Vikram Somany - Strength in the Depth of Despair

perseverance

#1

Somany

Vikram Somany, the founder of Cera Sanitaryware is a man of exceptional mental strength, and his story is worth telling.

In 1960, Vikram Somany’s father along with his brothers set up the first organized sanitary-ware company in India - Hindustan Sanitaryware (HSIL). It was initially incorporated as Hindustan Twyfords Ltd. in 1960 by the Somany family in collaboration with Twyfords Ltd., UK, to introduce vitreous china ceramic sanitaryware in India. HSIL, helped by the first mover advantage coupled with quality technology built a strong position in the marketplace quickly. In fact, HSIL continues to be the largest sanitaryware player in India even today.

However, Vikram Somany was not part of HSIL which - probably as a result of family restructuring - was run by his cousins. In his initial years, the former was running Madhusudhan Industries, a business in manufacturing of vanaspathi oil (type of vegetable oil used in India) and de-oiled cakes (used in agriculture as fertilizer and animal feed) manufacturing. The oil and cakes business was a commodity business and thus exposed to the brutal commodity economics.

Vikram Somany rhymes with Kochouseph Chittilappilly

Around 1980, Mr. Somany received a license to set up a sanitaryware manufacturing facility. This business broke-even in its first month. This is quite an achievement considering the fact sanitary-ware manufacturing is a complex process which has high start-up costs. A few factors contributed to this:
  • Mr. Somany staffed the sanitary-ware business with many ex-employees of Hindustan Sanitaryware. The sanitary-ware manufacturing process is prone to defects, and the defects lead to rejects, which can eat into the profits extensively. Hiring of people from the dominant leader meant the business began with extensive institutional domain knowledge.

  • Mr. Somany took a contrarian view in choosing natural gas fired kilns which had the advantage of being both cheaper and environment-friendly right from the beginning. This advantage was compounded by him setting up the plant near a major oil field with gas prices at very cheap levels. Fuel costs , which are a major cost for sanitary-ware manufacturing, were considerably lower for his business.

  • The above was backed by considerable customer focus. India was under the license raj then (new businesses needed government licenses to begin operating), and the average customer had very limited choice in goods to buy. In such a scenario, he was the first to produce colourful sanitaryware products back in 1980s (21 colours then vs 7 for competitors), when it was a seller’s market.

The above rhymes with Kochouseph Chittilappilly’s V Guard (covered here), which benefited from both Mr. Chittilappilly’s deep knowledge of the stabilizer product and his fanaticism with customer delight by designing the stabilizer product more as an ornament than another consumer durable.

Burning Bridges mental model to sharpen focus

It is the hesitation to take a leap of faith that precludes success and joy. Many people have that particular ‘something’ that they love to do but they do not want to take the leap of faith do the something full time. The primary reason remains the assumption that burning of the bridge is ‘risky’, which might be valid. But if you apply the principle of inversion to the problem, you just might end up with the conclusion that non burning of bridges is riskier.

For when you do just that thing which you love, you harness the power of focus and compounding. It is a natural conclusion that your focus, stamina and eagerness to learn are all stronger and longer in something you love. This is akin to increasing the rate and tenure of compounding. Focus, as per Mr. Buffett and Mr. Gates, is the most important ingredient for success in an endeavor, while compounding, as per Mr. Einstein is the eighth wonder of the universe. Harnessing these fundamental forces of the universe can lead to- as Mr. Munger would say- ungodly results.

And so, we turn the notion ‘Burning bridges is risky’ on its head - Burning bridges, at times, can be the most conservative decision that one can take.

What has all this got to do with Cera? Well, in 2001, Mr. Somany decided to exit the commodity segment entirely and focus purely on sanitaryware under the name ‘Cera Sanitaryware’. This allowed his entire entrepreneurial energy to be focused on just one business. This decision was well thought out. The sanitaryware business by then had become quite profitable, and 20 years was enough to understand the difference in economics between the businesses. He realized that sanitaryware business inherently has better and more stable margins and return profiles as compared to the flagship commodity business.

This aggressive decision was probably in retrospect, the most conservative decision he took till then. We will see how.

Vidush Somany enters; Creating a network of competitive advantage

Cera, which was run in a decentralized manner for a long time, moved from strength to strength since 2001. The progress was accelerated by the entry of Vidush Somany, Mr. Somany’s only son into the business in 2004.

From 2002-2012, sales improved nine-fold, PAT margins improved nine-fold while returns went from mid-single digits to low-30s. The improvement was steady and sustainable. This stupendous performance was driven by a series of measures which created a network of competitive advantages -

Quality focus: Even when it was a tiny entity with sales of less than $10 million, the Somany family spent considerable amount to improve its manufacturing process by employing foreign consultants. In 2008, he also employed a ceramic scientist of repute on their board. The focus was cost reduction, quality improvement and efficiency maximization. The focus on constant improvement in their knowledge became part of the company DNA.

