Make in India vs having made it in India: Skanray’s peculiar struggle

Earlier this month, Niti Aayog, the Indian government’s think tank, held a high-level meeting, with the secretaries of all stakeholder ministries—including the Ministry of Health—present. The agenda was simple. Boost the local manufacturing of medical devices—currently a $10 billion market.

India’s medical devices market is the fourth largest in Asia—after Japan, China and South Korea—and is projected to grow to $50 billion by 2025, as per industry estimates. However, while there are over 6,000 types of medical devices available worldwide, barely one-sixth of them are made in India. 

You see, in India, imports rule. About 80-90% of the medical electronics/equipment in the country are imported, according to the industry body Association of Indian Medical Industry (AiMED). 

So import-dependent is the sector that AiMED submitted a seven-point agenda to the Pharmaceuticals Secretary this month in a bid to ‘revive’ it. Among other points, AiMED suggested increasing the import duty to incentivise domestic manufacturing.

One would think this pro-indigenous manufacturing move would be celebrated by the likes of Vishwaprasad Alva, founder of Indian medical device company Skanray Technologies Pvt Ltd. After all, Skanray launched commercially in 2011 with the aim of manufacturing devices such as X-ray machines, ventilators and patient monitors from the ground up in India. Years before “Make In India” became fashionable.

But now, eight years later, the Mysuru-based company is yet to fulfil its potential. The rampant imports have hamstrung Skanray, and Alwa does not mince words when asked about the AiMED’s push for local manufacturing. “I can’t sit with these so-called Indian manufacturers with outdated technology and push outdated tech into the market. But I also don’t want to be seen as somebody who is hostile to Make in India. So it’s a very tricky situation,” he says.

Skanray’s financials over the years do not make for pretty reading. It has been profitable in only two years, and its revenue growth has been erratic—spiking only when Skanray made acquisitions.

The biggest jump came in the year ended March 2014, shortly after the company made multiple acquisitions, most notably that of engineering company Larsen & Toubro’s (L&T) medical technology business in the end of 2012. Skanray’s revenue surged to Rs 115 crore ($16 million) in the year ended March 2014 from a meagre Rs 0.49 crore ($68,200) three years prior. It was a statement of intent. Skanray had acquired a business with Rs 145 crore ($20 million) in revenue—20X its own turnover. “But in terms of valuation, we were 1.5 times higher,” Alva says, looking back.

M&A

In 2016, Skanray acquired Mectron India and Cardia International in Netherlands. Cardia’s acquisition added to their portfolio stressSKANcardi that provided vitals like pacemaker pulse and defibrillation protection. In 2017, it had joint ventures in the US, Mexico and Brazil, distribution agreements in Southeast Asia, Egypt, the Middle East and North Africa region. It also launched a European R&D unit in Madrid, Spain

Today, with 750 employees, the company has more than 100,000 installations of its suite of devices across the world. Yet, its revenue has hardly kept pace. It ended March 2018 with revenue of Rs 109 crore ($15 million), an actual fall of 5.2% since 2014. That, Alva says, was not due to a lack of orders, but rather the challenges in raising debt capital to help fulfil those orders.

But large Indian medical device makers beg to differ.

Sanjeev Marjara, director of R&D at Allengers Medical Systems Ltd, the largest Indian medical device maker by revenue, says, “We don’t see any competition from Skanray anymore in the market. Operationally, they aren’t doing good. Revenue is one indicator, they manage to sell products by lowering prices. But if we talk about profits, there are hardly any.”

The 12-year-old company, despite its reliance on ground-up manufacturing in India, has so far not been able to serve as an example for other smaller companies to follow. With the government’s “Make in India” clarion call, companies like Skanray come under the spotlight for their contribution.

There’s pressure mounting on Skanray—from other players and from the market itself. Intent is one thing, results, another.

Acquire and grow

 Skanray’s choice to tread the make-it-yourself path has seen it acquire businesses over the years to complement and grow its suite of products. The first such, as mentioned above, was that of L&T’s medical device business. But Skanray’s insistence on domestic manufacturing cost it Rs 30-40 crore ($4 million-5.6 million) in revenue the day the acquisition closed, after hiving off 30% of the L&T product portfolio that was made abroad. 

In 2013, Skanray went on to acquire Coimbatore-based Pricol Medical for an undisclosed amount. Pricol, a small company with Rs 4 crore ($557,000) in revenue, according to Tofler, added ventilators to Skanray’s portfolio. This gave the company a “complete intensive care unit (ICU) package” for hospitals. It also acquired Bologna-based CEI, which manufactures X-ray tubes. 

“This acquisition saved us the development time of having to design everything from scratch,” Alva says. Skanray’s X-Ray machines, Alva claims, have one of the world’s lowest radiation leakage levels. 

However, Skanray’s self-sufficiency and standards haven’t translated into stable, profitable growth. Its dealmaking has sparked revenue jumps, but it has posted a profit only in 2015 and 2016 on a standalone basis, according to Tofler. The company posted a loss of Rs 25.38 crore ($3.5 million) in the year ended March 2018, clocking revenue of Rs 108.75 crore ($15 million). 

Alva says Skanray ended March 2019 with Rs 220 crore ($31 million) in revenue. While that indicates just over 100% growth from the previous fiscal, it is less than that of rivals Allengers and Trivitron, which claim to have posted revenues of Rs 350 crore ($49 million) and Rs 540 crore ($75.4 million), respectively. 

Yet, Alva is unfazed. “Every year, we do a lot of adventure. We invest in a lot of technologies. We don’t wait to accumulate cash. Only in the last two years, we couldn’t acquire the companies we planned because of a credit crunch. We’re looking at aggressive expansions. We’re not a startup of the conventional kind.”

