MANAGING FAILURES A LIFE EXPERIENCE

By Mohan Valrani

Senior Vice Chairman and Managing Director

Al Shirawi Group of Companies

Black Swan Event

These are events that come as a surprise and have a major

impact on a country, organization or an individual. It can be

positive or negative.

Al Shirawi Group faced crisis starting from 1980 almost year after year due to external

circumstances which affected the overall business. The events that impacted the

performance were:

The Causes of the Failure

1980 – Outbreak of Iraq-Iran War

The first bomb fell on our Construction site in Basra and we lost 10 of our important

employees. None of our 5000 odd employees in Iraq wanted to continue hence had to

be repatriated. A major blow to one of our largest Construction Project in Iraq.

1980- We lost our Chief of Construction for Iraq Projects, who suddenly died of heart

attack due to external pressures which seriously affected the morale of the employees

across the Group.

I received this information in New York. I was sitting in Sloane Kettering hospital for the

treatment of my uncle’s malignancy, who was also a shareholder.

1981 – Detaining of Al Shirawi Cargo Ships

6 Bulk Cargo Ships owned by the Group carrying bulk cement to

Basra were detained and could not discharge or leave, even after

33 years, they are still there with no solution in sight. A major

financial blow.

Banks stopped Al Shirawi Group’s Facilities

Due to near continuous crisis faced by the Group, facilities given

by 43 Banks to Al Shirawi Group worldwide were choked leaving

the top management with no choice but to review, rethink the

future course of actions .

KPMG’s report on Al Shirawi’s Financial status

“Because of the significance of the matters referred to above, we

are unable to form an opinion whether the consolidated financial

statements present fairly the financial position of the Group at

30th June 1986 and the results of its operations for the year then

ended in accordance with International Accounting Standards.”

KPMG’s report on the Al Shirawi Group’s financial position from

1986 to 1993.

Al Shirawi’s Equity wiped off

In the space of one financial year, the Al Shirawi Group went from

a positive equity of 52.6 Million Dirhams for the year ending March

1985 to a negative net worth of 71.12 Million Dirhams for the year

ending March 1986. Group had a loss of 50.7 Million Dirhams in

Saudi Arabia, 33.85 Million Dirhams in Iraq, 5 Million Dirhams in

West Africa apart from losses in the UAE.

1984 – Default of the Nigerian Government

The Nigerian government decided to refinance the uninsured trade

arrears by issuing promissory notes. Thus the uninsured trade

arrears worth $4.8 billion were refinanced by promissory notes

between 1984 and 1988 with a maturity period of 6 years and an

interest rate of LIBOR plus 1%. These payments against the

promissory notes were further rescheduled in 1988 for a further 22

years.

1986 – The Crash of the Oil prices

The Oil prices started falling and by 1985-86 fell from $ 23.29 to $

9.85 per barrel affecting all Construction projects of the

Government in which the Group had a major stake in UAE, Oman,

Saudi and Iraq.

1987 – The Saudi Arabian Crisis

The Group suffered major losses due to enormous

delay in payments for Projects secured by the Group.

5000 odd employees in Saudi had to be repatriated.

1990 – Iraq’s occupation of Kuwait

Yet another crisis of Iraq’s occupation of Kuwait

brought shock waves in the Gulf.

Limited Choices at hand

I being the Senior Vice Chairman and Managing Director of the Group and at the

helm of all affairs and fully responsible for the ultimate results was left with two

choices :

Being expatriate, just run away from crises and take the flight out and be free

 

As an experienced professional, to take up the challenge and steer the Group out

of this difficult situation.

I chose the second one even though I realized that it was a herculean task and will

take mammoth collective effort to achieve this but I was determined to take this

challenge.

Everyday, we had to face new challengers and fight a new battle, but our focus

was on winning the war.

Master plan of recovery

A master plan was drawn up with the help of a high

powered Task Force and step by step, brick by brick

actions were implemented to bring in a recovery plan

which ultimately brought in systems, financial

discipline and productivity across all the 26

Companies in the Group.

In Retrospect

•Looking back in retrospect from 1987 to 1997 the recovery was achieved year after

year and when we settled debts of all the 43 Banks by 1997, the Group had a

positive cash position. From 1997, major investments have been made.

•We have so far invested a total of Dh 3.00 billion in Fixed Assets and upgrading of

Plant and machinery, to become one of the largest Industrial Group in UAE in the

private Sector. We have had 6 million sq. ft. of land, and as per the Government

regulations we are allowed to construct 50% which is 3 million sq. ft. This has

already been done.

•In the last 18 months, we have additionally acquired 5 million sq. ft. with a plan to

invest another 2.0 billion dirhams in the next 5 years. Group Policy is not to indulge

in any low margin business, but to focus on high value addition.

Case Study

I am proud that our Group’s turnaround is a real

case study in a major Business School. “Al Shirawi

Group turnaround”, a Case Study was prepared by

my son Mr Navin Valrani when he pursued his MBA

from London Business School. He got A+ and

successfully completed his MBA with distinction.

2008 – Crisis

Our Experience of 1986 crisis helped us to take

proactive steps in the year 2006-2007 during the

peak of the boom.