Economies of scale: Cera also made a decision to expand at their existing facility at Kadi, Gujarat harnessing the power of scale economies. Simultaneously, the company spent considerable efforts in strengthening and expanding their distribution network. This further improving the cost advantage.

Avoiding competition: The focus was initially on the mass segment in the initial stage of the journey. Sanitaryware is a bulky item which is prone to breakage in transit. And so, only premium sanitaryware was economically viable to be exported. Thus, Cera’s target market had no foreign import led competition. This was as opposed to the incumbent giant - Hindustan Sanitaryware’s focus on the more crowded premium segment.

Branding: Right since 2001, the family’s focus on brand was evident in the spending of more than 4% of revenues, on average, on brand building efforts. This allowed it considerable pricing power and allowed it to further leverage his passion for conservative-aggressive strategies. For example, when the decision was taken to enter into the related segment of faucets, Cera decided to first outsource production and sell it under its own brand to test the market. This indicates a cautious expansion of circle of competence into a related segment without sacrificing growth.

The net result is that the Somany family led Cera saw its market share moving from mid single digits to around 20% in a decade.

Over the years of its evolution, while Cera was continuously outpacing the industry growth rate, Mr. Somany was oft asked a question,

‘When do you think Cera will become the largest player in India?’

Mr. Somany’s response across time, was consistent:

‘We have no aspirations to be No. 1 or No. 2. If our growth is good, our service is good and our quality is good, then I think our results will be a consequence of this growth and innovation.’

A pattern we find in exceptional entrepreneurs is that their personality percolates into the organization they lead. This can be observed in Cera as well. In conference calls across different years, the top management responds similarly to questions on market leadership - that the focus is manufacturing good products, marketing them well and ensuring they are available when the customers need them; and then the outcome will take care of itself.

The unthinkable

Vidush Somany, eventually appointed as the Executive Director of the business, was fully involved in running it while Vikram Somany was slowly taking a back seat. The former, backed by an able team, had proved himself with the company’s revenues and profits increasing by more 20%-25% every year since his joining.

And then the unthinkable happened. In Aug 2012, there was news of the sudden demise of Vidush Somany. A parent surviving his / her child is one of the worst things to happen. The excruciating mental agony cannot be imagined.

While I do not know how Mr. Somany dealt with this loss in his personal life, I believe how he dealt with the crisis in the business is simply extraordinary. Mr. Somany had always had a strong focus on delegation and employee empowerment. In the past, an employee earned more than Vikram Somany himself, an indication of his ability to recognize and pay for talent, and lack of ego. This trait helped him deal with the vacuum created by his son’s demise, when SC Kothari - a long-timer who had retired in 2009- returned to take up the role of CEO within a couple of weeks. In a few months, a new COO was appointed, again from within the ranks. Simultaneously, the founder continued to buy shares from the open market indicating his faith in the business.

The Company continued to focus on its core initiatives as articulated by Mr. Somany previously - quality, service, distribution. In fact, since 2012, a period marked by weak economic sentiments, GST, demonetisation, etc, the revenues and profits of the company tripled with the return and profitability metrics continuing to remain strong.

Eventually he brought his daughter, Deepshika Khaitan, on to the board as the non-Executive Chairman to further indicate the family’s long-term intention to be part of the business.

For me, the grace and strength with which Mr. Somany dealt with this tragedy is worth remembering and emulating. It helped me in dealing with certain tragedies in my life as well. And the story of Mr. Somany reminds of a couple of Munger’s quotes that I love:

You should never, when facing one tragedy, let it increase to two or three through failure of will.

"I don’t care what the cause, your child could be dying of cancer, self-pity is not going to improve the situation. It’s a ridiculous way to behave, and when you avoid it you get a great advantage over everybody else, almost everybody else, because self-pity is a standard condition and yet you can train yourself out of it.

Sources:

Company reports and disclosures
Youtube

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Intelligent Fanatics August 2018 Digest
#2

@rohithpottigmail-com, I like the below quote. It looks like they’re focusing on process, rather than outcome.


#3

@rileynewport: Yeah. I get excited when I see this. Check this link out: The Power of Detachment
This has another example of the same.


#4

This is just amazing. Thanks for sharing this story.
Like you mentioned towards the end, lots of lessons to be learned from this.
Is there any more reading material on Mr. Somany or the company in public domain that you are aware of?


#5

@Hussain_Kagzi : There is no specific reading material in one location. I would suggest you check out the youtube link I shared. Other than this I found the conference call transcripts and the annual reports of the business to be quite helpful in understanding Cera’s approach to running the business.