Strategic Planning and Risk Management in a VUCA world

(Prepared by Group Strategy Office.)

Disclaimer – Data, Situations and analysis brought out in the case study are hypothetical. They
are purely for the purpose of academic appreciation. References/statements in this case study is
not linked with any Mahindra group company.

It is 8 a.m on a Monday morning. As the sun shimmers in the corner office of D’souza
House, Sam’s eyes are fixated on the clouds visible on the horizon. “I am skeptical about our
2020 goals!”, exclaimed Sam D’souza, CEO of Century Corp. “But Sam, our analysis shows we
are on the right path to achieving it”, starts Ashish Kumar, national sales head for Century
Automotive, the flagship company of Century Corp. Sam takes a sip of his morning coffee, when
Kausik Roy, his EA enters the office. “The meeting starts in 10 minutes. Here is the analysis you
asked for”, says Roy, handing a 2 pager to his boss.

Century Corp

Century Corp is a diversified group of companies, with interest in automotive vehicles, automotive
components, steel, and public utilities. The company was founded in May, 1975 by Edward
D’Souza, a visionary industrialist in the post-independence era of India. The journey of Century
Corp has been a microcosm of Indian growth story. The company started with steel trading and
slowly integrated vertically to become a steel solutions provider. Mr.Edward D’Souza saw
investment in steel as a way to contribute to social and economic development of urban India.
The fortunes of company turned when it entered the automotive space, manufacturing and selling
commercial vehicles. Over the last 40 years, the company diversified into multiple businesses like
auto components and public utilities.

Journey of Century Corp:

1990 – Diversifies into commercial vehicle 2006 – Acquired Diamond

1980 – Acquires Hasan manufacturing and distribution Forge – forges crankshaft for
specialty Steel in VIzag, AP. commercial vehicles

1975 – Founded. 1987 - Launches IPO for Century Corp. 2000 – Forays into machining 2014 –Revenues
Starts operations in Raises Rs 500 Crore. business, by acquiring Allied cross Rs 20000
steel trading 1988 – Expands steel capacity to Engineers Pvt. Ltd. Crore.
100,000 tons

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 Century Corp has 4 business divisions – Century Automotive, Century Steel, Century
Engineering and Century Utilities. Century Automotive is the flagship company, contributing 50%
of the group revenues. Century Steel contributed 28% and Century Engineering contributed 18%
of Group revenues. In 2014, Century Corp recorded Rs 20,000 Crore in revenues – a milestone
in their long journey towards becoming a large Indian conglomerate.

Century Automotive

Century Auto's product profile includes medium and heavy commercial vehicles (MHCVs;
including buses) and defense vehicles. It has manufacturing facilities at Pantnagar (Uttarakhand),
Ennore, Hosur and Chennai (Tamil Nadu), Bhandara (Maharashtra) and Alwar (Rajasthan).
It exports to countries like Sri Lanka, Bangladesh, Nepal, US, Russia and Middle East countries.
The company is broadening its focus to countries in the SAARC region and Africa, where it started
exporting light commercial vehicles (LCVs).

The CV industry has become increasingly competitive over the past decade. While
previously Century Auto used to rank third in terms of market share, the company started losing
share to domestic and international entrants from 2008-09 onwards. The company is currently
the fourth-largest player in the LCV goods vehicle segment. However, it remains strong in the
MHCV segment in both goods and passenger vehicles where it is the third largest player.

“Customer preferences are fast changing”, says Ashish Kumar, national sales head for
Century Auto; “Earlier functionality and service network were the key value propositions. Now
customer wants design, aesthetics, along with superior mileage, defect free engine and 24x7
service network availability. We lost many prospective customers to MNCs offering these value
propositions. To add to it, the demand slump in recent times and increasing raw material cost,
has decreased our EBITDA margins. Our products do not command the price premium which we
were able to 5-6 years ago. In some cases, we are perceived as overpriced compared to
competition.”

“Our JD Power rating has been consistently dropping. We were at number 2 in 2010 and
in 2014, we could only manage 5th position in 2014. Oil leakage from engine is the biggest
challenge our products face” (refer Annexure 2 for list of quality issues). “We spent nearly Rs 38
Crore, which is 20% of our PAT on warranty and replacements”, says Mr. Anup Shrivastava,
country head for quality and customer service.

