Titagarh Wagons' French Success
Image: Goutam Roy
he town of Douai in north west France is known today for its Renault factories, but some of its industrial foundations were laid about 150 years ago, when Lucien Arbel began forging parts for railway carriages. A century of manufacturing expertise gave Arbel Fauvet Rail (AFR) a niche position in the market, using its 15 patents to deliver specialised wagons to high-end clients.
Unfortunately for AFR, the onset of the Eurozone crisis in 2007 derailed its gravy train. Since then, it started making losses and in 2009 the losses reached a peak with €19 million. That year, AFR filed for bankruptcy and a year later went into liquidation.
JP Choudhary, chairman, Titagarh Wagons, noticed the troubles AFR was passing through. Perchance, Titagarh Wagons and AFR were working on a joint project on wagon design in 2008. It was clear by 2010 that AFR had valuable intellectual property and, if properly managed, it could be an asset for an emerging market wagon company.
Choudhary says, “AFR stood out because it was an excellent facility with good equipment and skilled labour. Its location in the north of France was also desirable as the region was famous for its rail technology—especially design capabilities.”
AFR had seen hard times before. The factory had been razed to the ground during World War I and the company had survived numerous changes in ownership thereafter. But the Eurozone crisis was one blow the veteran French wagon manufacturer could not recover from. By 2010, employees were being laid off en masse, the order book was near empty, confidence ran out among all stakeholders and the company went into liquidation. The cliff had come and AFR had run out of track. Or so it seemed.
At this point, Titagarh Wagons sniffed an opportunity to pick up a top-of-the-line European asset at a bargain price (roughly Rs 100 crore). It went ahead and acquired AFR in July 2010. While French industry minister Arnaud Montebourg may be castigating NRI steel baron Lakshmi Mittal for closing plants and sacking workers, in this case Choudhary and his team have given AFR, a French company, a dream turnaround. Employment in the French subsidiary has almost doubled from 85 to 150 and counting. Turnover has skyrocketed from a paltry Rs 9.95 crore in 2010-11 to Rs 163.51 crore in 2011-12.
Managing Director Umesh Choudhary (son of JP Choudhary) says income is expected to double this year. Last year’s profits were modest at Rs 4.43 crore, but up from a loss of Rs. 5.94 crore in 2010-11. Choudhary predicts the French subsidiary will start generating cash for the group within the next financial year. As more orders for high margin products come in, CFO Anil Agarwal predicts profits will increase by 80 percent.
The interesting thing about this turnaround is that Titagarh has used some out-of-the-box thinking to navigate the tricky French industrial business landscape. After winning the auction and acquiring assets, including the 52-hectare plant space, Titagarh Wagons boldly teamed up with someone who had bid against them. Pascal Varin has a wealth of experience dealing with the French rail industry as president of Ermewa, a giant subsidiary of the state-owned French railway service SNCF. Varin bought a 10 percent stake along with Titagarh’s 90. “I think I brought a sophisticated knowledge of the European and African rail freight market,” says Varin, “A knowledge of the local rail freight market was essential for the relaunch of the activity.”
Local knowledge helps
This has proved a wise move; Varin brought with him contacts and local know-how that helped the Kolkata-based company take its first full step into European production and get a foothold in the lucrative EMEA (Europe, Middle East and Africa) region. Together, Varin and Titagarh paid just €2 million for the assets and fronted €13 million in vital working capital. The downturn in Europe was a major factor in getting such high quality production assets at such a low price, says Umesh.
But the big problem, AFR’s high-cost operations, needed to be addressed fast. Fixed costs were bleeding Titagarh Wagons Arbel Fauvet Rail (TWAFR) dry. There were several ways in which the management tackled this problem. The main solution was concentrating work stations and production units into a single area, rather than spreading them around the factory. Not only did this bring costs down, but the proximity helped communication and improved work culture—the lack of which hurt the company in the past. In addition to plugging fixed costs, Titagarh Wagons negotiated for steel directly with Indian suppliers. High-volume deals in India made it possible to provide low-cost steel to Douai and this brought variable costs down.
The next task was to get out of low-value orders. Initially, the management had to take emergency measures to steady the ship. The central theme was to stop accepting orders for low-margin products like petroleum tank wagons—which sell for roughly €7,500 each—and focus on grain, cement and aggregate wagons that go for 50 percent to 70 percent more. “It is one thing to go looking for new orders but it is equally important to learn to say no,” says Umesh.
Then the company wanted to crank up the new order pipeline. That needed the trust of workforce as much as customers. “Our customers, past and present, had to see that we were fully committed to being there for the long haul,” says Umesh. “Earning back their confidence was a major turning point.”