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Established in 1936, the Khetan Group started off as traders of merchandises in Nepal. In the initial years their primary business revolved around import of fabric and other essential commodities from India and later on from China and Burma. The group through the last 70 years has grown to become one of the largest conglomerates in Nepal.
Presently Khetan Group under the leadership of Mr. Rajendra Khetan looks to consolidate its position as it continues to grow from strength to strength while bringing new business sectors under its portfolio through horizontal as well as vertical expansion. The Khetan Groups portfolio is spread across three primary industry sectors:
Industrial: Within this sector the Khetan Group has established 5 major companies, namely (i)Gorkha Brewery, (ii)Himalayan Snax & Noodles, (iii)Himalayan Petrochemicals, (iv)Bottlers Nepal & Bottlers Nepal (Terai) and lastly (v)Gorkha Brewery s Liquor Wing.
Amongst these companies Gorkha Brewery is recognized as market leader in Beer brewers and marketers in Nepal having more than 80% market share. Established as a joint collaboration between the Danish Beer Giant Carlsberg and the Khetan Group the company retains the distinction of being one of the largest foreign investments in the history of Nepal. In 2004, Gorkha Brewery started brewing and marketing Sam Miguel beer, on the license agreement with San Miguel Brewing International Ltd., Phillipines.
The Himalayan Snax & Noodles Private Limited was established in October 2000 in technical collaboration with Thai President Foods Plc of Thailand. Within a short time since its inception it has been able to capture significant market share within the industry.
Bottlers Nepal Limited (BNL) is the only bottler of Coca-Cola products in Nepal, and has two bottling plants; namely Kathmandu (Bottlers Nepal Limited BNL) and Bharatpur (Bottlers Nepal (Terai) Limited,) which is 160 km from Kathmandu, its capital.
Financial Services: In this sector the Khetan Group has 3 major companies under its umbrella. They are: i)Everest Life Insurance, ii)Laxmi Bank and iii)Prime Life Insurance
Trading and Investments Management: Under this umbrella the Khetan group invests in various small and emerging businesses associated with Mutual Trading and few other Financial and Mineral Base Companies both at Public and Private level. Additionally the Khetan group also owned stake in the Himalayan & Prime Group of Companies and in Nepal Bank.
In addition to the broad sector the Khetan group is also involved in industries such as bottling and filling of LPG, Drilling and boring deep tube wells for irrigation, Consultancy & representation in the field of Telecommunication, Power, Transmission Line, Hydroelectricity, Construction, etc and real estate.
Since Khetan Group with the gamut of all these businesses is already the leading private sector company recognized amongst the highest contributor to the exchequer, their further plan to strengthen our image and financial position. As per Mr. R. K. Khetan, chairman of the Khetan Group, they aspire to be the best South Asian Multinational originating from Nepal.
PRESENT CORPORATE STRUCTURE
The corporate structure of Khetan Group is depicted as follows:
Figure 1: Corporate Structure of Khetan Group
The Khetan Group believes in the philosophy that business should be run professionally and delegation of power and authority should be given to respective staff at respective level. The CEO or Director of each company has total authority to make the decisions on behalf of the company. The CEO alike in any professional business setup would be responsible to the BOD. However, the chain of command is followed under the supervision and policy decision by the board and in some cases to avoid unnecessary delay management committee or thematic committee work to resolve such issues. All companies have its own management, identity, investment and product nature and are individual profit centers. They are not mixed up with each other to avoid conflict of interest and cross investment.
EVOLUTION OF KHETAN GROUP
The evolution of the Khetan Group started around 1875, when the then Rana regime imported some merchants from Rajasthan and Bihar like Agrawals and Rauniyars respectively. Khetan Group originates from M/S Kisun Ram Purna Mal which initially started with importing fabrics and other essential commodities from India in 1936. Later on it expanded imports from other parts of Asia such as China and Burma. Subsequently:
? It diversified into export of Jute and Lentils in early 1970s.
? In the mid-1970s it started the company Bottlers Nepal Limited. BNL became the only bottlers for Coca-Cola in the entire country.
? In 1989 it established Gorkha Brewery which would go on to become the largest Brewery in Nepal.
? In 1993 in a joint venture with Habib Bank of Pakistan and other Nepalese business groups it started the Himalayan Bank in Nepal. Today the Himalayan bank is recognized as one of the top 500 banks in Asia.
? In 1994 it started the Everest Insurance Company one of the leading public insurance companies in Nepal.
? In 2000 the Khetan Group further diversified its portfolio by entering into the snacks food industry by launching the Himalayan Snax & Noodles company in a joint venture with Thai Presidents Foods PLC.
