7/26/2019 Interview With SCM TAFE

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Partnering Farmers in Progress

S. Chandramohan, President and Group Chief Finance Officer, Tractors and Farm Equipment Limited (TAFE)

Tractors and Farm Equipment Limited (TAFE) started out as a manufacturerof tractors, with just one model, in 1961. Firmly believing that tractors alonecan transform the destiny of farmers and thereby the economy at large,TAFE has strived, right from the beginning, to build machines that give thegreatest output. This family-owned enterprise was incorporated in 1960,nearly 55 years ago. Since then, it has stuck to its roots, but with an open

mind to change and innovate along the way. Today, TAFE is the world'sthird-largest tractor manufacturer, India's largest exporter of tractors, andsecond in terms of local market share. Backed by over 1,000 dealers inmore than 75 countries, its three iconic tractor brands Massey Ferguson,TAFE and Eicher continue to enjoy customers' trust for their quality andlow cost of operation.

Today, tractors are used in new, multipurpose applications beyond farming,yet TAFE's mandate to stay efficient yet profitable in an ever-changingbusiness environment remains central. That's where the role of S.Chandramohan, President and Group Chief Finance Officer, becomescritical. Mr Chandramohan joined the business 16 years ago, and has sinceplayed a key role in helping TAFE reinvent itself through acquisitions,alliances and strategic investments. He has helped it sustain its leadership position in the industry by putting in placebest practices in enterprise risk management, treasury, strategic planning and budgeting, as well as overseeing theentire operations of its engine division at Alwar.

There are many things that position TAFE where it is today, as a successful familyowned business: its thrust on soundcorporate governance being cash rich with zero debt and its ethical business practices. Mr Chandramohan chats withCFO Connectto narrate TAFE's growth story one that's deeply intertwined with his own.

Sticking to its rootsTAFE began as a family-run enterprise. Today, it employs over 2,500engineers apart from a number of specialists in other disciplines. Tell usabout the evolutionary journey and how the founders are able toprofessionalise the outfit whilst still maintaining the family presence insome way.

While TAFE is family-run and owned Mallika Srinivasan, its Chairman and CEO,is from the family it is run like any other professional company, with a strongemphasis on attracting talent, nurturing them, enhancing their competencies, andretaining them. At any point of time, 30 to 40 employees attend post-graduateengineering or management courses at reputed institutions, including ISB, IIT, andVIT. Several of our engineers have been deputed to the Warwick ManufacturingGroup to pursue post-graduate courses in engineering. We have a structuredthree-tier management and business leadership development program coveringunior, middle and senior employees. Our partners include leading institutions,

such as IIM Bangalore and IFMR, Chennai. So far, we have trained over 2,100employees across levels. Recently, we launched a "TAFE e-University", whereemployees can hone their product and leadership skills on an everyday basis. Theaverage age of employees today is 34, and the culture is one of learning and

sharing.

While TAFE is familyrun andowned Mallika Srinivasan, itsChairman and CEO, is from thefamily it is run like any otherprofessional company, with astrong emphasis on attractingtalent, nurturing them,enhancing their competencies,and retaining them.

We encourage transparency and discussions at every level. For instance, the annual planning exercise involves almost allsenior and mid-level managers. Strategy and action plans are discussed, articulated and agreed upon before implementation.Communication meetings ("Open Forum") are periodically held with all of the factories and marketing offices, including TAFE'sTurkey and China plants, where the Chairman-CEO and the rest of the senior management team discusses the organisation'sprogress and take questions from employees. These initiatives earned us one of Aon Hewitt's "Best Employers India" in 2013.

