management would have to keep in focus.The advantage of a huge retail network of 1,200 shops, 25 depots, 300 wholesalers and 20,000 dealers also implies a huge finished goods inventory for the company. In 1996, the company maintained a finished goods inventory of around three months of total production capacity -- a very high figure. The logistics of reacting fast to the changing demands of customers and maintaining adequate inventory to avoid stock-outs would hold the key to profitability of the company in long run.
Lupin Chemicals
While the reduced prices for rifampicin have had a negative impact on the profitability of smaller players in the industry, Lupin Chemicals appears to have been least affected. Its first-half results show that the company has achieved a turnover of Rs 49.63 crore -- a 13 per cent increase over the corresponding period in the previous year. This has been possible mainly due to the 13 per cent increase in production that has resulted from efficient operations. Another factor that appears to have helped is thata sizable portion of Lupin Chemicals' production is picked up by group company Lupin Labs, thereby ensuring a market. The company's expenses increased less than proportionately to the rise in sales and as a result, its operating profit saw an increase of over 15 per cent. It has recorded an operating profit of Rs 13.84 crore and operating margins have improved from 27.43 per cent to 27.89 per cent. However, the interest and financial charges have increased by 19 per cent to Rs 5.95 crore thereby causing the gross margins to fall from 16.33 per cent to 16.24 per cent. Depreciation charges have increased from Rs 2.15 crore to Rs 2.29 crore. The net profit has increased by over 15 per cent from Rs 5.03 crore to Rs 5.80 crore and the net margins have improved from 11.44 per cent to 11.64 per cent.
Not only has Lupin Chemicals performed well in an adverse market scenario, it is also taking steps to ensure a better future for itself. It is planning to introduce several new products and this should help reduce thecompany's business risk as it would no longer be dependent on a limited portfolio.
India Polyfibres
The Reliance group has extended a helping hand to India Polyfibres through a contract manufacturing arrangement, but the chances are that the move could be utilised by Reliance Industries for meeting a temporary surge in demand only. Traditionally Reliance has always gone in for green field projects of huge capacities, and, in the past, the Reliance management has been on record saying that there is no point in taking over small plants, as their operations are unviable.
Nevertheless, in order to meet short term demand supply gaps, the company over the past few months has been following a policy of giving contract orders to smaller units. Reports indicate that Reliance had considered giving contract orders to Baroda Rayon to produce POY for Reliance. However, the company decided to back out, after signing an agreement with India Polyfibres, showing how quickly such decisions can be reversed.
Formeeting its standard requirement, Reliance need not depend on these small units. So what we could be seeing is a scenario where the small units do manufacturing in months of peak demand only. While this is undoubtedly good for Reliance, the small units may find that the relief they get through the contract manufacturing arrangements is only temporary.
(with contributions from Manish Saxena and Sarad Saraf)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
