tough times don't last, tough people do

Business Today
10 January 2010

Set demanding standards of governance if you want to be the last man standing.
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.
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.

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.