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Stratagem
 
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GODREJ: EMERGING MARKET EXPANSION
To the spirit of exploration
The recent margin pressures faced by Godrej underscore the fact that its international acquisitions are a step in the right direction. Now it’s time to consolidate.
Issue Date - 10/11/2011
 
As a strategy to scale up business and growth, the $3.3 bilion real estate-to-soaps conglomerate Godrej Group has always been known for its strong tradition of joint ventures and acquisitions. Once synonymous with locks and safes, the group today has a presence in FMCG, consumer electronics, engineering, IT and other fields and has around two dozen companies dealing with everything from aerospace to chicken feed. Last fiscal, the company had a net revenue of Rs.25 billion and net profit of Rs.4.4 billion. But till around four to five years ago, Godrej was predominantly a domestic Indian FMCG company with a good cash flow. Like most Indian FMCG companies, it focused on diversifying its product portfolio and expanding its distribution reach. If a really good acquisition target came along, the company was willing to show some ambition, but there wasn’t anything exciting beyond that. Still, business was good and cash flow even better. After provisioning for its business requirements, the company was still left with a pile of cash, which it liberally gave out to its shareholders. As such, it had a high dividend payout ratio and dividends of upto 70- 80% was not uncommon. The company believed in giving back to shareholders and it thought that paying big fat dividends was the best way to do it. Then around 2005, Godrej started thinking of putting its cash to better use. That was the time when homegrown FMCG giants like Marico, Godrej, Dabur, Emami and Wipro started sprouting ambitions for inorganic growth and realised that the home turf alone was not good enough for expansion and growth.
 
With plenty of cash to boost its confidence and acquisitive yearnings, finding suitable acquisition targets hasn’t been a hurdle for the group’s flagship company, Godrej Consumer Products Limited (GCPL). The company has been on a global shopping spree for the past several years. There was a realisation that if the company wanted to push beyond its existing levels of growth, it would have to alter its current business paradigm. In 2005, GCPL, for the first time, began trying out different business models and exploring different geographies in the quest for global growth. That year, it made its first acquisition in the UK when it bought Keyline Brands. Since then, the company has made roughly one foreign buy every year. It bought Rapidol and Kinky in South Africa in ‘06 and ‘08 respectively, Tura in Nigeria in March ‘10, then Megasari Makmur in Indonesia in April ‘10, followed by Issue and Argencos in Latin America in May and June of ‘10. The group, according to an IDFC Securities report, has already spent over $600 million on its international buys, mostly in emerging markets where demographic and behavioural profiles are similar to that of India. These acquisitions have not only helped Godrej build a presence in new geographies such as Europe, Latin America and Africa, but also helped it cross-sell its home-grown brands. An additional incentive to invest in these markets can also be traced to the fact that multinationals like Unilever, L’Oreal and Procter & Gamble don’t have a domineering presence in these regions, which provides ample scope for regional brands to grow.

Back in 2008, the group set itself a target of tripling its growth in the FMCG business in three-four years. To achieve this, the company gave itself a new mantra, which has since been enunciated by its CMD Adi Godrej as its “three by three” strategy. It emphasises making acquisitions in three continents – Asia, Africa and Latin America – across three segments: hair care (especially hair colour), household products (especially insecticides) and personal care. International revenues in the last financial year contributed about 35% to the firm’s overall turnover. This year, according to company executives, the expectation is that international revenues will contribute close to 40%. Through its international acquisitions, GCPL has not only changed the scale of its business; it has also succeeded in catapulting itself to the top three consumer companies in the country. Since July 2008, the company’s stock price has more than doubled and despite spiralling input costs and strained economic conditions globally, it has been able to deliver on toplines for sure.

Consolidated sales have been rising by around 40% yoy, with the domestic business growing by 21% and the international business nearly doubling in size on the back of acquisitions. For the second quarter ending September this year, the FMCG company saw brisk sales; consolidated net sales rose 24.5% yoy to reach Rs.11.86 billion, beating analysts’ estimates. According to GCPL’s CFO P. Ganesh, it was one of the strongest sales growth quarters for the company, helped by 24% growth in domestic business with healthy growth across the categories of soaps, household insecticide and hair colours, and 19% comparable international business growth led by Indonesia and Latin America. However, the company’s net profit showed a yoy decline of 2.5% due to higher interest costs, tax rate and forex losses. The slippage in operating margins was curbed to an extent by reduction in manpower costs (down by 153 bp yoy) and ad spends (down by 92 bp yoy) according to Angel Broking. Chairman Adi Godrej has said that the company may have to raise prices soon due to margin pressures. On the positive side, recent equity raising and refinancing of bridge loans have helped keep interest costs in check.
          

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