Rajendra Hinduja, 61, is brimming with energy. Men of his age, having sold their family business for a hefty price, might look forward to more leisurely pursuits, but he is busy crafting an epoch of transformation at his garment exporting firm in Bangalore. “I never remember being so busy,” he says.
A 1,000 kilometres away at Malad in Mumbai, Susir Kumar and his senior managers are drawing up the strategy to win the largest contract yet for their business process outsourcing (BPO) firm focussing on banking and financial services sectors. Their ambition is to move closer to the top league of BPO firms in India.
Hinduja and Susir Kumar represent two diverse industries, but their companies have several things in common. Both are labour-intensive businesses depending on outsourcing orders from the West. They have to work hard to achieve high volumes at modest profit margins. And in the world of investment, they are both out of fashion. Textile and BPO don’t make money for the investor, so goes the belief.
Hinduja’s Gokaldas Exports and Kumar’s Intelenet have another thing in common: both were bought by the world’s largest private equity (PE) firm some 20 months ago. Blackstone Partners owns the companies, letting their previous owners still run them, on the basis of one assumption: it can unlock hidden value in these companies that will disprove the conventional wisdom about them. And make 200 percent profit in five years in the process.
There was one man behind Blackstone’s acquisition of Gokaldas and Intelenet, much against the consensus of the market: Akhil Gupta, managing director of Blackstone India. Even industry players were taken by surprise by his confidence in textile and BPO, especially these two companies. So, after 20 months and with the onset of global recession that has made most assumptions as worthy as a bounced cheque, many have started asking whether the Blackstone Hypothesis is working. But then, what is the Blackstone Hypothesis?
Gameplan
Gupta and his team believe they can make both Gokaldas and Intelenet more efficient and profitable. This will be achieved in three steps. One, Blackstone will leverage its professional management expertise to improve operations. Two, they will help the companies scale up globally. The third approach is the key. Blackstone will get the companies it has invested in globally to outsource their needs to Gokaldas and Intelenet, keeping the business with the family as it were. When stock market conditions improve, Blackstone will get its chance to exit.
Take the German chemical company, Celanese. Blackstone bought it in 2004 when chemical companies were out of favour and delisted it from the stock exchange. The firm put in $650 million in equity and almost immediately got back $500 million through a junk-bond offering. And when chemicals came back in favour, Blackstone did an IPO for Celanese and made a tidy profit.
Gupta has to adapt this approach to Indian markets, where stock valuations will eventually depend on operational improvements. Having worked in Hindustan Lever and Citibank, Gupta has the right mix of business and financial experience to spearhead Blackstone’s business in India, which along with China, is seen as the most important emerging destination.
But the killer app will have to be Blackstone’s ecosystem. Globally, the PE firm’s investment portfolio comprises 55 companies with cumulative revenue of $90-100 billion. About 800,000 employees work in these companies that include Nike, Hilton Hotels and Travelport. “If a fraction of business from our global companies lands up with Intelenet, they can grow several folds. That’s the icing on the cake,” says Blackstone’s managing director Amit Dixit, who initiated the Intelenet deal.
Two and Two Equals Five
Blackstone’s arrival has changed things at Gokaldas considerably. Hinduja continues to provide leadership, but as an employee. He is also effecting changes that he couldn’t carry out as owner. There lies the power of the Blackstone association.
A senior executive in a firm that buys Gokaldas products for retail chains in Europe says: “We do see a new sense of purpose, a desire to become more customer-centric from Gokaldas management Earlier, they were quite content with their position in India apparel industry.” A benchmarking study commissioned by Blackstone to document the exact time taken by workers in different countries to make a similar shirt had found Indians were only 60 percent as efficient as the Chinese. Hinduja, earlier as the owner of Gokaldas, had not addressed the issue lest the workers complain of overwork. “We had learnt to live with it.”
With Blackstone’s nudging, Hinduja got experts from the US and Japan to help them adopt lean manufacturing in Euro Clothing, one of Gokaldas’ 47 factories. Without openly emphasizing productivity, Hinduja’s team weeded out waste. A store counter was set up in some factories so workers could get components at one place, instead of getting them supplied at their desk. The result: a 40 percent jump in productivity at the Euro factory. Mattew Cyriac, Blackstone managing director and Gokaldas board member, calls such gains low-hanging fruits.
Similarly, Hinduja was also freed from the burden of day-to-day administration so he could focus on strategic initiatives. Blackstone has appointed a general manager to oversee Gokaldas. Gautam Chakravarty, an ex-Hindustan Lever executive, finetunes human resource policies, currency hedging decisions and even entry into new markets. Hinduja, with introductions from Blackstone, has met with key decision makers at Hilton Hotels and Ralph Polo, owners of famed garment brand Polo, to talk business.
HOW THE DOCTRINE WORKS
Investment is like alchemy:
Making gold from a raw substance. To Blackstone, it means finding companies that have a value that others don’t see but which need some refinement to extract that value. For Blackstone to get
interested, a target company should have the potential to yield three times the investment in five years.
(This story appears in the 19 June, 2009 issue of Forbes India. To visit our Archives, click here.)
Labour Extensive Industry will grow as India has more supply capacity than the actual demand on its own soil. <br /> <br /> But one needs to be very carefull as one strong jolt of recession will jeoparadise the entire Gameplan. So I will put it under "High Risk, High Reward" zone.
on Jun 9, 2009