Unconventional is right.

Its L&T acquisition is a prime example. At the time, Alva ignored the overtures of venture capitalists, including IDG Ventures, and chose to fund the deal with an investment from Arun Kumar. Kumar is the founder of Bengaluru-based public pharmaceutical company Strides Pharma and a prolific angel investor in his personal capacity. Today, Kumar, sources close to him say, is not quite happy with the way the Skanray investment has turned out for him.

“MNCs really don’t want to manufacture here. It’s a real challenge. Even if I were the head of GE, I would think twice before manufacturing here because supply chain is very tough. Making only for the Indian market is not very lucrative. We also survive because of OEM and exports”

Vishwaprasad Alva, Founder, Skanray

Those were the years when private equity and venture capital money was flowing into the industry and accelerating dealmaking. Fidelity backed Trivitron, went on to acquire a minority stake in Kiran Medical Systems. Opto Circuits acquired US-based Cardiac Science for $54.7 million, while Consure Medical, Forus Health and Perfint Healthcare all got funding.

Despite how it has widened its business, Skanray’s competition have the edge over the company, quite frankly because they’ve no qualms about importing in a sector where it’s cheaper to buy than to make.

Make in India, but how?

Skanray’s obsession with self-sufficiency could become its Achilles Heel. And Alva is keenly aware of the challenges.

“We’re predominantly R&D. Without knowing the challenges of R&D in the country, we spent a lot of money to set up. We’ve invested a lot of money on core technology. Our R&D team in Italy is complementing gaps of Indian R&D. MNCs really don’t want to manufacture here. It’s a real challenge,” he says. 

“Even if I were the head of GE I would think twice before manufacturing here because supply chain is very tough. I got 100 of my old colleagues from various companies. It requires endurance, supply chain, and a support system.”

Praveen Nagpal, COO of Bengaluru-based BPL Medical Technologies, agrees with Alva that the R&D framework in India needs improvement. “Tie-ups with universities and understanding what equipment should be planned by companies operating out of India helps,” he says. Nagpal also says India lacks the support system that a country like China has in terms of export incentives. 

There are other reasons as well for high imports. First, it is cheaper than what it used to be—by around 11%, according to AiMED and market peers. Second, most high-end equipment is not manufactured locally, leaving no choice but to import.

Allengers imports image intensifiers and X-ray tubes, while Skanray develops the two in-house. Yet “we are still making profits in it,” Marjara says. Still, he admits that the low prices—between Rs 2 lakh-7 lakh ($2,800-$9,700) per machine—that Skanray and others charge has made business tough. With revenue of Rs 262 crore ($36.6 million) in the year ended March 2018, Allengers holds 35-40% share of the Indian X-ray machine market.

Raising duties will not stymie imports, argues a senior executive of GE Healthcare. “If we were to have higher import duty, it will get passed on to the customer, and, in turn, the patient. Further increase will kill the industry. If 80% need is met through imports, increasing duty would hamper affordability,” the executive said on the condition of anonymity as they are not authorised to speak to the media.

Allengers sees things differently. The company, which imports components for its X-ray machines, argues that a higher import duty—such as the 20% proposed by Invest India on X-ray machines—would actually benefit it. “After two years, the import duty on the components will also be increased. So all those component manufacturers like those that make X-ray tubes will be forced to come to India,” Marjara says.

Chennai-based Trivitron holds the #2 spot, according to founder GSK Velu. “The market has been tough for every company. We were a trading company till 2010 and started manufacturing only in 2011-12,” he says, adding, 60% of Trivitron’s revenue comes from its international business. And it’s the African and the US markets that Velu is banking on to help Trivitron overtake Allengers.

Skanray and its peers may have different approaches, but they’re working in the same market, alongside the same government, and in that, they all have similar struggles. The biggest one being funds.

Bottleneck

For Skanray, working capital is always tight. “Banks don’t lend easily. The procedural delay with banks is very high. When you are a startup, collateral is always a problem. Banks have outdated business metrics for enhancing the limit, so it is not as easy as doing business in any other country,” he says.

According to Alva, India is the toughest place to do business. “While the Chinese get funds at 1.5%, the US at 2%, Europe at 2%, here banks give funds at 9% to 12%. Cost of PE funds are prohibitive,” he says. “When there is a sudden surge in orders, we can’t back it up.”

He says Skanray was always raising PE funds for inorganic growth, but it is now reliant on PE funds for organic growth as well. “We wanted to achieve organic growth through debts. Now it doesn’t seem to be working out. When I look back, I would be careful in choosing my debt and equity ratio. We should have done funding proportion and method differently,” he laments.

But the problem barely stops at banks. Since Skanray’s investors are small, it’s not able to raise the required funds, says Alva. The last time it raised funds was from Ascent Capital in 2013—an infusion of Rs 100 crore ($13.9 million). “We’ll probably go for Rs 1,000 crore ($139 million) this time,” Alva claims, without going into specifics about who Skanray is in talks with.

One day, Alva dreams, X-ray will contribute to 40-60% of the company’s revenue. “Opportunities are high, so someday X-ray may lead. At present, revenues coming from overseas and domestic markets are almost equal,” he says.

Other companies, albeit smaller than Skanray, which design, develop and manufacture their own medical devices such as Clarity Medical in Chandigarh and XcelLance Medical Technologies in Mumbai are mostly single-product companies. If Skanray’s growth (or the lack thereof) is anything to go by, especially in light of the Indian government’s Make in India initiative, it will augur well for these companies to tread carefully. Maybe even wait it out.

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