"Supply Chain is Breaking Down"

TV Ramaswamy, President and MD of Surya Tobacco Company (STC), is leaving Nepal soon on the completion of his term. In what can also be termed as an exit interview with New Business Age, the longtime CEO of the country’s highest tax-payer company, evaluates his own and his firm's performance over the period of his tenure before going back to his parent organization ITC Ltd. of India, which is the joint-venture partner in STC along with the British American Tobacco and Nepal's Soaltee Group. Excerpts:

How do you evaluate your term in Nepal?

I’ve spent nearly five years in Nepal and now at the end of the fifth year, I am thoroughly satisfied. We had our ups and downs in our business but we managed to retain our leadership position in this period and strengthen it further. However I still believe that there is still a lot of ground to be covered. There is a lot of potential for expansion in the market, for creative work, for strengthening the business and to diversify from our current portfolio of tobacco and cigarettes. So, there is lot of satisfaction as the company is in a stronger position today to look into future diversification.

Would you please elaborate a bit on the opportunities, threats and challenges?

In terms of opportunities, ours is a young company - only 15 years old. And Nepal has also opened up only recently. There are lots of geographical areas to cover and also a lot of rural population which can be covered in terms of products and services. These are huge opportunities.

In terms of challenges, the pressure on costs is mounting in terms of operations, labour etc. The duty increases on cigarettes has also put a strain on us. Therefore, we will have to look at various ways and means for managing our cost. We also have to look at challenges in terms of our competition, management morale, giving full time creative work to our people and looking after the needs of the society.

In terms of threats the biggest threat we see is that the supply chain from the factory to the final consumer is breaking down because of the current disturbances and we are losing some sales. There are two other threats - political instability and the lack of tourists which have ripple effects on employment, disposable income of consumers, ultimately on cigarette sales and the economy as a whole.

What were the innovations introduced in the business during your tenure?

We introduced an Integrated Enterprise Resource Planning System by computerizing all our information systems. All the operations of the company got integrated and this was the first time in a company in Nepal. We also take pride in the fact that we are the first company to have a VSAT connection between the factory and the head office. This has resulted in a lot of productivity improvement. The second innovative thing was a performance linked salary revision. Previously, the next year’s increment only was dependent on the previous year’s performance. But now in addition to the annual increment we have combined three years’ consecutive performance to arrive at the revised Terms and Conditions of a manager so that the person keeps a long-term perspective and performance improvement in mind. In this process we are able to reward the good performers and align the company’s compensation system with its results. And the third thing which we did was to overhaul a few of the systems in the factory to ensure that these remain flexible enough to make the product faster, cheaper and on time. In the area of product packaging, we introduced the ’10s hinge-lid’ packs in contrast to the currently available packages of 20 cigarettes. Though 10s packaging is not completely new for Nepal, we came up with the hinge-lid format. Surya Luxury Kings and Shikhar FTK are in this format now. This has helped the company in two ways: First, it improved the image of the brand as the product looked more trendy. Secondly it has helped us to improve the penetration level because of its convenience. In the area of communication, we introduced outdoor advertisements of very high quality. As you are aware we were the first to come out with branded shops, we were the first to come out with frontlit hoardings. We were the first to sponsor international tournaments of Golf and Karate. We also take pride in our calendar. It has become a sought-after item because of its elegance and convenience. This year we depicted a relatively lesser known but a beautiful part of Nepal - Lo Monthang - through our calendar. There are other areas of improvement too. In the factory we have recruited a lot of new engineers to make sure that the technical competency is at a high level. One more thing which we have been doing consciously over the last five years is to gradually induct people from Nepal in various important positions. Currently, some of the key posts which were hitherto held by people from outside Nepal are now held by people from Nepal. And this experiment has been very rewarding.

How do you evaluate the results of these innovations?

The 10 HL has been a run away success. We have had very good results. As to the manager’s terms and conditions, they are happy and motivated. There is a great sense of professionalism and the urge to perform for the long term gains of the individual and the company is evident. The innovations in the factory have improved the performance a great deal. With the computerised information system, we have achieved a higher level of efficiency this year, and we plan to reap further benefits from it next year.

How has been the experience of STC in tobacco farming and exports?

In tobacco farming we started in a very small way ten years ago. The objective was to make sure that some of our tobacco comes from Nepal. There were several shortcomings that we had to overcome. Farmers in Simra and Bara were not used to tobacco farming. Secondly, we have very short sunlight hours at the time of tobacco growth. As a result the photosynthesis is not optimised and this results in poor quality of tobacco. If we plan to plant our tobacco earlier, it interferes with the paddy crop. We are trying to optimise the date of plantation. We do not grow such varieties of tobacco in Nepal that require very tender care. Instead of the fluecured variety we grow only the aircured variety in Nepal. Fluecured variety also requires burning wood fuel, which is environmentally not friendly. And there are about 2600 farmers involved. Now we grow about 700 tones of tobacco every year. These are mostly small farmers and their quality of life has improved over the years. Two years ago we were able to export about 200 tones of tobacco to India, and we hope to maintain this export trend. But it is a very tough market. The costs in Nepal are almost at par with those in India. So we do not get any extra benefit by selling tobacco to India. Our yield is about 1300 to 1500 kg per hectare. But if it can go up to 2000 kg per hectare, the cost will come down. Then the farmer will have adequate money to invest in fertilizers and engage in better agricultural practices. We can improve the quality, reduce the cost per kg and probably gain more market. Tobacco for your information is the highest remunerative crop for farmers in Nepal.

Your company was also in radish seeds exports?

Yes, we went into the vegetable seed business - Onions and Radish - thinking that it would add to our existing strength of being in the agribusiness. We have exported radish seed and onion seeds regularly to Bangladesh.

How has been the experience?

It was good, but now there are more players, so it is very risky now. Prices fluctuate in Bangladesh and the buyers do not give committed orders; instead they just give an indication. This is not a happy situation. In the domestic market, the farmers are not willing to pay a price for high quality. The concept of branded seeds has not yet come to Nepal. So, we are thinking of curtailing the seed business.

How is your comment on the gradual decline in the tobacco production in Nepal as shown by the official government statistics?

Actually, in the production of tobacco by farmers in and around Simra and Nawalparasi, there is no reduction.

STC claims to be the highest contributor to the state revenue. How do you substantiate it?

Six per cent of the government revenue comes from the Cigarette Industry i.e. from excise, VAT, Smoking and Liquor fees, the customs duties and income tax. We have 65% market share and therefore we account for 4% of the His Majesty’s Government of Nepal’s revenue.

What are your comments on the provisions of the current fiscal year’s budget regarding tobacco industry?

Tobacco, and especially cigarettes is a highly taxed commodity. Our view to the Government has always been that if we have a moderate increase in duty, or even no increase in duty, the collection could be better. Last year, the duty did not go up much. Therefore, the market expanded. People were able to upgrade from plain cigarette to regular size filter and king size filter cigarette. Therefore, the government was able to collect 15% more duty than the previous year. As I had mentioned earlier 6% of the governments revenue comes from cigarettes. Hence this increased collection was good for the government. And this year too, we represented to the government stating that "if we keep the duty moderate, we may, if everything else remains the same, be able to collect more revenue". But unfortunately our representation was not heard. The government has increased the duty by nearly 9%. We feel that the collection of duty in the coming year will not be as much as it was last year as the market will shrink.

How about the higher increase in the plain segment than in filter segment?

The base of the duty on king size cigarette is already high. The increase of 6.7% in it seems small in percentage terms. But the absolute amount of increase is the highest in the king size segment and the lowest in the Plain segment.

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