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1. CASE STUDY A contract manufacturer’s pipeline of orders dries up. Can launching his brand of lubricants save his business? BY POOJA KOTHARI PHOTOGRAPHS BY JITEN GANDHI hreenarayan Agrawal had grown up watching his father go to work at the Indian Oil Corporation, a huge player in the oil industry. Over the years, the dream of running a business in the oil industry had simmered at the back of his mind. So, when it came to deciding his future, it was but natural that Agrawal chose the same industry. In 1987-88, post his graduation, the young Agrawal made a humble beginning with Nandan Impex. His small plant, at Vashi in Maharashtra, would re-pack bulk lubricants into small packs for companies in the public sector. Te entrepreneur in him spotted a glimpse of opportunity in the plastic containers that were used to re-pack the oil. Te statistics at play intrigued him and before long, Agrawal had started manufacturing the containers for the lubricants industry. Te packaging contracts taught him the nuts and bolts of the industry and gave an insider’s view of the dynamics that were at play. By 1992, all grown up, he was ready to open his own manufacturing plant for lubricants, Nandan Petrochem (NPL). As luck would have it, the commissioning of the plant in Taloja coincided with an ofer from the S 38 | INC.INDIA | JULY 2010

2. Seeking Opportunity From four plants producing lubricants for multiple clients, SN Agrawal was left with one contract and no brand to market. It took him time, but he bounced back to grow sales to Rs 80 crore last fiscal.

3. CASE STUDY The Experts Weigh In Hinduja-owned Gulf Oil to manufacture lubricants for them. Agrawal saw a new business opportunity in con- tract manufacturing and started doing “job work” for other brands. Moreover, it assured revenue for NPL, which suited Agrawal. Te arrangement continued till 1995, when Gulf Oil shifed to its own manufacturing facility in Silvassa. Te exit of Gulf Oil was made up by the appearance of a number of other oil companies on the business horizon. A slew of contract manufacturing orders followed. Te next few years saw NPL scale up, working with companies such as Indo-Mobil, Chevron, IBP Caltex, Total Petroleum, and Tata-BP Lubricants. At one point in time, he had four plants producing lubricants for clients, both public sector enterprises and multinational ones. “I was making more than 1 lakh metric tonne in job work,” recalls Agrawal. Given the long-term nature of his contracts, he pumped money into capacity expansion, in the belief that returns were assured. During the same time, he started a transport company, Nandan Roadlines, for bulk transportation of base oils and fnished lubricants. Soon, he had became a single window solution for his clients by providing raw material transportation, supply of packing materials, manufacturing and packing of fnished lubricants. And then in the mid-nineties, the volatile spirit of the global oil industry expressed itself. Like a shifing desert, the pattern of the industry’s landscape changed completely as a series of mergers and acquisitions took place. It started with the end of the marriage between IBP and Caltex, the impact of which hit NPL in full force. Te company had to stop manufacturing operations much before the expiry of its contract. A few years later, in 2001-02, Tata BP Lubri- cants India, a joint venture of Tata and British Petroleum (BP), separated into individual identities. Later, Castrol merged with BP, accommodating the latter’s business requirements within its existing plants in India. Another of Agrawal’s blue-chip clients, Total Petroleum India, took its business to Elf Lubricants India, afer a merger took place between the two parent organisations.  Agrawal, of course, could foresee what was coming his way. “I realised that the company could not sustain itself only through contract manufacturing,” he recalls. Tere was only one thing lef to do—launch his brand of lubricants. But Agrawal had played in the industry long enough to know that Indian customers were inherently attracted to foreign brands. “Foreign companies exerted a powerful attraction on the Indian customer. Te industry mindset is such that they would naturally associate better quality with a foreign brand,” says Agrawal. So he decided to get a foreign stamp on his products. Te search ended with a technical collaboration with Meguin, one of the largest independent lubricant manufacturers in Germany. NPL would manufacture and market their branded lubricants in India. EVALUATE MARKET CONDITIONS AND PLAN FOR THE LONG TERM Shreenarayan Agrawal’s entry into packaging and subsequent growth into plastic container manufacturing, followed by lubricants manufac- turing plant, was riding on the back of outsourcing requirements of his clients. His investment decisions and growth plans revolved around growth in demand for outsourcing. Public sectors lacked packaging capacity, so Nandan started with packaging business. On deregulation of lubricants market in 1992, new entrants came in to play, who wanted to limit their exposure to the risks of the market, and outsourced manufacturing, packaging, transportation and distri- bution. Nandan assumed this to be the natural, long-term route to the business growth. Agrawal, it would appear, did not closely follow the lubricants market, particularly the responses from the existing public sector companies and the progress of new players. As events evolved, neither public sector players lost the ground (except to an existing player Castrol), nor the new entrants could penetrate the market in a significant manner. Nandan could not have sustained growth on the back of new players. Nandan has done well to tie-up with Escorts and Bharat Earth Movers for the OEM business. How- ever, dependence on a few OEM buyers has its risks, as was the case with a few outsourcing clients. Only now we observe that Nandan has ambitious plans to grow more than six-fold in five years. This is pro- posed to be achieved through the increase in retail sales volumes. It is unclear, though, what would be the strategy for this level of growth for a product/market, which has shown very limited growth in vol- umes historically, without resorting to credit sales, which is risky, as experienced by Nandan in the past. Agrawal will need special brand- building strategies and changes in distribution channels to extend the market reach, which require major investments. He has not exhibited that his decisions are based on an evaluation of market conditions and aligned to a long term vision, strategy and plan for Nandan. R Yagnik|INDUSTRY LEADER, CHEMICAL AND PETROLEUM|Global Business Services, Global Delivery, IBM India, Pune. SOME IMPORTANT LESSONS This example underlines an entrepreneur’s ability to steer through an unexpected turn of events and convert a problem into an opportunity. There are many management lessons to be learnt from this case study. One, given the competitive environment we operate in, it’s important for SMEs to constantly evaluate their distribution network. When NPL launched its own brand of lubricants, it reduced the extra layer in the distribution network to make it price competitive. Two, it’s important to have more than just one segment of customers to cater to. NPL could nicely juggle around from marketing branded oils to contract manufacturing and OEM marketing based on the internal and external challenges. This is one of the important strategies that could help them overcome the tough times. Three, the importance of a clear credit policy cannot be emphasized enough. Motivating distributors to pay early by providing high incentives helped NPL come out of the red. Last, but not the least, is the attitude. From a humble beginning to a dream of Rs 500 crore in the next five years speaks highly about NPL’s attitude and self belief. To overcome the challenges that business throws up, this attitude is a must. S Ramu|CENTRE FOR FAMILY MANAGED BUSINESS|S P Jain Institute of Management & Research, Mumbai. Slowly and steadily, sales volumes increased. Te long odd before NPL, however, was turning around the credit-ruled nature of the Indian lubricant market. Even though the sales-clock was ticking good, revenue collection remained poor. Tis led to working capital problems for Agrawal and soon the company had large amountsout- 40 | INC.INDIA | JULY 2010