? In April 2002 the Group set up its second banking company Laxmi bank. This bank was primarily for promoter s holdings.
? In June 2007 the group initiated the formation of Prime Life Insurance Company Limited.
? Apart from these companies the Khetan group has also ventured into real estate, bottling and distribution of LPG, telecommunication etc.
? The group has made numerous contributions towards social development of Nepal.
OBJECTIVES & METHODOLOGY
Analysis of Khetan group gave our team the unique perspective to look at a large conglomerate having a diverse portfolio. We began our project with looking at the organization structure (describe in figure 1 and figure 2) and assessing the strengths and weaknesses of the group (Refer Appendix A for the SWOT analysis of Khetan Group). Subsequently we delved into assessing the portfolio management strategies of the group and assessed how the company has gone about building up its current portfolio of companies. Our objectives was to find out the strengths of the portfolio and also assess the growth share matrix of the portfolio in order to understand the Stars (High growth, high share), the Cash Cows (Low growth, high share), the Dogs (Low growth, low share) and the Question Marks (High growth, low share) based on the performance of the companies under the portfolio. Our objective is to recommend how to optimize the Khetan group s portfolio based on the growth share matrix. We also assessed Khetan group s methodology of going for new acquisition and business expansions. Lastly, we analyzed the possible synergy opportunities to optimally use the company s resources under the portfolio for achieving cost benefits and bolstering the overall performance of the group.
DETAIL PORTFOLIO ANALYSIS
Financial Analysis: Growth rate, Margin & Market share
Important financial data of Khetan Group (KG) is summarized in the table below.
Name Industry Age (years) % Revenue % Profit Market
share (%) Margin
Growth rate (%)
Ltd. (BNL) Food & Beverage 31 9 1.19 64 38 26
Company Ltd. (EIC) Insurance 16 4 2.12 10.22 38 17
Ltd. (LBL) Banking 8 10 10.92 2.89 35 28
Ltd. (HBL) Banking 17 21 43.51 6.24 60 28
Himalayan Snax & Noodles
Pvt. Ltd. (HSNL) Food & Beverage 10 12 3.03 33 19 8
Prime Life Insurance
Co. Ltd. (PLIC) Insurance 3 3 3.23 4 75 32
Pvt. Ltd. (GB) Food & Beverage 21 38 35.98 70.58 32 21
Pvt. Ltd. (HP) Energy 15 3 0.02 5 6 15
The graph below shows the financial data, with margin as bubble size.
Nepal officially the Federal Democratic Republic of Nepal, is a Landlocked country in South Asia and, as of 2010, the world s most recent nation to become a republic. It is bordered by People s Republic of China on the North, and by India to the south east and west. Nepal has experienced dramatic political changes in the past few decades. Governments in Nepal have tended to be highly unstable as a result of which no government has survived for more than two years for the last two decades. A movement in April 2006 brought about a change in the nation's governance by which an interim constitution was formed with the King giving up power, and an interim House of Representatives was formed with Maoist members. In August, 2008, Maoist leader Prachanda was elected Prime Minister of Nepal, the first since the country's transition from a monarchy to a republic. On May 4, 2009, Mr. Pushpa Kamal Dahal resigned over on-going conflicts over sacking of the Army chief.
The Khetan group began its business from 1936 and experienced large changes and challenges in political environment. However, it has strived to maintain good relations with the government to ensure that the political instability of Nepal does not adversely affect Khetan Groups business. Chairman of Khetan Group, Mr. Rajendra Khetan is a member of the Constituent Assembly and has many ties with other government associations. Political changes could give the domestic companies big influence. For example, different laws and rules about tax, tariff and labor according to different government entities make the company adapt accordingly. The political changes put a large-scale impact on the investment strategies and so on. One of the major problems of constant political changes is the lack of consistent policy making. This has a direct bearing on the businesses as it makes it very hard for them to make long term strategies. According to Mr. Khetan, this is the major hindrance to the growth of the company. Khetan Group is active in setting up association to lobby with the government.
Nepal's gross domestic product GDP for the year 2008 was estimated at over US$12 billion, making it the world s 115th-largest economy. In spite of having a workforce of 10 million, Nepal suffers from acute shortage of skilled resources. Its long-standing economic agreement underpins a close relationship with India. It also has a pegged exchange rate with the Indian Rupee which has its own set of impact on the economy. The economy is extremely dependant on foreign aid. It receives aid from India, Japan, the United Kingdom, the United States, the European Union, China, Switzerland, and Scandinavian countries.