Over a period of time, the utility oftractors has evolved from merefarming to multipurpose

application, including Haulage.While earlier, tractors were used inagriculture primarily for ploughing ,today, they are spreading to otherareas, such as weeding, spraying,

Product rangeCurrently TAFE produces tractors with a capacity of 85 HP, thoughconsumption in India is only in the 35-60 HP range. What determineshorsepower and, is there a plan to go beyond 85 HP? (In the globalmarket, most of the demand for tractors is at, or around 80 HP.) Areproducts differentiated only by horsepower, or by other features,too?Customers' choice of horsepower is determined by a variety of factors,including farm size, soil type, crop and non-farm use. Features, too, varysharply across product categories and markets. Even though the Indianmarket is predominantly tractors-driven up to the 60 HP category, with theemerging applications in the commercial and infrastructure sectors, the

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harvesting, postharvesting(including stubble clearing andbaling).

set of features required is changing rapidly. However, it is not true thatthe export market is only in the range of 80 HP: in fact more than 80 percent of the tractors we sell in the export market are below 60 HP, and halfthe US market is below 60HP. Tractors up to 100 HP would cover morethan 80 per cent of the global market.

Tractors: the new multipurpose toolDoes the changing utility of tractors from farming to multipurpose applications open a window of opportunity forTAFE?Over a period of time, the utility of tractors has evolved from mere farming to multipurpose application, including Haulage. While

earlier, tractors were used in agriculture primarily for ploughing (i.e. land preparation), today, they are spreading to other areas,such as weeding, spraying, harvesting, postharvesting (including stubble clearing and baling). Non-farming applications includetrench-cutting, cable-laying, and as loaders and dozers. Last-mile connectivity is always better with tractors, so they are beingused in place of trucks for transporting agri and non-agri products. Tractors cost less than trucks, and given India's roadconditions, almost match their speed, particularly in rural areas.

Growth plansWhat are the inorganic and organic growth opportunities thatyou are looking at capturing?In 2005, TAFE acquired Eicher Motor's tractor plant at Bhopal(Madhya Pradesh), its engines plant at Alwar (Rajasthan) and itstransmissions plant at Parwanoo (Himachal Pradesh), through itswholly-owned subsidiary TAFE Motors and Tractors Limited ('TMTL').

The acquisition has helped us to grow the market strongly in the pastfive years, and we have realised significant synergies across thevalue chain. While opportunities exist both in the domestic andinternational market to grow organically, we may not be averse toinorganic growth, provided it is a strategic fit.

Your main export focus export has been the developing world,primarily South Asia and large parts of Africa and South America. Reports indicate these markets have been a success.Are there any challenges as well? Is it a conscious decision not to be in the European market?While Turkey was TAFE's first overseas plant it started in 2010 we have recently opened a machining plant in China, wherethere are good sourcing opportunities. While our focus is primarily on South Asia, we have been exporting to more than 75countries, from Australia to the United States, and select European markets. The huge depreciation of the Brazilian Real, theTurkish Lira, and several African countries, does pose challenge to the Indian tractor industry in terms of competitiveness. At thesame time, it compels us to look internally to reduce our costs to remain competitive.

Mechanising is the way forwardWith harvesting technology slowly coming of age in India, how long do you think it will take to mechanise agriculture?Will it solve some of the burdens and problems faced by farmers?We take pride in the fact that we offer not only relevant but also appropriate technology to farmers in India and abroad. Thechallenge in India is that while the vast North American market can be considered to be one region, in India, each state has itsown peculiarities, such as shallow puddling in West Bengal, deep puddling in Telengana, and different soil conditions, includingsoft soil in Rajasthan and black cotton soil in Maharashtra. Even the cropping practices are not uniform, in terms of row spacing,crop pitch, to name a few. More importantly, land holding sizes and affordability at the farmers' end are limited, which forces usto innovate, including in terms of multi-purpose usage in both agriand non-agri applications. The knowledge base of farmers hassignificantly increased, and therefore the usage of implements, such as laser levellers and combined harvester, is increasing.

What does it take to mechanise agriculture? Does relevant and affordable technology resonate with your philosophy?

Rice planting operations are slowly changing, from manual to automated seeded, and with the adoption of uniform row spacingpractices, the use of equipment like sugarcane harvesters will also increase. With the current labour shortages in agriculture, theonly way to fulfil India's food demand is increased mechanisation. All of the products developed at TAFE, both for the domesticand the export market, use in-house technologies.

