It was a wild risk, but the underlying businesses were strong: Murugappa’s N Srinivasan on CG Power’s Revival

First, it is not as if Murugappa has never taken on distressed assets. They have a history of buying stressed companies and turning them around. EID Parry, for example, was bought for Rs 9 crore in those days. So that mindset was always there.

Second, there is an important lesson in this acquisition that a company is made up of underlying businesses. In CG’s case – motors, transformers, switchgear and railways – the underlying businesses were fundamentally good. There was no problem with the technology or the markets. The problem was at the corporate level: diversion of funds, the manner in which it was done and the collapse of working capital.

All the businesses were starved of working capital. If you inject money, restart operations and generate cash, the cash can be used to put out corporate fires. I think this must have been their logic.

CG was a leader in motors, competing with ABB and Siemens. The transformers and power businesses were globally known. In railways, if you are an approved supplier and you perform, you keep getting orders. So the franchise value was strong.

Of course, there were intimidating factors: multiple investigations, five years of accounts under cloud, around Rs 1,000 crore of tax demands and covid. Nobody knew how long covid would last.

So, in my view, they took a calculated call that the businesses were strong enough. It was a bit of a wild risk. If it had gone wrong, it would have been a problem for TI (Tube Investments). Here, fortune favoured the brave.

N. Chandrasekaran, Chairman, Tata Sons; Natarajan Srinivasan, Author of The Great Revival and former MD & CEO, CG Power; Uday Kotak, Founder and Director, Kotak Mahindra Bank

What were your priorities in the first six months?

Everything was urgent. There was no cash in the company. The auditors had given a disclaimer; they said they were unable to express an opinion on the balance sheet. The government said five years of accounts had to be recast and re-audited.

At the same time, there were secured lenders, unsecured lenders, operational creditors, tax and GST demands, investigations. You cannot say I will do this now and that later. But if I have to pick the first priority, it is not to let anyone drag the company to NCLT.

So my first priority was to settle creditors in such a way that nobody goes to NCLT. Under the RBI mechanism, all secured creditors had to agree to a settlement together. We did that. Cases like Exim Bank, which had given guarantees to foreign subsidiaries, and Yes Bank, where even the status of the “letter of comfort” was in dispute, were more complicated but we systematically negotiated those too.

Simultaneously, we launched the recasting of accounts to get a balance sheet that shows a true and fair view, certified by auditors. I wanted to know clearly: these are my assets and liabilities; beyond this there is nothing.

At the same time, all plants had to start producing. So, you can say there were three streams running together — creditor settlements, recasting accounts and restarting operations.

Unlike the banks, you didn’t ask for any haircut on the Rs 700 crore owed to vendors. Why?

Because they supplied goods and the money was due to them. In the case of secured creditors, every lending involves some risk. They are in a different position, they are paid to take risk. But these operational creditors are mostly MSMEs and SMEs. Many of them had already gone through hell because of seven–eight months of delay. If I negotiate a 50 percent haircut, many of them would not survive.

So my view was very clear, don’t negotiate with them. We will pay the principal in full. We did not pay interest — only the principal — but even that made a huge difference to them.

Operationally, what were the biggest changes that helped in the turnaround of CG Power?

It is important to understand that the mismanagement was at the corporate level. At the factory level, CG had a strong technical, operational culture — Six Sigma, black belts, all that. But of course, once corporate goes wrong, some of that culture also gets affected. We had to move very fast.

First, we overhauled procurement. For three–four years, there was no working capital. Yet supplies were coming. Vendors were being paid after seven–eight months, sometimes partly, sometimes not at all. So obviously, if something was worth Rs 20, vendors would bill Rs 60 so that even if they got Rs 10, they survived.

I called McKinsey and said, “Ignore past prices. Last year’s price means nothing. We will do clean-sheet costing.” Our procurement was around Rs 3,000 crore. We created a cross-functional team of about 60 people, led by two senior CG employees, to ensure buy-in. Whatever savings we generated, we paid McKinsey a fee out of that. Over three years, we saved in “three digits” every year — hundreds of crores.

Second, we rolled out Project Lean, with Japanese consultants going across all plants. They worked on eliminating waste, unnecessary movements, optimising manpower — if ten people were needed and 15 were there, you redeploy five.

Third was to regain customers and market share. Each business had to list where it had lost ground and how it would win it back. In motors, we quickly moved market share from around 20 percent to 26 percent. In railways, we re-entered after paying penalties and convincing them that there were new promoters and a new management.

Between Project Lean and the procurement work (called Project Mudra), our margins went up by around 150 basis points. We even created an internal website capturing all savings, so that any unit could see what others had done and replicate it.

You have said you avoided engaging with investors until the recast balance sheet was ready. How did the market react once the numbers started coming through?

Until the recasting was completed and I had a final balance sheet, I refused to speak to investors. I told everyone, “I will not talk now because I don’t know what the risks are. Once recasting is done, I will talk.”

After that, every quarter we were improving – either sales were going up or margins or product mix. When we finally resolved a long-pending property matter in Kanjurmarg and sold it after seven years of litigation, we were able to repay around 50–60 percent of the debt. The order book was growing, post covid demand went up and we started planning expansion.

We also fought and got the Rs 1,000-crore tax demand quashed in the high court. So by the third year, the company was virtually debt-free, had surplus cash and a clean balance sheet. We did not go to the markets to raise money in this period, we had enough.

You have handled turnarounds before including at Cholamandalam. Where does the CG Power episode rank for you?

Between 2008 and 2010, during the financial meltdown, Chola had about Rs 4,000 crore of loans, which were likely to go bad. If the entire Rs 4,000 crore had gone bad, it would have impacted the group. We collected around Rs 2,500 crore of small personal loans, worked very aggressively and in two–three years we brought the company back.

That was one big challenge but I was 20 years younger then.

CG Power was a much larger challenge in terms of complexity – legal, regulatory, financial, operational, people and covid – everything at once. It required, apart from brutal action, a lot of mental maturity – to decide what to do, when, and how, in a very tight situation.

I also had a lot of independence here. Nobody interfered. And since I was producing results, nobody wanted to touch me either. So I enjoyed this assignment. I have had two or three such opportunities in my career. I would rate this as the best.