The economy is still very small and lacks competitiveness. Poverty is acute; per-capita income is less than US$470.Purchasing power of the local populace still very low. Lack of purchasing power has a major impact on the business environment in Nepal and this causes most businesses to compete on cost. It is very difficult for businesses to focus on the quality aspects of the product as it is simply too expensive to do so. This has led to fierce price wars in many industries. This has also been identified as one of the main constraints to the growth of the group.
The country has been suffering from high levels of illiteracy. Net primary enrolment rate was 74% in 2005. It now is about 90%. So it s noticeable that the country s education level is improving. More efforts are being made to accelerate the country s talent-manufacturing machine - the education system. However, it s still a problem that in Nepal it s difficult to retain the talent since overseas jobs are more attractive with higher salary, other benefits package, career developing space and living environment. Khetan Group high reputation and good HR practices allows it to pick the cream of the limited talent pool. Its businesses are one of the few in Nepal that is able to recruit from the good business school in Nepal.
There is a huge amount of social unrest in the country due to very high levels of unemployment. Added to the unemployment problem is that very high level of politicization of labor groups in the county. This has had an extremely adverse impact on the business environment of Nepal. In most businesses (particularly in the big ones), the workers have organized into unions which belong to different political parties. Many times, the actions of the unions are not particularly beneficial to the long term well being of the company. This situation is even more acute in the manufacturing sector. Khetan Group has major manufacturing businesses. However, Khetan Group is one group which has managed to maintain good industrial relations. They have focused on industry where the problems with labor unionization are the least. Companies that have manufacturing units tend to have the low end labor that are highly politicized (especially by the Maoist unions). In service oriented businesses, companies are more guarded against this. This is one of the reasons Khetan group had chosen to diversify into the services sector.
As an impact of globalization, Nepal has been exposed to more and more advanced technologies in recent times. Many domestic companies have come up with new technologies, and some SME companies are also trying to import international technologies and transfer them locally.
Khetan group s primary businesses are in food, brewery, bottling, petrochemical, insurance and banking services. The company prides in being technologically superior to all its domestic competition. This stands out as one of the most significant competitive advantage for the Khetan Group. The group has also been keeping a close eye on new technological advancements as possible avenues of business expansion. Some sectors such as telecommunication and energy are showing signs of growth. However, the overall level of technological development remains very low as compared with the rest of the world. It is also notable that although a few major cities have very good internet penetration rates, the majority of the country is completely unaware of this new technology. This has meant that businesses in Nepal are still not able to leverage the power of the Internet to reach more number of people and thus expand their reach. Businesses have to still rely on traditional supply chains.
Khetan group operates in three different sectors, industrial, financial services and trading and investment managements. The current corporate structure is horizontal with directors and CEO of individual corporates reporting to the Chairman of the board, Mr Rajendra K. Khetan.
Many of the businesses in the portfolio are already market leaders. The group has prudent financial policies and uses very low debts to finance its capital structure. As the group is also known to attract and retain the best manpower in the country. Many of its businesses are run by the best qualified people in the country. The Khetan Group believes in the philosophy that individual SBU s CEO or director should a high level of autonomy to run the business professionally independently. In our interactions with the Khetan Group Chairman, he mentioned that, in order to give the SBU enough responsiveness, all companies have their own brand, management team, identity, and financial investment.
Like many other Asian business conglomerates, the Khetan Group typically target business ventures which demonstrate prospects of profitability. Although the group s three sectors are quite unrelated, we noticed that most of the businesses are doing quite well in terms of the market share and profitability.
Here we put the Khetan group business Matrix graph. We describe the relative competitive position by market share in X-axis and the Business Grow rate in Y-axis. We found that most of the KG s businesses lie in Cow and Question marks.
Star: BNL is the only one Star in Khetan Group s portfolio. A star operates in a high growth market and needs large quantity of cash to sustain the high market share. BNL is the only bottler of Coca-cola products in Nepal. Khetan Group has been in this business for 15 years. Now the group holds 22.5% stake and enjoys high profit margin in this business.
Cow: These businesses have large market share, but are in industries with lower growth rates suggesting that they operate in relatively mature industries. The cows in Khetan Group are Gorkha Brewery and HSNL. Gorkha Brewery has very high market share and is also very profitable. However, HSNL does not have high profit margin, one reason of which could be the very high marketing expenses in this business. The company still believes that noodles consumption per capita in Nepal is very high, which provides good prospects in this sector. They hope to push the noodles brand to attain a greater market share and move to the top position in the sector.
