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“We should cross 7 billion tubes in 2005”. - Views on News from Equitymaster
 
 
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  • Dec 1, 2000

    “We should cross 7 billion tubes in 2005”.

    For a Director (Manufacturing, Supply Chain and IT) of India’s largest laminated tubes company, Essel Packaging, R. Chandrasekhar comes across as a very unassuming personality. This highly qualified professional (Chandrasekhar is a chartered accountant, a company secretary and a cost accountant all rolled in to one) started his carrier with the oil PSU, HPCL. Since then he has moved from the erstwhile TOMCO to Lupin until he finally joined Essel Packaging as GM, Finance in 1994.

    From then on he and his company have never looked back. Today, Essel stands as the world’s largest laminated tubes company following its recent merger with Propack. We caught up with Mr. R. Chandrasekhar to find out more about the merger, its advantages and Essel’s future plans. And we must say, he was candid in his views.

    EQM: At the outset, could you elaborate on the Essel-Propack merger?

    Mr. Chandrasekhar: What the merger envisages is that Essel Packaging, through a special purpose vehicle to be set up in Mauritius, will take over 100% control of Propack’s current equity in all its global tube operations. Propack has tube operations in China, Philippines, Indonesia, Venezuela and Colombia. In case of China and Philippines they are 100% subsidiaries of Propack. In the Venezuelan and Colombian operations they hold 50% stake and in Indonesia, they hold a 30% stake.

    In lieu of this acquisition, we will give Propack 22% of the post merger equity, aggregating about 6.8 million shares of Essel Packaging, plus a cash down payment of US$ 11 million. Ultimately, what will be the structure is, that there will be Essel Propack, which will own a 100% subsidiary in Mauritius. This subsidiary will be the owner of all Propack operations. At an appropriate point of time down the line, depending on the tax advise which we get, we are open to the idea of merging this 100% subsidiary in Mauritius back into Essel.

    EQM: After the merger, who holds management control – Essel or Propack?

    Mr. Chandrasekhar: The management control post merger will lie with the current promoters of Essel. They hold roughly 45-47% of Essel’s equity currently, which will go down to about 35% post merger.

    EQM: What benefits do you see from this in the years to come?

    Mr. Chandrasekhar: Currently, in the tube making technology there are three or four technological streams. First is the laminate making technology, which is resident with Essel. The second is the printing and the graphics technology, which is also resident with Essel. The third is the injection moulding technology for making caps. Here again Essel is a dominant player.

    Propack, in the last one and a half years has developed a prototype of a new tube-making machine. This new tube-making machine will reshape the entire laminated tube industry globally because this machine is capable of delivering 340 tubes per minute, at the same cost as a current 240 tubes per minute tubing machine. Therefore, for the same investment we will have a higher output with the new technology. This will improve our margins, productivity and returns in the years to come.

    The new entity, Essel Propack will acquire the patents for the new machinery. Though we are not a machinery company, by acquiring the patent we can always have this machine made to order for us through any other machinery company.

    The other major benefits for the merged entity are:

    • Essel is a dominant player in India; Propack is a dominant player in China. Propack has tubing operations in South East Asia and Latin America, and Essel has tubing operations in Europe and North Africa (Egypt). So you can see the operations do not overlap, but rather complement each other. Only in China, both Propack and Essel are present. But here also, while Essel has focused on domestic Chinese toothpaste companies, and Propack has all along focused on the MNC companies.

    • The merger brings on the platform the combined volume of about 2 billion tubes that is already contracted with customers for the next three to five years. To this 2 billion tubes you add Essel’s free float capacity of 700 million since only a part of Essel’s volumes comes from contract. So we are really talking about this joint entity moving from 2 billion to 3 billion tubes in a very short span of one year. By 2002, we should be able to touch 3 billion tubes without much effort.

    • Essel today, is in a position to give highly cost effective thinner laminates, which are tailor made and Propack from its side offers a machine to make laminated costs at a much lower cost, thus enhancing capital productivity.

