FEATURES/Boardroom | Feb 1, 2010 | 35351 views

Treasure Hunt

Ten stories of businesses that made money in sectors that were never on anyone's radar


ick Jagger, the only surviving dinosaur from the Jurassic period, said that he became interested in cricket when he watched a young Dennis Lillee tear into bowl. Business is less a spectator sport and more a narrative. But how do you figure out who is the big story? Only a few entrepreneurs manage to make it big. Those manage to grow big create wealth for themselves, their shareholders, their employees and suppliers.

Most entrepreneurs in Forbes India’s “hidden gems” list fit the bill. They make their money in businesses as varied as coal tar pitch, cooling solutions, water desalination, building truck bodies and even water treatment. They overcome adversity. Most are unlisted companies who will go public some time. There are a few that are listed but they are still small and have growth left in their sails.

Perhaps the most critical task for us was identifying these companies. We decided to use a surrogate way. We decided to follow the moneymen. We pored over a list of 800 deals private equity companies had done over the last four years and looked for companies seeing a sharp rise in sales, profits and valuation.

Then we did the taste test. A few discreet calls to a few private equity investors that have made some serious money told us that the companies in our list were thought of highly. We applied a third hurdle. If there were more than one private equity investor in the company then that was one more thing in the favour of the company. Having identified the gems, we got Dun & Bradstreet to verify the financial numbers that companies were disclosing to us. Only when the numbers added up did we move ahead.
The list that emerged had one very interesting common feature. Except for three companies, Acme and ACB (India) and Firepro, other seven companies are actually old businesses that been refurbished through smart business model changes and passionate entrepreneurship. Almost 90 percent of the businesses in India are family-owned. Once they were thought of as middling companies who would disappear once the IIT-IIM crowd took to business. That has not happened. Instead, the family-owned businesses have gone out, picked up new technology, learnt to value professionals and experimented with business models. For instance, Himadri Chemicals and Cebbco are such companies. The great thing is that the gems in our list are scattered all across the country — from Jabalpur to Thrissur.

This is why it is great to see blue-blooded Wall Street firms understand and finance some of these old businesses. Ten years ago, Goldman Sachs would have financed an IT services firm. A company like Sudhir Gensets would have been dismissed as an old entity with a commoditised business. But today, Goldman has put money in Sudhir because it knows that the company serves a real need that is unlikely to disappear in a hurry.

Clean-Up Man G.C. Mrig bets on sustained demand for
Image: Vikas Khot
Clean-Up Man G.C. Mrig bets on sustained demand for "washing" coal supplied to power plants

Promoted by G.C. Mrig, Capt. Rudra Sindhu and Major Satya Sindhu; Washes coal to reduce its ash content helping power plants to become more efficient and eco-friendly.
Secret Sauce Seasoned team, favourable regulation and sustained
demand for coal.
Financial Dashboard In 2006, Warburg Pincus bought a 24 percent stake for Rs. 310 crore. Aryan plans an IPO this year to raise Rs. 1,000 crore. Warburg will sell 10 percent. Aryan Coal’s valuation now stands nearly seven times its 2006 level.
What the Smart Set Saw First mover advantage.
Guiding Light To go beyond coal-washing and expand power generation capacity.

In 1998, when Mrig and his two friends founded Aryan Coal Benefications Ltd, the annual production of coal in India stood at about 250 million tonnes. Indian coal typically has high ash content that keeps combustibility low and affects the efficiency of power generation equipment. Only 5 percent of the coal production in the country was “washed” to reduce the ash content and most saw no need for this extra expense.

So it was not surprising when Mrig, who had spent 40 years in the industry including as managing director of Bharat Coking Coal Ltd., found it tough to get orders for his new company. His friends even wrote him off, saying, “Aapne toh paisa duba diya,” (you have wasted your money).

That was then. Now annual mining has increased to about 450 million tonnes. The government has made it compulsory for power stations located 1,000 kilometres or more from mines to wash the coal. Given that four out of 10 power stations in India are located in such faraway locations, the scope for the coal-washing business has expanded.

ACB has 62 million tonnes of coal-washing capacity, nearly half of the 130 million tonnes capacity in the whole of the country.

Private equity watchers now think that Aryan might do for Warburg Pincus this year what Bharti did for it nine years ago. And both investments were made by Pulak Prasad, who has since started his own hedge fund Nalanda Capital. Just the way Prasad spotted Sunil Mittal’s execution he was able to see Mrig’s understanding of this industry and execution skills.

Most of ACB’s washeries are located very close to the coal fields and the transportation costs are low. The company has massive operating profit margins of 44 percent that the company makes. Crisil expects ACB to benefit from the increase in demand for washed coal and stringent prequalification requirements that restrict new players. So, its market share is not under threat in the foreseeable future.

ACB doesn’t waste the coal reject that remains after the washing either. It uses the material to runs some small power plants. With 4 million tonnes of coal reject coming free every year, this has become a very profitable way for ACB to dispose the waste.

Mrig says he got the idea to recycle the waste when he saw gold miners in South Africa going after dumped mines and the Chinese extracting most out of low-quality coal.

But now it wants to enter the big league. It plans to build a 1,200 MW power plant in Madhya Pradesh and a 1,100 MW plant in Chhattisgarh.

(by Prince Mathews Thomas)

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Comments (2)
S Agrawal Aug 23, 2010
Surprising to see the article getting published in Forbes India regarding ACB. Did anyone in Forbes do a due diligence before going gaga over company's success. The Clean up man mentioned here , cleaned up the govt funds worth Rs 20 Cr. please see the link for some back ground
Marazban Mar 9, 2010
Very interesting article would like a link to it.
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