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Recent manufacturing woes of Century Auto

Mr.P.K Das, country head, Manufacturing and supply chain for Century Auto remarks,
“Our problems began in 2009, when we acquired land in Bhandara, Maharashtra for capacity
expansion. Government was providing a good subsidy on the civil works cost as well as incentives
were expected if we manufactured export-oriented products from the facility. Mr. D’Souza
inaugurated the foundation laying ceremony on 16th November 2009 and a plant with capcity of
30000 units annually was constructed.” “We were unable to bring our key suppliers to this facility
due to paucity of land. Parts and sub-assemblies were to be transported from Chennai, Pantnagar
to this facility, increasing our IUTN costs.”

“Manufacturing in Bhandara facility increasingly became expensive”, says Mr.

Subramanian, CFO for Century Auto. “Moreover the incentives expected in the form of tax holiday
and CST exemption also never happened.” “We were manufacturing products for the US markets
when in 2010, the US commercial vehicles industry tanked. We were operating on sub-optimal
capacity levels. To add the problem, being away from ports, we could not transport our vehicles
in time to be shipped to US. This impacted us in 2 ways – increased ship freight costs and lost
customers in US”.

Mr.Das continued, “Some of the parts for US products as well as new products for
domestic markets were exclusively designed by one vendor. The suspension and the differential
assembly was exclusively supplied by this particular vendor. While the tests did not show any
problem, the real issues started when the products hit the market. Customers started complaining
about this specific quality issue in the differential. We lost huge amounts in warranty costs.”

Green Shoots for Century Auto

“We need to quickly address these issues in our new products. We are expecting 2
launches in H1 FY16. If we are able to get all ingredients of market right for these 2 products, our
market share and EBITDA will get significant boost”, concluded Sam.

Commercial vehicles market has been subdued since 2012 and the bottoming out was
seen in Q2FY15. Industry has started reporting good volumes. Growth rate post Q2FY15 has
been very high. “We see opportunity in the growth of industry. The challenge for us will be to
deliver our new products and fix quality issues of the existing product-line”, says Mr. Ashish
Kumar. “In the past, we have never been able to launch products on time. Even improvements in
existing vehicle takes much more than expected. Our Program office is constantly working to

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ensure we meet project deadlines. However, it has never happened in the past. We have lost
huge sales opportunities and incurred warranty costs due to these delays. A project management
tool has been put in place. It is a new technology and we have to evaluate its full benefits before
we can say that our project management skills have significantly improved.”

Century Steel

Century Steel is one of the largest manufacturers of cold rolled steel (CR) and galvanised
steel. There are 2 plants – one in Raigad, Maharashtra with a capacity of 1 mtpa (million tonnes
per annum). Second plant is located in Vishakhapatnam, AP with a capacity of 0.75 mtpa.
Proximity of Raigad plant to the Mumbai port and Nhava Sheva port augurs well for the company's
export business.

Century imports 50% of raw material (including coking coal, grade steel). Century steel
has tie-up with a Japanese supplier for procuring grade steel, which comprises 60% of its imports.
Coking coal is supplied by two vendors from Australia.

The company is involved in the business of procuring hot rolled steel (HR) and processing
it into CR steel and further, into galvanized steel and colour-coated coils. The excess capacity of
CR steel, which is not used for galvanizing, is converted into value-added grades in Cold Rolled
Closed Annealed (CRCA) coils and Cold Rolled Grade Oriented (CRGO) and Cold Rolled Non
Grade Oriented (CRBO) coils.

Steel manufactured by the company has applications in automobiles, white goods, general
engineering and electrical segments. It exports about 35-40 per cent of its production to 50
countries, around the world. Its domestic customers include Automotive OEMs, large capital
goods companies and public sector power plant engineering companies.

Steel sector in India is highly fragmented with total production in 2014 being 100 mn
tonnes. Capacity set up by steel players was 200 mn tonnes (peak capacity). Low capacity
utilization along with slowdown in global demand have impacted steel prices in domestic market.
(Refer Annexure 2). “Globally, we have a situation of steel glut”, quips Mr.Sunder, COO of Century
Steel. “Larger steel companies in India like Tata Steel, Jindal Steel, Essar Steel etc. have
embarked on a utilization improvement drive and are providing end-end solutions in steel. Road
ahead looks shaky for us given the increasing intensity of competition”, added Mr. Sunder.

