Business
Today
10 January 2010
Set demanding standards of governance if
you want to be the last man standing.
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The
run-up to the financial crisis was best described
by a banker, who said that the mindset at
the time was: "Till the music plays,
I will dance". Well, as we know, the
music did stop. Whilst our revenues and profits
were impacted across businesses, measured
against the competition, we stood our ground.
The litmus test we applied was: If a downturn
of this magnitude were to persist for some
time, would our group be the last man standing:
which means, will we be the industry player
least likely to be affected? Without doubt,
we faced our toughest challenge. But we have
been the last man standing.
We believe that tough times don't last, tough
people do. We constantly reminded ourselves
that our collective endeavour as an organisation
is to build businesses for the long haul.
We saw a meltdown the world over, not just
of economies, but equally of governance, I
believe our demanding standards of governance
set us apart. Clearly, investors and employees
appreciate and
learn to value-differentiate between organisations
like ours—that are honest, ethical, transparent
and well-governed—and others, for whom
governance is a platitude. This is a huge
strength.
Our aluminium business, under Hindalco,
felt the tremors of the slowdown as demand
declined overnight and prices of commodities
nosedived. But we managed to remain relatively
unscathed. Our businesses are inherently
solid on fundamentals. The importance of cost
optimisation, globally benchmarkable products
and services, upping the ante on customer
needs and innovation—which has its genesis
in deep consumer insights—are
embedded in our processes.
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A
little over two years ago, our team at Hindalco
led by D.
Bhattacharya initiated the POLESTAR Project.
The project brought together key managers
across Hindalco's locations to a common pursuit
of challenging boundary lines for all the
key value drivers. They had to challenge limits
set by past experiences or budget estimates.
The project was path-breaking as not many
companies were pursuing cost controls at a
time when the economies were strong and the
results were looking good. POLESTAR brought
a lot of positives to Hindalco. The higher
profits (Hindalco's net profits grew 11 per
cent to Rs 2,860 crore in the year ended March
2008, a few months before the global recession
began) gave us more cash to tide over the
tough times that were lurking round the corner.
Most important, our management mindset that
believes cost-competitiveness is supreme,
came to the rescue.
- Investors
and employees prefer organisations
that are honest, ethical and transparent.
- Reopen
and renegotiate contracts in a downturn
to achieve savings on
input costs and on capital expenditure.
- Flexible
product mix and a diversified product
portfolio help
in a meltdown.
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With its impressive cost position—
of being one of the world's lowest-cost producers—Hindalco
was among the very few aluminium companies
in the world to deliver positive results in
the fourth quarter of 2008-09 (it showed net
profits of Rs 269 crore).
During the meltdown, Hindalco reopened and
renegotiated several contracts. In the process,
the company achieved significant savings not
only on input costs, but also on capital expenditure,
which augurs well for the future.
The concept of a business portfolio, built
meticulously over the years, benefitted Hindalco.
The copper business by virtue of its model
(being a converter) stood out in the otherwise
difficult environment. This is reflected in
its higher contribution to Hindalco's earnings
before interest and tax (up from 14 per cent
in 2007-08 to 29 per cent two years later).
Similarly, our flexible product mix and diversified
product portfolio, too, helped us in containing
the impact of the meltdown.
I believe Novelis—which Hindalco acquired
in 2007 for $6 billion—is a great asset.
To counter the problems of metal price ceilings
and price volatility on
the London Metal Exchange (LME), we used the
combined expertise of the risk management
teams of Novelis and Hindalco. We have an
offset hedging model in place, which significantly
absorbs the impact of LME price shocks on
Novelis' cash flows. During the last two quarters,
Novelis has been the best performing company
in the space it operates in, namely, flat
rolled products. Novelis has taken several
fundamental business initiatives—optimising
the manufacturing footprint, substantially
reducing fixed costs, savings in procurement,
improved pricing and a richer product mix.
It has transitioned from being a company driven
by volumes, to one focussed on delivering
greater value.
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