How Vellayan Subbiah, the fourth-generation Murugappa Group scion, successfully turned around CG Power

A floor desk and chairs welcome us as we enter Vellayan Subbiah’s ‘strictly shoes-off’ and minimalist office in Chennai, which requires sitting cross-legged on the ground. Slight and athletic, he is at ease in this arrangement—no wonder the 54-year-old Executive Vice Chairman of southern conglomerate Murugappa Group’s Tube Investments of India (TII) rode shotgun on a 50-hour truck ride from Delhi to Mumbai in 2016. As Managing Director of the group company Cholamandalam Investment & Finance Company (CIFC), it was important for him to gain a deeper understanding of truck companies, who were major customers. It was also a ride during which he supposedly kept up his yoga practice in a moving truck.

A few years after he joined the engineering and component maker TII as its MD-designate in 2017, the management recognised the need to shift away from relying heavily on the cyclical auto industry to achieve sustainable growth. TII, best known as the parent of BSA Cycles, specialises in manufacturing precision steel tubes and strips, automotive and industrial chains, car door frames, and bicycles. Back then, automobiles accounted for over 70% of its revenues. The business had to be derisked. “It was basically that if auto is not growing, how do you make up through growth in other sectors?” explains Vellayan, the fourth-generation Murugappa Group scion.

Inspired by leading auto parts manufacturers globally and domestically, such as American diversified conglomerates Danaher Corporation and ITW, Motherson Sumi, and Sundram Fasteners (from the erstwhile TVS Group where Vellayan has worked), a three-engine growth plan was drawn up—TI-1 or core business; TI-2 or frontier businesses; and TI-3 for inorganic growth through acquisitions. Danaher, a firm he has tracked since 1995 and one that safeguarded itself from cyclical loops to grow through acquisitions, offered a solid playbook. In the past, Danaher would acquire firms that were not considered top performers and then work to improve their performance.

To its credit, TII too has acquired and turned around a debt-ridden and fraud-hit company—CG Power and Industrial Solutions. TII first noticed the troubles of the motor and generator maker, formerly owned by Gautam Thapar-led Avantha Group, when it defaulted on payments to another TII subsidiary, Shanthi Gears. By March 2019, CG Power had amassed over Rs 2,000 crore in debt. Its share price nosedived to Rs 5 on December 11, 2019, from Rs 225 in September 2014. In November 2020, TII acquired a 57% stake in CG Power for Rs 800 crore and set a five-year target to turn it debt-free and generate an annual revenue of Rs 5,000 crore. Under Vellayan’s chairmanship, it accomplished this by March 2022 . (It turned net debt-free by FY22).

“Apart from the timely decision of derisking the business, the acquisition and turnaround of CG Power has been a major turning point,” says Saji John, Research Analyst at Geojit Financial Services. He says TII’s profit has doubled on a consolidated basis, and CG Power’s transition from loss to profit has also won them investor confidence. Currently, CG Power’s shares hover around Rs 400, and its market cap has grown to Rs 66,000 crore.

Vellayan attributes the successful turnaround to the emphasis on four key metrics: profit, revenue growth, free cash flow, and return on invested capital. But the IIT Madras alumnus admits the decision to acquire the company “wasn’t so scientific or so well thought through.” Instinctively, it felt like a very good company. “When that is the case, you will get over the challenges. That is the confidence with which we went into it.”

But acquisitions are opportunistic, and TII needed a growth engine, especially as growth in certain core business areas, such as cycles, is depleting. “In situations where CG-like acquisitions are too expensive, how can we use a VC approach, which is being very careful about capital but trying to get into a potentially larger space?”

With its three engines, the company has cut its revenue reliance on the auto sector to 30-35% as a parts supplier. But, a big part of its TI-2 engine is its EV bet, which is expected to bring growth, as India targets transitioning to electric mobility by 2030; and also turn the component maker into an OEM.

Through its subsidiary, TI Clean Mobility Private Ltd (TICMPL), it has rolled out passenger three-wheeler Montra in the south, and e-trucks. Three e-tractor models are in the works. TII has invested Rs 750 crore in TICMPL, raised Rs 1,250 crore from investors such as Multiple Alternate Asset Management, and is raising Rs 1,000 crore from PE players. Analysts say they are keenly watching how the firm scales up its electric three-wheeler business that earned it hefty valuation multiples.

But Vellayan says he’s not worried about the next quarter or the next year’s performance. It is a long-term game. “Our focus is on being one of the leading players when the market shifts. If the market takes three years to shift, we want to be patient... If it shifts more next year, we are ready.” It’s with the same idea that TII has forayed into manufacturing active pharma ingredients, medical consumables, and mobile phone camera lenses to leverage the China+1 opportunity.

“The thing with family businesses is that we are patient,” says Vellayan. He is happy to invest even five to seven years to sort out the electronics business. The way he sees it, the core business of engineering, metal formed and industrial products will grow at low double-digits over the next few years through product range expansion and exports. Analyst John agrees that TII’s expanding core business to new geographies has helped scale.

For the next several years, the group is betting on a new set of businesses to propel growth. “What we are trying to build in TI is a company that’s strong for the next 100 years,” says Vellayan. He says there are lessons to be learnt from nature, where nothing is rapid. “You need to be patient to allow something to bloom.” Agility and patience—the business mantra of a true yogi.

@SaysVidya