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Cover Story
 

Does R&D Really Pay?

Issue Date - 03/02/2011
 
Case Analysis : FMCG
“We spend Rs.400 mn on R&D”
After successfully selling a fairness product to men, Director, Emami Group discusses why R&D is a necessity to sustain a fierce competition

B&E: FMCG is a high-competition industry. Is this the reason that drives companies to invest more in R&D?
Priti Sureka (PS): Certainly, for players belonging to FMCG industry the crucial reason for investing heavily in R&D is only and only to fight against the ‘me too’ theory. It is one such challenge that makes the industry the most dynamic and competitive. Thus, in order to compete with similar products of different brands, intense R&D is extremely important. It gives the final edge. Getting into deeper potential of R&D, it is one such segment that possesses the capacity to come up with amazing innovations that can turn around a product’s life cycle entirely. Moreover, R&D also helps in bringing out a proper forecast. For example, we have an Intelligence Group in our organisation that scans the market on a quarterly basis to forecast demand.

B&E: Do you think demand forecasts on such regular basis actually help you in product related decisions?
PS: Well, it’s not mandatory for us to utilise these data every time. However, we forecast the data every time because simultaneously they are utilised for data mining purpose as well. But then, such forecast has often enabled us to hedge risk. For example, before launching Emami Fair & Handsome we had conducted a thorough research and it confirmed that there was a demand for the product. So, we went ahead and addressed it through right strategies. Our research was really crucial because we were not talking about some economical product. The price of our product is higher than even that of HUL’s.

B&E: You spend a good amount on R&D every year. How is it connected to enhancing the MCAP of the company?
PS: We spend around Rs.400 million per annum on R&D of our FMCG business. These investments are not only concentrated on product development, but also on other areas like packaging. However, unlike pharma companies, in FMCG there is no direct co-relation between FMCG and market capitalisation. You might have a very innovative product, but if it’s not marketed properly it doesn’t really help. So there is an indirect relation between R&D and market capitalization when it comes to the FMCG industry.

B&E: By that, do you mean to say that there is no co-relation between R&D and EPS as well?
PS: There is always a relation between R&D and EPS. What I mean to say is R&D is not the only factor. It has to be supported by proper marketing and portfolio enhancement. You also have to do brand extensions to constantly engage your customer with the brand. Such engagement can only be done when you have a proper product portfolio in place. This, supported by proper marketing, will help the company in generating more revenue.

 
Case Analysis : TELECOM
Investing in a green future

For a nation that houses a host of telecom operators it is imperative for a player like gtl to invest in R&D. But is it really paying GTL?

It has always been the service providers who have hogged the limelight when it comes to the telecom industry. Telecom tower providers, the backbone of the mobile telephony network, have stayed backstage with telecom towers being seen as just unwanted structures on a high rise. However, a closer look at the numbers and it’s enough to change one’s perception.

According to a recent research report by CLSA Asia-Pacific Markets, one of Asia’s leading financial services group, India currently has about 3,37,000 telecom towers and is expected to add another 4,63,000 towers in the next three years. And given the power outage situation in India, each tower currently consumes on an average almost 4,000 litres of diesel every year. This means the telecom industry is expected to consume over 1.8 billion litres of diesel every year. This not only increases the carbon footprints of the industry, but also results in huge cost appreciation. In fact, energy expenses currently form close to 20% of operators’ network operating expenditure and are expected to further go up with increased network expansion in rural areas.

Thus, eyeing the future, GTL, a leading network services company (GTL’s consolidated revenues for FY2010 stood at Rs.22.36 billion), has already started increasing its investment in research and development (R&D) of green and power efficient telecom equipments and towers. Over the last few years, this Mumbai based company has increased its R&D spend from Rs.68.26 million in FY2008 to Rs.575.71 million in FY2010. In fact, the company plans to take this investment figure to a whopping Rs.25 billion during the next three years.

Though a large chunk of the investment goes into the development of green and energy efficient products, the company is investing a decent amount in energy management solutions as well. And the efforts have paid it off well. In fact, as soon as the company increased its R&D spend from 0.5% of the net turnover in FY2009 to over 3.5% in FY 2010, its consolidated net worth jumped by 25.7%, from $249 million in FY2009 to $313 million in FY2010. “Our R&D is always driven by innovation and operational excellence to enhance sustainability and provide clean and green telecom sites and it has benefitted us a lot,” Vikas Arora Sr. VP – Corporate Affairs, GTL tells B&E.

          

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