October 2008: The mood at the Rs 4,985-crore Apollo Tyres’ swank office in Gurgaon was grim. The global economic downturn had hit home and Apollo Tyres found itself in very rough waters.
Omkar Singh Kanwar, 66, chairman of India’s largest tyre company, looked at the numbers before him and grimaced. Net profit for the July-September quarter had plummeted 85 per cent to Rs 7.8 crore; employee morale was low; and they were uncertain and scared about their future.
Though overall sales weren’t hit, profitability suffered as a result of an over 35 per cent increase in raw material costs.
The situation worsened in the following (October-December) quarter. Net profits fell further to Rs 5.5 crore, compared to Rs 62.2 crore in the previous corresponding quarter, a plunge of over 91 per cent.
Investors hammered down the Apollo Tyres stock, which fell from Rs 40.1 on August 28, 2008 to Rs 15 on February 26, 2009. “There was no denying that things were not on track and we needed to address this urgently,” Kanwar says.
He decided to hold weekly meetings with his senior management team every Monday at 12.30 p.m. to review the global and domestic market conditions.
“We had to look at all expenses with a microscope. Cash is king in any business and we realised that we had to pull out all stops to cut our costs,” he says.
There were other issues as well.
The company had just begun building its new plant near Chennai. This would naturally require massive funds, which he and his senior team would have to find.
Through this crisis period, there was one silver lining. Apollo Tyre’s sales hadn’t suffered much.
Reason? About 80 per cent of the company’s sales, both in India and abroad, came from the replacement market (when people buy tyres to replace their existing old ones) and only 20 per cent from original equipment manufacturers (where automobile companies buy tyres to fit on new vehicles).
“The replacement segment was not very badly affected as consumers had to go in for maintenance though they deferred their plans for purchases,” the Apollo chairman says.
Then, the company decided to increase its focus on the rural markets.
“This worked like magic. We added 16 new godowns and this increased sales significantly,” he says.
But that still left the issue of rising costs and falling profits unanswered.
For starters, the Apollo management decided to lay off all its 1,000-1,500 casual workers at its three factories. “But we did not retrench even one regular employee,” Kanwar adds quickly.
The company also decided to reduce its wage bill. It scrapped its “overtime” policy. As a result, employees had to work longer hours for the same pay. This improved productivity.
The senior management also decided to take much lower incentives for the third and fourth quarters.
“The decision to take lower incentives was taken by the team itself. I did not want to tell them anything. This goes on to show that there is a sense of ownership among employees,” Kanwar says. Quarterly assessments, too, became more rigorous.
Through all this, Kanwar and his team kept every stakeholder informed of the company’s position and the initiatives to nurse it back to health. This ensured that even unpopular decisions got a buy-in from the staff.
The next step was to reduce inventory (stock of materials), as prices of raw materials — mainly natural rubber and tyre cord — had doubled over the last few months.
“Earlier, we used to keep inventory for about 20 days, but by the third quarter, we decided to stock up only for 10 days in order to reduce costs,” he says.
To restore investor confidence, Apollo Tyres also decided to buy back shares at Rs 25 per share in March, 2009.
However, by the next month, the share price of the company started recovering and shot up to over Rs 30 per share and the buy back plan did not materialise.
And finally, Apollo invested heavily in retraining its work force.
Wasn’t this a luxury, especially in times of a slowdown?
“Not at all,” says Kanwar. Several of these workers will be relocated to the company’s new plan in Chennai, thus, giving Apollo Tyres a readymade work force already in sync with the company’s culture, who will be able to train its new recruits.
The slew of measures paid off. The company’s profits bounced back to Rs 46.2 crore in the January-March 2009 quarter and further to Rs 94 crore in the first quarter of 2009-10.
With the worst behind him, Kanwar is once again bullish about Apollo Tyres’ future. “Our target is to make it a Rs 10,000-crore company by 2011,” he says.