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Century Engineering

Century Engineering’s business interest are in gear manufacturing and forging

transmission components for commercial vehicles. Key customers of the company in the gear
business are Mahindra & Mahindra, Ashok Leyland and a few foreign heavy vehicle
manufacturers. The forgings business supplies components to Ashok Leyland, AMW and Man
automotive.

Century has set up state-of the art machining facility with technology tie-up with Nippon
Engineering and a technology tie-up with a German company for its forging business.

High beta of Acquisition Strategy

Century Corp. growth has come from acquiring companies and vertical integration. It also
diversified into automotive and auto-components to capitalize on the growth of these industries.
The acquisitions once left the company searching for its survival when debt to equity ratio reached
unhealthy levels of 4:1. Sam recalls, “We have always been aggressive in our business pursuits.
Most of our acquisitions were funded by debt and our ability to quickly turn around these
acquisitions to generate cash, helped us service the debt. Our credit rating has been BBB- and
above. However, in 2009, when the global financial crisis hit, funds dried up. In fact, banks which
earlier lent on amenable terms started arm-twisting us. The demand fell and our cash flows were
in serious trouble. Our credit rating for the first time fell to C, increasing our cost of capital. Banks
started scrutinizing our loans. Servicing the debt which reached levels of 4.5:1 became a huge
business problem.”

It was at this time that Century Corp was at the verge of bankruptcy. “We sold some of our
non-core assets – few land banks, to bring in capital. The markets were suppressed, these were
seen as distress sale. Some of our assets were sold at 80-85% market value.” The company saw
a white knight in the form of Nippon Engineering, which bought minority stake in the auto
components unit, infusing much needed equity capital. “This helped us on two accounts – firstly,
it reduced stress for selling other assets, which were fetching sub-optimal prices. Secondly, we
were able to retire some high cost debt, improving our debt to equity ratios and enhancing our
ability to service future debt interest”, said Mr.Krishnamurthy, CFO for Century Corp.

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Recent Headwinds

With global slowdown, steel glut, domestic coal scam after effects and drop in demand of
commercial vehicles, Century Corp has been living on a thin edge. “All our guns are running out
of ammunition at the same time”, says Sam. Government has also recently announced increase
in custom duty on imports of coking coal (from 0% to 2.5%). Increase in iron ore royalty (10% to
15%) and increase in freight rate for iron ore by 15%. This is expected to squeeze margins for the
steel business. With the coal auctions, prices for coal are expected to go up impacting the coal
buyers in near term. However, “Make in India” has been the focus mantra of NDA government.
Century Auto and Century Engineering are chalking out ambitious plan to leverage this
opportunity.

Century Corp also has significant exposure to currency fluctuations. Exports constitute
35% of group’s revenues. The group also imports 45-50% of its raw material requirements. “Given
the huge volatility seen in F13, our finance team has put in a hedging mechanism to avoid any
downside risk on account of forex”, said Mr.Krishnamurthy.

“We are starting to see some improvement in the commercial vehicles demand in India in
F15”, says Mr. Anand, COO for Century Engineering, “These are indicators of bottoming out of
the commercial vehicle demand slump. Things are expected to move upwards from here”.

Road Ahead

Century Corp strategy team advised the top management that the company should
diversify into allied businesses like power transmission, automotive lighting solutions and
unrelated businesses like financial services and real estate, to be able to achieve the goal for
2020. The team also gave a roadmap and tentative timelines for such business entries to ensure
timely fruition of the strategy. Sam D’Souza, after consulting the M&A, team has come up with a
business plan and funding proposition for two acquisitions – one each in the power transmission
and financial services NBFC. He has also marked the land banks available with the group for
commercial development and his team has identified contractors for developing these.

The proposed funding plan is expected to increase the debt to equity ratio of the group to
close to 5, which the board has identified as a fragile threshold. Should the board allow Sam’s
ambitious plan? Can Century Corp achieve its 2020 goals? Does it make business sense
to diversify and at this point in time?

Sam definitely has a tough meeting coming up in 10 minutes.