Number gameTractor sales in the domestic market witnessed over 20 per cent growth in 2013-14, mainly because of a good monsoonin key regions like the Western and Southern markets, coupled with increased demand from the farming community.While according to tractor industry officials, a growth of 12-15 per cent in 2014-15 is expected. What is your "gut feel"as far as the future is concerned. What kind of growth do you foresee?While the tractor industry grew at a compounded growth rate of 8.82 per cent over the last decade, the TAFE Group has grownby 9.89 per cent, aided by the addition of new models and features, and by deeper penetration in the market place. The tractorindustry de-grew by 13 per cent in 2014-15 due to inadequate and unseasonal rainfall in several parts of the country, inadequate

increase in minimum support prices, softening global commodity prices, and other reasons. These adverse conditions havecontinued in the first four months of the current year. The recent increase in crop acreage due to a fairly good monsoon giveshope that the second half of the year would be better, allowing for marginal growth in the financial year as a whole. The long-term fundamentals of the industry are intact and we expect a CAGR of 8-9 per cent in the next five years.

Showing the way

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TAFE launched an initiative in the North- Eastern Region to help train farmers on agricultural mechanisation. What wasthe end result? Do you have a similar drill for other markets in India as well?We have been continuously involved in the training of farmers, both in mechanisation and in farming practices. Recently, wetrained a group of lady farmers at our "J Farm", which was well received and appreciated. J Farm is an agriculture researchcentre which is engaged in adaptive research, and offers farm advisory services, including crop- and geography- specificfarming solutions covering more than 180 crops through a multi-lingual farming portal. We have been partnering with thegovernment on inclusive mechanisation of small and marginal farmers. We have also opened several regional training centresacross the country, using a hub-and-spoke model, to train mechanics so as to minimise the downtime of tractors.

Partnering for growth

TAFE has an understanding with US farm-equipment manufacturer AGCO Corp which holds a 23 per cent stake in TAFE for distribution in the US, certainmarkets in Africa, Turkey, and other countries. In what way is this collaborationadding value to TAFE?Our relationship with AGCO spans a period of more than five decades, and has beenbuilt on foundations of mutual trust and respect. Our relationship has beenstrengthened and consolidated over the years to include supply of parts, componentsand aggregates, as well as fully finished tractors. In the history of our relationship, wehave strictly followed the principles of 'no compete' and 'collaborate'. During the pastdecade, we have made significant investments, internally as well as across thesupply chain, to meet AGCO's requirements. In turn, AGCO has also helped usleverage our technology over a period of time. We are confident that the partnershipwould be further leveraged in the coming years for mutual benefit.

If you look at past trends,there has always been astrong positive correlationbetween rural prosperityand overall GDP growth.Therefore, agriculturalgrowth, and in turn,mechanisation, is essentialand inevitable.

What is TAFE's approach, both in terms of creating profitable growth through overseas diversification, as well asthrough a careful management of the supplier and customer eco-system within India?TAFE has forged a very strong partnership across the value chain with suppliers, dealers, bankers and employees, based uponour core values of "trust and long-term relationship with stakeholders." We provide financial support to our vendors, helpingthem to expand their businesses and grow with us. In the last few years, we have also given several longterm loans andsubscribed to debenture issues and preference shares of vendors. We have organised channel finance, at competitive interestrate, for our dealers, and our bankers acknowledge that our portfolio is among the best in India. TAFE has cemented a strongrelationship and understanding with all its bankers, and with NBFCs who provide competitive retail finance to farmers.

The company is debt free, has strong cash flows, has funded growth largely with internal accruals, and has invested significantlyin building internal capability through a strong product development program and state-ofthe- art manufacturing tools. We haveborrowed only for acquisitions, and have repaid these loans ahead of schedule. TAFE has never been shy of investing forgrowth and for new product development.

