Corporate Governance @ Cut from a Different Cloth
Sabu Jacob certainly has a few
anxious months ahead of him(October 11, 2020). But
it’s not because there is a global pandemic wreaking havoc across businesses
small and big and jeopardising economies worldwide. He runs what he describes
as a recession-immune business, that of kids apparel. His company, Kitex
Garments, a Kerala-based exporter of kids wear, is the world’s second-largest
manufacturer of apparel and sells to some of the world’s biggest retailers
including Amazon, Walmart, Gerber, Mothercare, Carters, The Children’s Place
and Target, among others. With one centralised manufacturing facility, Kitex
export a million units of kids wear a day to over 28,000 stores in the US. Our
nearest competitor is a Chinese company that has over 15 manufacturing
facilities.” Today, almost 99 percent of the company’s products are sold to the
US market, with just 1 percent going to European markets.
Kitex Garments is part of the larger
Anna-Kitex Group, run by Sabu and his older brother Bobby. While Sabu runs the
export-oriented infant wear business, Bobby’s diversified business includes
manufacturing aluminium ingots, kitchen utensils, spices, and school bags. The
group has an annual turnover of ₹1,500 crore, of which Kitex garments rakes in
₹1,050 crore, while Bobby’s business has a turnover of ₹500 crore. Yet, Sabu
has been having some sleepless nights of late. That’s because, as Kerala gears
up for the local civic polls in October, a bellwether for the Assembly
elections in 2021, a political party firmly backed by the 54-year-old and his
brother will contest in five panchayats, with 74 candidates. Their opponents
cut across established political parties who are likely to put up a united
fight.In 2015, 17 of the 19 candidates backed by them won against a unified
opposition in the panchayat elections. That was perhaps the first time in
India’s electoral history that a company openly backed candidates. Since then,
the Anna-Kitex Group has won acclaim for helping build houses, roads, canals,
promoting organic farming, and a supermarket where products are sold at 80
percent discount for the 36,000 residents of their village.
In 2013, the group had formed a charity arm, Twenty20 Kizhakkambalam, as an NGO
registered under the Travancore Cochin Literary Scientific and Charitable
Societies Registration Act, 1955. The Jacobs had used their personal funds, and
money from their companies’ Corporate Social Responsibility funds to help in
the functioning of the NGO. In 2015, Twenty20 Kizhakkambalam backed independent
candidates in the panchayat elections.
From aluminium scrap to school bags
Much of the group’s success began in the late 1970s, when MC Jacob, a public
works contractor who had dabbled in numerous businesses including soap and
trading in areca nuts, forayed into manufacturing aluminium and related
products. In 1968, after mortgaging some properties, Jacob started producing
aluminium, using scrap from homes and the INDAL factory. Over the next four
years, Jacob, who started with 10 employees, built up a huge stock of
aluminium, so that when Tamil Nadu and Karnataka were hit hard by power
outages, leading to an aluminium shortage in Kerala, he had enough inventory.
“Until then, a kilogram of aluminium was being sold at ₹6 per kg, which shot to
₹24,” says Sabu. Over the next few years, the group began focussing on
aluminium utensils and found a steady market in Kerala. The company was named
after Annam, MC Jacob’s mother, while its cookware range Chaksons was named
after his father, Chacko.
By the late 1970s the group forayed into textiles and spices, with
Kizhakkambalam Textiles (shortened to Kitex later) and Saras curry powders.
Kitex focussed on making bedsheets and lungis. “The idea was to give permanent
employment to people,” Sabu says. “My father had grown up seeing unemployment,
and he wanted to ensure he provided jobs.”
Going Global
In 1995, Sabu decided to set up Kitex Garments, focussed on infant wear. “We
were the first company to set up a dormitory with 2,000 beds in India and we
made it centrally air-conditioned,” he says. “Our father had ensured that we
worked our way up from the bottom when it came to the business. I have cleaned
toilets, worked at the factory level across functions before being brought to
the top. So, the welfare of our workers has always been paramount.”
Jacob, who passed away in 2011, split his family business between his sons.
Bobby handles Anna Aluminium, Saras, and Kitex Ltd, which makes shirts,
trousers and school bags, among other things, while Sabu runs Kitex Garments.
“There are a few things our father always told us,” Sabu says. “That we
shouldn’t go into the liquor or finance business. He also told us not to employ
relatives or close friends, and not to get into a partnership with anybody. He
ensured that the business was divided between us.”
Today, the brothers stay under the same roof with their mother, wives and
children. “We eat together and sleep under the same roof,” Sabu says. “And we
don’t talk about each other’s business unless we need specific advice. Our
father had always said that if the business wasn’t divided, then it could make
us enemies.” Now, Sabu has set a growth target of ₹2,000 crore in revenue by
2025, while Bobby is looking to target the European market for infant wear
apart from ramping up his spices and aluminium business.