4. CASE STUDY “Foreign brands exerted a powerful attraction—the Indian customer naturally associated better quality with them.” standing in the marketplace. Tat was not an end to the problems. Differences arose between Agrawal and Meguin over payment of royalty due to the German frm. According to the agreement, NPL had to pay royalty only on Meguin sales and not on sales made to OEM clients, such as Kirloskar and Greaves Cotton. However, due to some ambiguous clauses in the agreement, Meguin sued NPL in 2004 and Agrawal had to stop marketing its products. “It was the lowest point in the history of my company,” says he. “We had only one contract man- ufacturing client and two OEM customers.” NPL suddenly had no brand to market, and the fixed revenues that used to trickle in through the contract manufacturing channel had almost gotten to be negligible. The Decision Agrawal knew he had to act fast to save his company. He decided to build the company from scratch, a second time. Te pro- cess started with a change in the profle of the entire management team. A much younger group made its way into the ofce chambers. Next, he got rid of his cash-eating Silvassa plant and moved opera- tions to a smaller one. Tat helped in the repayment of loans to the banks, to a great extent. On the marketing front, he leveraged the distribution channel developed for Meguin and kicked of his own brand, Nandan. “We also realised that our earlier distribution strategy was one of the reasons for our downfall,” says he. NPL earlier sold through a CFA- cum-distributor, who provided carry and forward services to the company for distributors under his area, and also acted as a distributor for the company. (CFA stands for carry-and forward agent). With the Nandan brand, Agrawal stopped this arrangement and terminated all CFAs and depots, and started supplying directly to distributor locations from the manufacturing plant. Under the new arrangement, CFAs can stock the company’s products, but cannot sell them; they can only supply according to the company’s instructions. Tis has created a clear distinction between a CFA and a distributor. He also became tight-fsted with his credit policy, starting to ofer credit within limits through the head ofce. To end the ugly habit, those who paid in cash upfront were given huge discounts. Together, this swung around the working capital situation. However, coupled with the switch-over from a German brand to a local brand, they also reduced volumes. Agrawal sought solace in the fact that, at least, the company recovered 100 per cent of its outstanding from the market. He then shifed his focus to the OEM segment—both by increasing the sales made to existing OEM clients and get- ting in new ones. “Since lubri- cant sales are not core to the aftermarket operations of OEMs, it made sense to try and work with them,” reasons Agrawal. Finally, in 2006, his eforts paid of when Escorts, one of the largest tractor manufactur- ing companies in India, came on board. NPL was asked to supply lubricants for its factory fill and service fill require- ments. It had an almost imme- diate efect on the volumes. As the numbers started getting hit, the company’s position Never Say Die SN Agrawal offered discounts on cash payments to turn around his working capital situation. improved considerably. Tereafer, NPL added another OEM customer, Bharat Earth Movers, a public sector enterprise manufacturing earth moving equipment. For both Escorts and Bharat, NPL tailor- made products, which resulted in commercial and technical benefts to these companies. Meanwhile, Meguin was taken over by Liqui Moly, another Ger- man company, which had a direct impact on the litigation process. Te new management requested an out-of-court settlement to the dispute. Finally, afer multiple rounds of negotiations, a compromise was reached and a new agreement signed in April 2008. Since then, NPL has been focusing on retail sale of lubricants under Meguin brand, while the Nandan brand continues as a less-premium option. “We are in the process of replacing Nandan with a more international brand, both in terms of name and feel,” says Agrawal. Meanwhile, it’s full speed ahead at NPL. Having propelled the organisation back towards growth, with sales of Rs 80 crore in the last fnancial year, Agrawal and his team have set their eyes on more ambitious numbers. Tey want to reach Rs 500 crore in turnover in the next fve years. Given how well-oiled his machinery has become, Agrawal is unlikely to let this hum get lost again. | INC.INDIA | 41 JULY 2010