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Cover Story

Does R&D Really Pay?

Issue Date - 03/02/2011
“R&D is our identity”
ONGC continues to do what it is best at – R&D. In fact, it now plans to take it to the next level. B&E catches up with its Energy centre head to know how

B&E: It is said that in order to create value, the investment on R&D needs to deliver a return that exceeds the company’s cost of capital and benefits its shareholders. Do you agree?
D. M. Kale (DMK): I completely agree with the statement. As far as ONGC is concerned, it firmly believes in the practice of investing in R&D. In fact, R&D is the basis, or to be appropriate, the identity of ONGC as our core business is research and exploration. We conduct a wide range of research activities, which includes seismic surveys, oil drilling, et al. And that’s the reason ONGC is running nine specialised research institutes which take care of the research and development work in oil & gas domain and its allied activities. In fact, in North Gujarat, ONGC is developing a new technology called ‘Insitue Combustion’ which is directed towards extracting and producing heavy oil by compressing the air underground and then extracting the oil so that the light components evaporate and heavy coke is left. This reduces the viscosity of oil and it flows out smoothly. This technology has been successfully used by very few oil & gas exploration firms in the world and ONGC is one of them. The new technology will also help the company in extracting oil and gas from heavy regions across the globe.

B&E: So, how much does ONGC invest in R&D activities?
DMK: As I have already mentioned that ONGC is all about R&D, so there is no defined upper limit for investments in R&D. Money is being spent to know about the nature of the product and the results too are overwhelming. In fact, our entire budget is dedicated to research and exploration.

B&E: Your core areas of research...
DMK: Our core areas of research include exploration technology and alternative energy resources. Further, ONGC’s new Energy Center is an initiative to cater to the future energy needs by developing new energy resources and technologies in the exploration of oil & gas. The new energy center is the biggest exclusive center for research in future technology in mass energy generation and sources. We have already begun with our research by exploring new energy resources like shale gas, underground coal gasification (UCG) and other new technologies. In fact, UCG is one big future technology which will covert unminable underground coal into usable source of energy. Apart from UCG, we are also developing and applying biotechnology in oil-field services for enhancing oil recovery.

B&E: Has R&D really helped ONGC in creating wealth for its shareholders?
DMK: ONGC in itself is a big success story in India Inc. At the time of its inception in 1958, the Government of India had invested Rs.3.43 billion in it. Today, for every 1 rupee invested in ONGC, it has given a return of more that Rs.1,500 to every citizen of this country.

B&E: How do you plan to take the R&D work forward from here?
DMK: ONGC will continue to do what it is best at – R&D. In fact, we will take it to the next level. Spending on it will continue to be robust which is evident from the opening of our new energy center. We plan to open and develop new energy avenues and cutting-edge technologies to meet the ever expanding energy demands.

Case Analysis : FMCG
A cut above the rest
Nestlé india is a firm believer in sustained r&D and has been able to retain growth in an increasingly competitive market so far

The global food industry is worth $3 trillion today and growing at a rate of 20% every year. But at the same time, it is one of the most dynamic sectors in the global economy. It is almost impossible for a company to survive without innovation and renovation of its products portfolio and without keeping pace with ever changing consumer needs.

Nestlé India, which recently announced the setting up of its R&D centre at Haryana (with an estimated investment of Rs 230 crores), realises this in no uncertain terms. Antonio Helio Waszyk, CMD, Nestlé India comments, “The centre will help us to accelerate the company’s growth and contribute towards reducing nutritional deficiencies in India”. Globaly Nestlé invests above CHF 2 billion in R&D and considers it to be a critical differentiator even in a market like India. Talking about increasing competition in the noodles space, Waszyk says “If the competitor has technology to invest, it’s good, but if the market share that others have achieved is just statistics, then it will not last for very long.” Products like Maggi Nutri-licious Pazzta, Maggi Rasile Chow and Masala-e-Magic (for rural markets), Maggi Vegetable Multigrainz Noodles and Nescafe Cappuccino have been the more recent launches from the company that have helped it retain a differentiated position in the market. Nestlé enjoys a leadership position in baby foods & infant formula, instant noodles, sauces & pasta, instant coffee and wafers & whites.

In the last 5 years, Nestlé’s profit has grown at a CAGR of around 26% and revenues grew at a CAGR of around 23%. The stock has given a return of 297% to investors in the last 5 years and 45% in the last one year (data considered backwards from January 14, 2011). For the nine months ended in September 2010, the company posted net sales of Rs.45.84 billion, a y-o-y growth of 21.4% as compared to the FMCG sector growth of around 15%. Net profits grew by around 13.5% to reach Rs.6.15 billion, with rising commodity costs and higher advertising/sales promotion expenditure eating into margins. Still, it is remarkable that a company like Nestlé continues to post such growth despite the obvious disadvantages of size. And its sustained R&D focus appears to be playing a major role in the same. Nestlé is still able to prevail in the numbers game, particularly in terms of volumes, which will be the ultimate deciding factor in the long run.

By Avneesh Singh


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