Unrelated diversification makes little business sense
CRISIL’s fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as industry and business prospects, and financial performance.
Mr V. Jagannathan (71 years old) started the company in 1961 with the setting up of a flour milling unit in the Tirunelveli district of Tamil Nadu. A textile engineer by qualification, he was an employee of Laxmi Mills Company (LMC), a vertically integrated textile manufacturing company. The unit commenced operations while he was still employed. He later discontinued active service to grow the business. His son, Mr Suresh Jagannathan (52) has been involved in the business since the early 80s. He is currently the Managing Director and chief decision maker. Mrs Chandrakanthi, Mr V.Jagannathan’s wife, is also actively involved in the administration of the food and textiles divisions.
Management has domain expertise in flour milling and textiles The management team for the food and textiles divisions comprises qualified personnel who have been associated with KLRF for a long period of time. For the castings business, the company has recruited experienced industry professionals. The systems and processes are adequate for the current level of the company’s operations.
Unrelated diversification = low synergies Since inception, KLRF has diversified into low value-adding businesses. The management identified the castings business in order to reduce its dependence on commoditized businesses. However, it may face significant challenges in achieving the desired scale of operations since it has no experience in the business and power is expected to continue to constrain operations. Further, the ability to graduate to the more value-accretive machined castings will require investments in designing and equipment; the inability to do so, may cause margins to remain low. Also, the management has diversified the business into unrelated segments, offering low synergies.