Rural prosperityWhat is your perspective on the reality of economic growth and prosperity in rural India, and the outlook for agriculturein India, especially in the backdrop of the government's thrust on developing agriculture, and ensuring the welfare offarmers?If you look at past trends, there has always been a strong positive correlation between rural prosperity and overall GDP growth.Therefore, agricultural growth, and in turn, mechanisation, is essential and inevitable. If we exclude the de-growth in the tractorindustry in 2014-15, the industry's rolling six-year CAGR (2008-09 to 2013-14) was 15.74 per cent, while we have grown by 18per cent in the domestic market.

According to a Crisil report, we require nearly 13 million tractors to till India's entire arable area of approximately 160 millionacres, whereas the current 'population' is only about 5 million. The HP per hectare in India is also relatively low at 0.8 ascompared to a global average of 3 to 4, and 10 in Germany. Hence, the opportunity in this space to grow is substantial given therelatively low mechanisation level in India. In addition to tractors, our focus will be on growing the business of engineeringplastics, batteries, gen-sets, spare parts and implements. There is also potential to grow the export market.

Over the next five years, we expect tractor sales to grow at a CAGR of 8-10 per cent supported by several factors. Theseinclude, first, the procurement of better seeds and the increasing use of implements, resulting in greater demand for tractors.Second, there is likely to be a rise in multi-cropping and commercial usage. Third is the evolution of agricultural practices suchas the formation of farmers' co-operative societies, and rising procurement by large producer companies, pushing up demand oftractors from marginal and small farmers. Fourth, there is an increasing use of tractors, beyond land preparation, in activitiesranging from haulage to weeding, spraying, seeding, inter cultivation and post harvesting. Fifth, is a rise in governmentexpenditure, particularly on irrigation and rural infrastructure. Sixth, tractor demand will benefit from an increase in mining activityand general growth in infrastructure spends.

Over the next five years,

we expect tractor sales togrow at a CAGR of 810 percent supported by severalfactors. These include,

Finance the key driverHow have you navigated your finance role alongside your other

responsibilities? What is your focus as a CFO?I focus on the drivers of the business, which vary across divisions, and also providegeneral support and guidance. A big part of my role is devoted to strategy formulation,implementation, and review with the Chairman and the rest of the seniormanagement team to allow for any mid-course correction. I also work on thefollowing areas: enterprise risk management bench-marking costs and processes

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first, the procurement ofbetter seeds and theincreasing use ofimplements, resulting ingreater demand fortractors.

with the best in the industry, with the aim of continuous improvement improvingsystems and processes to allow for accurate online reporting for faster decision-making financing arrangements that allow for growth stronger supply chains ensuringcompliance across various divisions/companies. Additionally, given that we export toover 75 countries, forex management is extremely critical. To this end, we haveevolved a suitable hedging mechanism, duly approved by the Board, which wecontinuously review. Further, in view of wide currency fluctuations, pricing is extremelyimportant to remaining competitive, and it is the responsibility of Finance tocontinuously review product- and countrywise costs and margins.

How would you sum up your 16-year journey at TAFE?The journey has been challenging, stimulating, and on the whole, rewarding. During the first five years, the paramount focus wasto organise finance for dealers as well as for farmers. Later, in 2004, our one-year acquisition journey was exciting. Thenegotiation phase covered various gamut of issues, including valuations. It was exhausting at times, but in retrospect, it gave metremendous satisfaction. Post-acquisition, we had to revisit our strategy, ensure that synergies were obtained as envisionedbefore the acquisition, standardise our systems, processes and controls, among other things.

In 2007-08, I was given the additional responsibility of looking after the operations of the engine division at Alwar, which showedme a different perspective of the business. Today, we enjoy the highest market share for gen-sets in the telecom segment, andhave set new service benchmarks for gen-sets across all segments. In the past few years, overseeing the operations of thebattery and engineeringplastics divisions also gave me new insights. The learning has been continuous and the journey hasalways been exciting. I have to acknowledge that I have thoroughly enjoyed working with Ms Mallika Srinivasan, who has beenan exemplary leader, and instrumental in taking the company to a different level. Perhaps, the only difficulty is that she knowstoo much about my subject too, which makes the CFO's role that much more challenging!