Question marks: Question marks in Khetan Group are PLIC, LBL and HBL. PLIC is a life insurance company and HBL and LBL are in the banking sector. As Khetan group mentioned, decades ago, Nepalese businesses could not imagine entering the service sector because of the closed economy. However, certain families explored this service industry in Nepal. Among four families, Khetan Group happened to start HBL which was the first private sector company. This led to the group entering into other service industries like non-life insurance, airline (which was closed later on).
Dog: The Dog in Khetan Group is HP (Himalayan Petrochemicals). It is in a relatively low growth market and also has relatively low market share. The other company EIC is in the insurance industry. EIC probably is not exactly a dog because if we define the parameters a little differently, it may very well end up in the cow category. It is one of the older companies in the portfolio and has very good profit margins.
Comment on Overall Strategy
The Khetan group believes all their businesses are important to them. In fact, all their companies and brand today are amongst the market leaders except commercial banking that they envision elevating to that position in the next couple of years. The entry criteria to new business by the group are to optimize return and minimize the investment risk.
There are always two phases of how strategic plans are developed at Khetan Group. At the first stage, the group with other potential investor discuss on details regarding investment decision and future plans for any given business or any new business venture. And in the second phase, the businesses within the group (SBU) then set their own targets and annual plans, which are reviewed on a timely basis. The executive Board would review the final plan made by respective SBU and approve if required.
We could conclude that so far this family business group is running successfully with their current strategy. However, we still find some points that could be improved with our recommendations at below.
The recommendations for the Khetan Group fall under two categories. The first one falls under synergies and the second one falls under portfolio rebalancing.
We certainly believe that the corporate office for the Khetan group needs to be structured a little more. There needs to be some functions that need to be housed in the corporate office. Basically, the corporate office needs to identify the functions that can be centralized without hampering the autonomy of the individual businesses too much.
1. Media buying: The first thing that can be centralized is the media buying function. The group owns businesses in the FMCG sector and is known to have huge advertisement expenditures. The media buying function can be set up at the corporate office and this can be used as a shared resource by all companies within the group. Buying media space as one group will certainly give them substantial discounts with the media companies. We however do not recommend that they centralize functions which have anything to do with the marketing messages. We think that doing this will negatively hamper the autonomy of the businesses. While it would be nice to have all companies working with one Media Company, it could also be a major constraint. The businesses should free to design their own marketing strategies as marketing is very specific to each business.
2. Legal Services: The second function that can be centralized is the legal services. There should be a fully fledged legal department within the corporate office. It is very costly for each of the businesses to have its own set legal departments. Since much of the legal work is also very tedious and cumbersome, this could divert management attention in the business units. The legal department needs to be a shared resource centre for all the businesses to use. As the legal department becomes more mature, it could even be a source of competitive advantage as it will become experts at handling legal matters of many different kinds of companies.
3. Audit Services: The third function that can be centralized is auditing services. This function needs to be centralized for two reasons. The first reason being that the group as a whole can negotiate very good auditing fees from the auditors. The second reason being that it will give the group more control over what is being put out to the public. For a group like the Khetan group, it is very important that they guard against any accounting malpractices which could lead to their corporate image being tarnished.
4. Buying or purchase function: The fourth function that can be centralized is the buying function. A buying department can be set up in the corporate office which takes care of the buying needs for all the companies. The buying department will negotiate and buy anything that any of the companies need. This could range from direct materials and services to indirect materials and services. The central buying department can get very good deals on most of the purchases as they have more volumes. Furthermore, this department will have people who are specialists at this function. Over time, this department could be a source of competitive advantage for the group. In fact overtime, this could be a function that may be developed into a revenue centre.
5. HR function: Lack of human resources has been identified as one of the major factors that can limit growth for the group in the future. This makes it even more critical to have the HR function centralized at the corporate level. This does not mean that the individual SBUs will not be doing their own hiring. This only means that when they need to hire, they forward the requirements to the corporate headquarters which in turn will be responsible for organizing this entire activity. In a way, the business units will not need to waste too much time thinking about how to go about the entire process as hiring could be a very time consuming process. This will ensure that the business units focus on their business issues. On the other hand, this will also ensure that the corporate office gets better at hiring competent people. As the corporate center gets better, it can start to strategize about developing managers for the future by having people work in different business units. One of the major problems in Nepal is that it is very difficult to retain competent people as they leave for overseas opportunities. The Khetan group could evolve into an organization which gives attractive opportunities in terms of career development. The centralized HR function can be developed into a strategic competitive advantage in the long run.