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Annexure 1 – Statement of Ambition 2020

Century Corp will achieve:

• Business revenues of Rs 31,500 Crore ($5 billion, assumed at Rs 63/$), through organic
and inorganic growth
• Profitability – EBITDA margins of 40% and PAT margins of 8%
• Customer Satisfaction Score – To be recognized as top 3 automotive brands in JD
Power survey.
• Market Share – Move from the current 18% Market Share to 21% market share

Annexure 2A: (Top quality concerns as per customer service survey 2014)

S.No Quality Issue % Respondents who raised the issue

1 Oil Leakage from engine and transmission 45%
2 Problems with differential 34%
3 Suspension maintenance 22%
4 Telematics failures 20%
5 Slippage of drive belt on slopes 12%
6 Excessive knocking 5%
*Multiple responses from every customer. The sum of all percentages hence may not add up to 100%

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Annexure 2B

Price Movement - Steel

60,000

55,000
Rs per tonne

50,000

45,000

40,000

35,000
May-10

Nov-10

May-11

Nov-11

May-12

Nov-12

May-13

Nov-13

May-14

Nov-14
Aug-10

Aug-11

Aug-12

Aug-13

Aug-14
Feb-10

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15
CR Coil - Landed Cost Galvanised Sheet Landed Cost

Market price is inclusive of excise duty, but exclusive of VAT/sales tax

Annexure 3: Financial Performance

3. A.1. Century Corp (Consolidated PnL)

Column1 F09 F10 F11 F12 F13 F14
Sales 12229 16064 15567 16338 19478 20860
Operating Profit 1775 2903 3781 4462 4609 4808
Other Income 113 368 516 235 298 536
EBIDT 1887 3271 4297 4697 4907 5344
Interest 437 711 1511 2108 2843 3124
Depreciation 215 696 707 1126 1452 1944
Profit before tax 1236 1864 2079 1464 612 276
Tax 371 559 624 439 184 83
Net profit 865 1305 1455 1025 429 193
EBITDA margins 17% 25% 32% 36% 33% 35%
PAT margins 7% 8% 9% 6% 2% 1%

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3. A.2. Century Corp (Consolidated Balance Sheet)

F09 F10 F11 F12 F13 F14

Equity Share Capital 219.83 238.55 238.72 238.97 239.24 239.24
Reserves 1877.79 3158.93 4590.06 5591.16 5996.24 6165.32
Secured Loans 5950.56 8220.02 16117.20 32423.43 35096.69 35449.08
Unsecured Loans 349.70 799.47 1174.17 470.82 424.19 1333.76
Total 8397.88 12416.97 22120.15 38724.38 41756.36 43187.40

Net Block 1625.17 5077.73 10336.05 18666.59 22620.30 21754.43

Capital Work in Progress 4005.38 1923.73 5304.68 13853.95 12134.46 14034.88
Investments 983.69 2022.89 3194.94 2764.26 2901.60 3006.09
Working Capital 1783.64 3392.62 3284.48 3439.58 4100.00 4392.00
Total 8397.88 12416.97 22120.15 38724.38 41756.36 43187.40

3. B. Financial Performance – Century Auto Ltd.

Unit F12 F13 F14

Income Rs Crore 9200 9270 10200
Net Profits Rs Crore 414 334 184
EBITDA Margins Percent 34% 37% 36%
PAT Margins Percent 4.5% 4% 2%
RoCE Percent 18% 15% 17%
Interest Coverage Ratio Times 2 1.9 1.6

3. C. Financial Performance – Century Steel Ltd.

Unit F12 F13 F14

Income Rs Crore 5600 6270 5500
Net Profits Rs Crore 73 55 30
EBITDA Margins Percent 9.3% 9.6% 9.8%
PAT Margins Percent 1.3% 0.9% 0.5%
RoCE Percent 11% 11% 8%
Interest Coverage Ratio Times 2 1.9 1.6

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3. D. Financial Performance – Century Engineering Ltd.

Unit F12 F13 F14

Income Rs Crore 1600 2500 2900
Net Profits Rs Crore 150 188 210
EBITDA Margins Percent 90.0% 79.0% 70.0%
PAT Margins Percent 9.4% 7.5% 7.2%
RoCE Percent 7% 6% 6%
Interest Coverage Ratio Times 1.5 1.3 1.3

Annexure 4: Century Corp share price movement

5 – year return -50%

3 – year return -30%
1 – year return -15%
Base Date – 27th March 2015

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