“Kids wear is a relatively more stable segment, and India is reasonably
competitive internationally,” says Devangshu Dutta, CEO of consulting firm
Third Eyesight. “However, a subdued market affecting the financial health of a
specific customer account remains a risk for any business.”
Kitex
Garments’ announcement to move out its expansion plan from Kerala to
investor-friendly Telangana for Rs 1,000 crore project
in Kakatiya Mega Textile Park(13th July 2021), made, Kitex Chairman and Managing Director Sabu
Jacob richer by Rs 222 crore in the last seven days as he owns 55% in the
BSE-listed company. Since the controversy broke out between the Kerala
government and Kitex Group, the company’s stock price has increased from Rs
108.9 a piece to Rs 168.65 on Monday, an astounding rise of 55 per cent in a
matter of just five trading sessions.
The total value of Kitex touched Rs 1,121.52 crore, an increase of Rs
408.32 crore from last Tuesday. The spike in stock price of Kitex, which is the
world’s third-largest infant garment maker, is surprising given that the
company’s net profit has been coming down. For the quarter ended March
2021, its profit after tax plunged by 53.06% to Rs 8.27 crore from Rs 17.62
crore during the same quarter the previous year. Total sales had also declined
by 23.65% to Rs 111.70 crore in the quarter ended March 2021.
The
announcement that Kitex was moving its Rs 3,500-crore worth project from Kerala
followed a series of inspections and raids on its garment
manufacturing/processing units in the state by various government departments.
In the last six months, there have been 11 raids by various departments on the
company.
Prior
to his departure for meeting the Telangana government, Kitex Garments MD Sabu
M. Jacob had stated that the company was being hounded out of Kerala. "We
have already spent Rs 200 crore for the proposed project, which would have
given employment to 30,000 people, apart from developing 600 small-scale
ventures in the sector,” he said.
Kitex
Garments had a turnover of Rs 783.57 crore in 2019-20 before Covid-19 hit the
market. Its net profit had touched a high of Rs 108.67 crore. However, the
company's yearly sales fell by 60 per cent and profits by 80 per cent in the
last financial year due to COVID-induced pains. Kitex Garments posted Rs 111.70
crore in Q4 sales in the fourth quarter of 2020-21 compared to Rs 120.9 crore
reported in the previous quarter and Rs 146.32 crore in the year-ago quarter.
The net profit was at Rs 9.72 core against Rs 16.8 crore reported in the
previous quarter and Rs 19.22 crore posted in the year-ago period.
Notwithstanding
the huge loss in terms of jobs when the state's unemployment is already at a
high of 40.5 per cent compared to a national average of 21 per cent, the Kitex
Group's decision to look outside its home state is a significant setback for
Kerala, both in terms of economics and optics. One of the consequences of this
move is the erosion of the state's tax base and its subsequent impact on
revenue mobilisation. Besides the estimated loss of 35,000 direct employment
from the proposed projects, the withdrawal of such a large investment from the
state would send a wrong signal to the investor class and may trigger a domino
effect.
As
of January, exports from Kerala during the last financial year stood at $3.36
billion, with marine products and spices forming a major part of the exports.
In 2018-19, Kerala accounted for 2.9 per cent of India’s total merchandise
exports, which is far below its share of 4 per cent in India’s total GDP.
However, there has been a steady growth in exports from the state. According to
an EXIM Bank report, the state’s merchandise exports stood at $9.8 billion in
2018-19, registering a CAGR of 17.86 per cent from 2013-14 to 2018-19, which is
higher than the CAGR of 0.97 per cent in India’s merchandise exports during the
same period.
At
the same time, the report suggests that Kerala has much room to diversify into
high value-added products, including the textile sector. In 2018-19, Kerala's
$133.40 million worth export of readymade garments of cotton comprised only
1.36 per cent of the state's total exports, and 1.53 per cent of India's
exports. The state left an exports-oriented company dejected even as it sits on
an untapped merchandise export potential of nearly $ 6.7 billion.
Questions
1. Define
a. Business
ethics
b. Corporate
governance
c. Stakeholder
2. List
the Stakeholdes of Kitex group
3. In
which relationships with stakeholders of Kitex , do you find violation of
Business ethics?
4. Is
enquiry by any Govt Dept a concern in
Corporate governance or Business ethics?Elaborate.
5. Do
you justify the move of Sabu M Jacob, MD of Kitex Group being vocal about his
decision to move investments out of homestate? Substantiate your answer.
References
https://www.khaleejtimes.com/international/india/yusuffali-tops-hurun-list-of-richest-keralite
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