Mumbai: Ullas Kamath has lost 4kg in five months, but the joint managing director of Jyothy Laboratories Ltd isn’t complaining at the toll the integration of Henkel India with his company has taken.
Improving performance: Ullas Kamath, joint MD, Jyothy Laboratories, expects the company to grow 30% a year for the next three years. By Shriya Patil Shinde/Mint
Jyothy, an upstart start-up that is best known for its best-selling fabric whitener Ujala (itself made famous through a TV ad featuring an ear worm of a jingle) acquired Henkel last May and if its results for the quarter ended December are any indication the integration would seem to be going well— thus far.
Indeed, investors are already recognizing this fact: Jyothy’s shares have risen by 22.72% since the start of 2012, outperforming the BSE FMCG Index that rose by just 2.70%. As pointed out by Ravi Ananthanarayanan in Mint’s Mark to Market column on 21 February “that reverses the situation seen in 2011, when Jyothy underperformed, as the acquisition of Henkel India pulled it down.”
Jyothy clearly needs to do more but Kamath is sanguine about its prospects. He expects it to grow 30% a year for the next three years and double its turnover from around Rs 1,300 crore at the end of March 2011 to Rs 2,600-2,700 crore. He also expects Henkel’s operating profit margins to rise from the current 11% to 18%. And he claims the company, which has around Rs 450 crore of debt on its books currently, will be debt free by 2015.
When Kamath refers to the company, he means the merged entity. Jyothy is in the process of integrating Henkel with all operational aspects, although the two companies will remain separate financial entities till March 2013 to maximize fiscal benefits including tax breaks.
Analysts say reaching those goals won’t be easy.
“The challenge is not of a small order. With scale to become a full play consumer products company, Jyothy needs to demonstrate ability and capability to take on larger players. Also how they make the transition from hands-on to professionally managed is to be seen,” said Nikhil Vora, managing director of IDFC Securities Ltd.
The entire team of Henkel, comprising close to 250 managers besides the ground sales staff, quit following the acquisition.
Jyothy’s response was to make Kamath, a deputy managing director previously as joint managing director and put him in charge of the integration. In April, Jyothy-Henkel will move to a new structure, with a CEO and three heads for three businesses—personal care, household care, and fabric care. Kamath is also working on integrating the sales force of 200 from Henkel India and 1,800 from Jyothy Labs. Starting April, he said, the company would “grow business and volumes”. “The Henkel brands are all undernourished.”
Jyothy-Henkel plans to grow these brands by investing in advertising—up to 10% of sales in some cases.
Henkel has brands such as Margo and Fa (personal care), Pril (household care), and Henko, Mr White and Chek (detergents).
“We have already plucked all low-hanging fruits and seen initial results,” Kamath added.
“The real impact of this acquisition will be felt when sales growth picks up, and scale benefits are visible across procurement, manufacturing, advertising, and distribution,” wrote Ananthanarayanan.
The increase in volumes, Kamath says, will come from improved reach. Currently, 70% of Jyothy Lab’s sales are from rural India; a mere 20% of Henkel’s are. And while modern retail accounts for a mere 2% of Jyothy Lab’s sales, it accounts for 25% of Henkel’s.
“Henkel has a dedicated team with a good relationship with modern trade and Jyothy will benefit from that,” said Devendra Chawla, president of food and FMCG business at the Future Group, which runs hypermarts Big Bazaar and Food Bazaar.
Jyothy-Henkel’s primary focus, Kamath said, will be on personal care and fabric care. In detergents, the consolidated marketshare of the company’s brands is 4%. “Each is strong in certain pockets and play at different price points. We will remain a regional player in detergents and not take on the MNCs,” said Kamath.
Analysts draw parallels to a similar case that tasted success—that of Godrej Consumer Products Ltd (GCPL). GCPL merged with affiliate Godrej Household Products Ltd that had better relationships with modern trade and a stronger presence in cities.
“Our modern trade shares are ahead of our general trade now. Even rural sales and volumes are picking up and will soon outstrip the urban growth rate,” said Tarun Arora, executive vice-president, marketing, GCPL adding that the scale that came with the merger allows for investments in dedicated teams to grow each of these different channels and consumer segments.
In Jyothy Labs’ case, “sustainable profitability and visibility on growth will get investors appreciation,” concluded Ritesh Chandra, executive director and head, consumer vertical, Avendus Capital.
Meanwhile, Jyothy has restructured its debt of Rs 450 crore for a five-year period as opposed to the initial agreement of three months.
It has also put on hold its plans to divest some stake in the company to strategic investors as it waits for better valuations. “We want to get debt free as soon as possible but will wait for the right valuations to divest and sell our assets,” said Kamath.
sapna.a@livemint.com