By integrating businesses seamlessly and scaling up prudently, DCM Shriram has done enviably well in an unpredictable sector.
There is the Buddhist story of a boy who turned a dead mouse into a fortune. He built his riches step-by-step, by imaginatively reusing every bit of trash he found. He successfully traded the rodent for honey, later dried twigs for pots and finally bundles of fresh grass for jewels. The last was bought by wealthy merchants looking to feed their tired horses. It is a long story but the moral is simple — everything can be mined for gold, if you can spot the vein. DCM Shriram, the 120-year-old diversified conglomerate, has displayed similar ingenuity in mining gold from the various businesses in their basket — however boring and unglamorous they may be. The Shriram brothers — Ajay, Vikram and Ajit — who run the show now were handed down a troubled business after the partition of the legendary Delhi Cloth Mills founded by Lala Shri Ram in 1909 as a textiles company. They were once to Delhi what Tatas were to Mumbai, even opening institutions of excellence such as the Shri Ram College of Commerce (for higher education) and Shri Ram Centre for Performing Arts. Then, in 1990, the group was split into four among Lala Shriram’s sons and their heirs. DCM Shriram was born with the three grandsons inheriting Kota complex (with chlor-alkali and PVC units in Kota, Rajasthan) and the textile business in Delhi’s Moti Nagar.
Diversified businesses were the norm during the licence raj when there were constraints on capacity addition – the only way to expand a business was to find new business lines and/ or form new companies with new capacities if the licenced capacity was breached. After the mid-nineties, diversified businesses went out of fashion as the market refused to fairly value conglomerates. That’s because investors no longer fancied buying a bunch of businesses with mixed fortunes, and modern management, too, advocated core competency as the way to go.
To cope, most business houses realigned their portfolios, spinning off different businesses as separate companies. The Delhi-headquartered group, however, has continued with its diversified portfolio till date with interests in chemicals, sugar and value-added products. Over the years though, they have pared down loss-making businesses — textiles and agri-retail, and ploughed money back into the rest of the pack, especially chemicals. The diversified business structure actually helps. “When something goes down, something else goes up. As a group, we are generating sufficient cash flow to reinvest and grow,” says Vikram (See: New order).
DCM’s three-pronged approach focusing on cost, building scale and integration has helped the company show impressive topline and bottomline growth. Over FY14-19, sales jumped from 56 billion to 77 billion, and more impressively, cash profit jumped 3x from 3 billion to 11 billion (See: The big picture). DCM Shriram’s free cash flow is driven by chemicals with a hefty contribution of 76%, and high margin of 39%. Needless to say, the chemical business, too, has been buoyant, helping the company grow. “The idea is to continuously set the ball rolling in a virtuous cycle of investing, increasing capability, integration and increasing margins,” says Vikram. Running a tight ship and scaling is the only way for a commodity business to run profitably, DCM’s integration strategy has helped in delivering better return than its peers.
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July 19, 2019