MY LETTERS TO SHAREHOLDERS

Sl. No. Date Theme Remarks

1 05/06/2005REAL ESTATE DEVELOPMENT - THE COOLING OF THE SOUP, LIQUIDITY,

CRACKS CAN BE SEEN IN THE REAL ESTATE MARKET. BOOM IS UNSUSTAINABLE BEYOND THE CURRENT PIPELINE OF PROJECTS. THERE IS EARLY SIGN OF LIQUIDITY CRUNCH IN THE MARKET

2 01/01/2006 DUBAI STOCK AND PROPERTY MARKETS VIS-À-VIS GROUP PERFORMANCE

STOCK AND PROPERTY MARKETS ARE UNREASONABLY HIGH. BALOONING PRICESS OF THE MARKETS ARE UNHEALTHY, CORRECTION IS DUE.

3 22/06/2006 CHANCE FAVOURS THE PREPARED MIND LOCAL MARKETS, THREAT OF INFLATION AND CRACKS IN THE LOCAL MARKET

4 13/12/2006 HEALTH OF THE GROUP GREED IS BEGINNING TO GET A BAD NAME, ECONOMY IS OVERHEATING

5 15/07/2008 ECONOMY OVERHEATED AND WILL CORRECTIMMINENT COLLAPSE, MAJOR CORRECTION OVERDUE, SUPPLY IS MUCH HIGHER THAN DEMAND

MY LETTERS TO SHAREHOLDERS

Sl. No. Date Theme Remarks

6 03/12/2008 STRATEGY DURING RECESSION TIMEDELEVERAGING BOOKING LOSS IS BETTER THAN HOLDING STOCK UNNECESSARILY, REAL ECONOMY WILL FURTHER CORRECT

7 30/12/2008 DOWNSIZING SIZE MATTERS, REDUCE EXTERNAL DEPENDENCY, HEADCOUNT REDUCTIONS, COST REDUCTIONS

8 05/02/2009 FUNDING RISKS

REAL ESTATE MARKET WILL BE FLAT, LIQUIDITY WILL BE TIGHT. MANY COMPANIES WILL FACE DIFFICULTIES, INTEREST RATES WILL BE HIGH AND MANY COMPANIES WILL FACE BANKRUPTCY, PROPERTY AND LOCAL MARKET WILL REMAIN FLAT

9 14/02/2010 ALL SHAREHOLDERS

ECONOMY REACHED MORE OR LESS BOTTOM AND IT WILL BE FLAT. INCREASE MARGIN TAKE COMPETITIVE ADVANTAGE OF GROUP FUNDAMENTALS, BUT DON'T BE COMPLACENT. CONCENTRATE IN THE AREAS OF SALES AND RECEIVABLES AND EXPANSION.

Management Philosophy of Al Shirawi Group

FINANCIAL RATIOS

BENCHMARKACTUALS AS ON

30-06-2014

NET FIXED ASSETS SHOULD NOT EXCEED NETWORTH(Fixed Assets / Net worth)

1 : 1 0.81

TOTAL LEVERAGE(Total Liability / Net worth)

1 : 1 0.76

FINANCIAL GEARING(Financial debt / Net worth)

Less than or equal to 0.60 0.31

MANAGEMENT PHILOSOPHY OF AL SHIRAWI GROUP

1. Succession Plan implemented

2. Corporate Governance

3. Transparency – web based portals

4. Open door policy

5. Speed in Decision Making

6. Delegation of authority with responsibility

7. Strong Internal Audit

8. Checklist Culture

9. Competitive interest rates and low financial fees –

Cost of borrowing 1.15% p.a. without collateral

securities and personal guarantees

10. Management Information Systems – keep it simple

11. IT – Heavy investment in IT & retraining

12. Investing in Human Resources - 150 MBAs, 400

Engineers, 20 CAs and 20 CPAs

13. Staff turn over ratio less than 5% – Total employees

strength 8,500.

FUTURE

Our view on future investments in Dubai

Going forward, we have a vertical view as far as investments are

concerned. Do not forget that a strong balance sheet is very

important. Uncertainty and volatility is the nature of not only for

Dubai, but also the entire world.

DUBAI1. Infrastructure

2. Middle East base for rest, recreation and leisure activities

3. Middle East base for various operation of large number of

companies

4. Base for Rich and famous from GCC, India, Iran, Pakistan,

Afghanistan, CIS European Countries (Tax free heaven)

5. Base for rich GCC Nationals to settle and educate their children.

6. Dubai has no competition

7. Dubai is a city, not a country. It will not be able to accommodate

the world.

8. Knowledge based

9. Health care, Aviation

• My presentation has put all the blame on Black swan.

• Am I evading the responsibility?

• Who do you think has made maximum mistakes?

• Who do you think responsible for failures?

MISTAKES

• Heavily leveraged Balance Sheet

• Geographical diversification. We had offices and

businesses in Japan (Tokyo), Hong Kong, Singapore, Iran

(Tehran), UAE (Abu Dhabi, Dubai, Sharjah), Oman (Muscat

& Salalah), Iraq (Baghdad & Basra), Saudi Arabia

(Dammam, Riyadh, Jizan, Tabuk), London, Geneva, Nigeria

(Logos, Port Harcourt)

• Weak Management Information systems

• Manual Accounting,

• Weak Internal Audit

• If we would have had a strong balance sheet, we would have

been a better off and survived a crisis like what we did in

2009. We came out much stronger and better than before.

• Prosperity is sustained on the bedrock of values.

• Merit

• Learning mode

“Winners never quit andquitters never win”