Cholamandalam Muragappa Group Analysis
India has witnessed the rise of numerous business conglomerates that have drastically fueled the growth of the country. From the houses of Tata, Godrej, and Birla to the new age Reliance and Adani Group, the list goes on. In today’s editorial, we shall analyse the 121 age-old business empire— the Murugappa group.
The story begins in 1900 when Dewan Bahadur AM Murugappa Chettiar set up a banking firm in Myanmar. His company ventured into various other businesses in south-east Asia. Towards the end of the 1930s, the Murugappa group migrated to India and entered the engineering sector by establishing Coromandel Engineering Co. Ltd. The business development strategy used by the group was very interesting. Instead of starting fresh, they formed joint ventures (JV) with industry experts to enter into a particular industry. For example, TI Cycles was established in 1949 in partnership with UK-based cycle manufacturer Tube Investments Ltd.
Later in 1954, the Murugappa Group formed Carborundum Universal Ltd (CUMI), which produces industrial inputs such as abrasives and ceramics. The group also entered the financial services sector to offer loans to small businesses by forming Cholamandalam Investment and Finance Company. In 1981, they made an aggressive move by acquiring EID Parry, one of the largest sugar manufacturers in south India.
Currently, the Murugappa Group is divided into 3 business verticals: Agriculture, Engineering, and Finance.
As discussed earlier, EID Parry is a sugar manufacturing and marketing company. Retail products such as refined sugar and brown sugar are sold under the ‘Amrit’ brand. Sulfur-free, low glycemic index sugar are some of their other products. EID Parry also supplies sugar used for coating tablets and tonics to the pharmaceutical industry.
The company extracts ethanol from sugarcane molasses, which is used as a blending mix in fuel. The government, through the Ethanol blending Programme (EBP), targets a blend of 20% of ethanol in fuel by 2025. Additionally, the manufacturer uses byproducts of sugarcane (bagasse) to generate electricity. It can replace coal as fuel in power plants.
EID Parry has a stake in Coromandel International Ltd (CIL). The subsidiary is also an agricultural player that engages in the business of fertilizers, nutrients, and crop protection.
As we can see, CIL contributes the majority of the revenue. EID Parry reported consolidated revenue of Rs 18,758 crore in FY21, resulting in 8% growth year on year. The five-year Compounded Annual Growth Rate (CAGR) is 5.21%.
Looking through the profitability of the business vertical, the crop protection, pharma, and ethanol segments have a Profit Before Tax (PBT) margin above 12%. It means that for every Rs 100 earned as revenue, the company can retain Rs 12 as profit before paying taxes.
Now, let us compare EID Parry with other sugar companies and interpret its performance in the sugar industry.
For the past four years, EID Parry has been a loss-making entity, while peer companies have improved their margins in the same segment.
In the case of leverage, the manufacturer made the balance sheet strong by reducing the debt from Rs 3,888 crore in FY17 to Rs 576 crore in FY21.
Cholamandalam Investment and Finance Co. Ltd (CIFCL)
CIFCL is an emerging midcap finance player with a market capitalization of around Rs 47,000 crore. The lender mainly provides loans in 3 main categories:
Vehicle financing covers more than 70% of their loan book, of which loans for the used vehicle market share 27% and light commercial vehicles constitute 21%. The impact of the Covid-19 pandemic has increased defaults made on vehicle loans, which further lead to the decrease in profitability of the lender. Loans against property (LAP) and credit for Small & Medium Enterprises (SME) constitute 22% of the total loan book. This segment reported an income of Rs 1,639 crore in FY21 with a 3-year CAGR of 15%. Unfortunately, the loans being defaulted are also increasing at a rapid pace, from 0.3% in Q1 FY21 to 2.1% for the Q1 FY22. If the lender cannot limit the bad loans, it may affect the overall efficiency.
The company is led by Mr. Vellayan Subbiah (Chairman & Managing Director). He is part of the fourth generation of the Murugappa family. Vellayan served various roles in the group and is also the MD of Tube Investments of India.
The promoters hold a 52% stake in CIFCL, followed by mutual funds at 22% stake and foreign Institutional Investors (FIIs) with 19%. The company’s Asset Under Management (net value of their financial assets) has doubled in five years. The lender is reporting strong profits, but increasing bad loans is a concern.
Tube Investments of India
Tube Investments operates some of the well-known cycle brands in India, including Hercules, BSA, and Montra Cycles. The company has three main verticals: engineering, metal-formed products, and cycles.
The Engineering wing manufactures products such as Electric-Resistance Welded or ERW tubes (used for transportation of oil & gas) and auto components for two-wheelers and trucks. The metal-formed products business mainly manufactures inputs for industrial applications like railway coach parts, chains, and door frames for vehicles. The cycle business offers brands such as BSA, Hercules, Mach City, and Montra. Track & Trail is a retail cycle outlet chain operated by Tube Investments that spreads across 225 outlets in the country.
The company’s total revenue declined 23% YoY to Rs 6,195 crore in FY21. The 3-year CAGR of the topline stands at -5.92%. Decreasing revenue over the years is a concern as the company is unable to capture new business opportunities.
The engineering wing reported high-profit margins of around 11% in FY21. Even though the cycle business is a low-margin business, rising profitability across the years is a good sign. However, profit margins of the metal products segment have declined sharply.
The company has announced its entry into electric mobility (three-wheelers) and plans to hit the market towards the end of 2021.
The story of the Murugappa Group does not stop here. The group is further diversified in the three verticals with other niche players. Carborundum Universal Limited (CUMI) is one such player that manufactures silicon carbide, zirconia, and other electro minerals and abrasives. Coromandel International, being a crop protection player, is the second-largest phosphatic fertilizer player in the country.
When we analyse these companies from the business house, we can find similar corporate principles and beliefs binding them. Murugappa Group has established strong businesses throughout its 121-year-old legacy. Moreover, they diversify into a segment by either collaborating with industry leaders or acquiring a quality player.
Have you included any of the Murugappa companies in your portfolio? Let us know in the comment section of the marketfeed app.