6. General administration: Nepal as a country is going through huge political transformation which has resulted in the formation of militant trade unions and workers in the recent past. Many valuable business hours are spent on resolving complex labor disputes, especially in the manufacturing sector. The individual business units need to be helped in tackling these problems which in many cases are a result of much bigger political tussles. One of the many strengths of the Khetan group is its ties and connections with the various power-centres of the country. Administration of such problems can be taken up at the corporate level so that the managers at the business units can focus on improving the market share of their respective businesses.
7. Finance function: A CFO can be hired at the corporate level to coordinate all finance related activities for all the businesses. Each business will obviously have its own finance manager but the corporate level CFO will be more responsible for aligning the financial objectives with the overall corporate strategy. E.g. It might be decided at the corporate level that one of the businesses needs to be divested or liquidated. It will be the job of the corporate CFO to look into financial implications of such a decision.
Having talked about all the activities and functions that could be integrated at the Khetan group, we also feel that their current strategy of giving autonomy to all business units is a major part of the group s success. In a small economy like Nepal, it is not possible for a business group to grow to a significant size without pursuing businesses in unrelated areas. The current strategy allows the group to pursue any investment and integrate it easily with the group. Therefore, we feel that while the group strives towards extracting synergies, they should also be very sensitive about not tampering with the independence of the business units. They should strive for a structure where all the business units feel that the corporate office is there to help them and not control them.
The group should also look at creating an ideal portfolio of businesses. Below are two pictures. One is the ideal portfolio and the second one is the Khetan group portfolio.
Figure 3: BCG Matrix (Khetan Group Vs Ideal Portfolio)
The portfolio map looks very impressive indeed. In fact it looks pretty close to an ideal map. A few strategies to improve the map would be:
1. Star Strategy
a. There is only one star in the portfolio. The star in this portfolio is Bottlers Nepal. Typically a star operates in a high growth market and is cash neutral as it requires a lot of investments to keep or increase the market share. The group needs to be very careful to not take money out of Bottlers Nepal. It will generate a lot of cash but will need almost most of it to consolidate its market position. As the market matures and the growth rate for the market falls, if the star has managed to retain the high market share, it will turn into a cow which can be milked.
b. It is very notable that the group is short of stars. The group needs to work hard towards creating more stars. This can be done by acquiring firms in high growth markets or organically developing firms. KG identifies the education, energy and communications as markets that are high growth.
2. Cow strategy
a. These are the foundations on which the business grows. Typically, the cash cows will be in markets with low growth rates. The cows will have a very good market share and should have low costs. They should be generating cash for the entire group. The cash they generate is used to convert the questions marks to stars. Therefore, there is no point in having huge expenditures for the cows.
b. In KG s case, the cash cows are Gorkha Brewery and HSNL. GB is extremely profitable but HSNL is not. This is probably because the group is putting too much emphasis on marketing HSNL products. They should just concentrate on cutting costs at HSNL and milking the business as it already has a good enough market position.
3. Question marks strategy
a. The question marks for KG are PLIC, LBL and HBL. The question marks are typically cash absorbers. They are in high growth markets but they have weak competitive positions. As they operate in high growth markets, they face very high levels of competition.
b. Ideally the size of the question marks should be small enough (size of the bubbles in the diagram above) so that the company s resources are enough to turn them into stars. In KG s case, the size of HBL seems to be too large. KG has to make a decision to invest in around two of its question marks as it will be very difficult to pursue all of the question marks.
c. Apart from the strategy of investing in the two question marks (LBL and PLIC), the other strategy (in case of HBL) should be to divest. It is typically very costly to convert question marks into stars and it looks like HBL due to its sheer size could be very costly to transform into a star. The second best option in this case is to divest HBL and use the proceeds to fund the other question marks.
4. Dog Strategy
a. There is only one dog in the KG portfolio and that is HP. Because dogs operate in low growth markets and also have a weak competitive position, they are typically a big drain on the group resources. They generate cash but is usually not enough even for themselves. In very rare cases, dogs can be turned around by clever business segmentation and focused niche markets.
b. In the case of HP, it seems to be declining in profitability. The group needs to make a decision about it pretty soon. The two alternatives are
Find buyers for the business if possible and sell it. If not possible to do so then look at the second option listed here.
Stop any investment in the business and start to milk the business as much as possible. Take as much cash out of the business and let it die
Perform further market segmentation and try to reposition the business to the new segments. In a low growth market, there will typically be competitors with entrenched position. There will be some competitors who have a cow in the market. It will take a huge amount of resources to wrest market share away from such entrenched businesses.
Appendix A: Khetan Group