    EQM: Your comments on the global laminated tube scenario? How do you see Essel progressing in this scenario 5 years from now?

    Chandrasekhar: In terms of the global market, the per capita consumption of the laminated tubes is extremely low in continents of Asia, Eastern Europe, Latin America and Africa. In all these continents the laminated tubes industry is showing a double-digit growth. Whereas, in the mature markets of Western Europe and North America, the growth has stagnated to about 2%.

    In light of this, the merged entity (Essel Propack) is going to have a presence in all the fast growing markets. The merged entity also has strength in terms of already having existing contracts for delivery over the next three to five years. And finally, in most of the places where there is a double-digit growth rate for laminated tubes, there is a large potential to convert metal tubes into laminated tubes. That becomes an added advantage for the combined entity, for Essel brings with it the technological edge of the laminate, and its ability to do cost effective conversion from metal to laminate. Based on this huge potential, our plan is to comfortably start on a base volume of 2 billion tubes in 2001, and should cross 7 billion tubes in 2005. By 2005, we are looking at an 80% market share in both India and China and a 60% share of the global laminated tubes market.

    EQM: Companies like Shree Rama Multitech have entered the fray in the domestic scene. Do you perceive any threats from them?

    Mr. Chandrasekhar: In India, we do have competition from about three other companies. Essel has always commanded a premium because of the superior quality and technological advantages, which we offer. From what we have seen so far, out of three competitors in laminated tubes, one has gone into BIFR (Board for Industrial and Financial Restructuring), and one of the other companies is not doing well.

    If one looks at the reasons, why this happened is that almost all these companies made the mistake of using a lower price as an entry strategy to a highly capital intensive industry. In the long term, unless you have a very high sustaining capacity to sustain losses over a long period of time, it is impossible that the lower price strategy will ever work.

    Competition will still continue to exist in India, but the fact is that today based on our new technology we can offer highly competitive prices without hurting our bottomline. Obviously, our competitors cannot match that. The same advantage is valid for Essel Propack in India as well as China.

    EQM: Even earlier it was reported that Mr. Chandra had taken over KMK Ltd. Is the current merger announcement a culmination of that takeover?

    Mr. Chandrasekhar: There have been a lot of news items in the last 4-5 years reporting that Mr. Subhash Chandra owns KMK. I think it was very well clarified by Mr. Schywn (Propack’s promoter) himself, whose family owned KMK initially. Mr. Schwin categorically stated that in 1994 the Schwin family sold KMK to a group of investors’ who are currently running the business.

    If we (Essel) owned KMK, there is nothing for us to hide. However, Mr. Schywn, in a separate deal, is looking at buying out KMK again. In 1994, the Schywns’ exited from the machines’ business (KMK) and concentrated on tube making (Propack). Now, since Mr. Schywn has merged Propack with Essel, he is looking at the opportunity to enter the machining business again by buying KMK from the group of investors’, who are looking for an exit.

    EQM: On the personal side, any personalities, books that have influenced you the most?

    Mr. Chandrasekhar: I am a very avid reader of philosophy since my college days. At one point of time, when I started my college career I was a committed Marxist. Over the years, I have moved from one extreme to another extreme. It is not that there was anything wrong, but it was a process of rediscovery for myself. There are certain things, which look good in terms of a philosophical approach, but they just don’t work on the ground.

    There are quite a few books that have influenced my thinking. I am a reader of history, as any philosophical student is. I must have read almost the entire volumes that are available on the World War II, especially the Nazi economy and role in the war. I found these very interesting.

    On the other end of the spectrum, because I wanted to keep my thoughts open, there are two books, which did influence my way of thinking. Both the books were classics in their own right and were written by George Orwell. One is a simple book called ‘Animal Farm’ and the other is of course, ‘1984’. Both these books made a big change in terms of my thinking. Of late, I read more books on management and corporate strategies.

    The only passion I have is people. I don’t have any other passion. I love people and it is my sincere belief that everybody has something good in him or her. My success lies in my ability to know what is good in a person and work on it rather than to condemn somebody for his or her shortcomings.

     

     

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