Mumbai: It is a rare company that welcomes a minor dip in its fortunes, but that is exactly what Jyothy Laboratories Ltd is doing.
In the September quarter, Jyothy Laboratories reported muted sales growth in its major brand Ujala.
“We believe the company has lost market share on the back of a cut in retailer margins, which has resulted in hushed push by channel partners. Simultaneously, Maxo also lost market share in the mosquito repellent category. We believe Jyothy Laboratories would be unable to sustain revenue growth with low channel partner margins,” said analysts Sanjay Manyal and Parineeta Poddar, ICICI Securities Ltd in their November report.
“The change from gurukul to business school is not easy,” said Ullas Kamath, joint managing director of Jyothy Laboratories who is willing to forego some sales growth in the short term but is hoping to reach a revenue of around Rs.3,000 crore by 2015.
His reference is to the company’s move towards professionalizing its management, which can be traced back to May when it appointed 46-year-old S. Raghunandan as CEO of Jyothy Laboratories Ltd. His mandate: to ensure the smooth integration of Jyothy Lab with Jyothy Consumer Products Ltd (JCPL), formerly Henkel India Ltd, and double the revenue of the combined entity from Rs.1,200 crore to Rs.3,000 crore in 2-3 years.
Raghunandan had his job cut out since the culture at Jyothy Lab had not changed for the last 20 or more years, noted Kamath. The company did not have brand managers; the advertising agency was the custodian for the brand. Its brands were under-invested as the company spent just 8% on advertising and marketing as compared to the industry norm of 12%.
There was no manufacturing head or sales head. The company also paid higher distributor and trade margins that cut into the advertising spends.
“This can easily qualify as the toughest job in the industry,” Raghunandan said in an interview on 28 January.
And so far, he seems to have done alright. Between July and December shares of Jyothy Laboratories rose 38.40% on the Bombay Stock Exchange. In the same period, the BSE FMCG Index rose 18.51%, while the benchmark Sensex rose 11.46%.
Founded by M.P. Ramachandran in 1983 with a capital of Rs.5,000, Jyothy had grown into a Rs.800 crore company on the strength of brands such as fabric whitener Ujala, but it was its 2011 May acquisition of Henkel India that made the company’s top management feel the need to change.
“M.P. Ramchandran, my chairman, and I myself are not from the FMCG (fast moving consumer goods) space,” admitted Kamath.
He added that with the acquisition of Henkel, the company felt the need to change from a family enterprise to a professionally-managed one as it entered the more competitive detergents and personal care business where its newly-acquired brands such as Margo, Pril, Henko and Fa compete with multinationals.
A marketing expert said this was smart thinking.
“After a particular time to scale up, an organization has to go beyond itself failing which it stagnates. Getting professionals on board helps induce fresh thinking and this is important for growth,” said Piyush Kumar Sinha, professor of marketing at the Indian Institute of Management, Ahmedabad.
That was where Raghunandan came in.
In late 2011, a few weeks after being promoted as the head of the Rs.2,000 crore India unit of Reckitt Benckiser Group Plc, Raghunandan resigned (he describes the role as a “maintenance job”).
“Jyothy made sense as the job promised me freedom and independence to reengineer the entire organization”, added Raghunandan who has previously worked with other family-owned consumer product companies such as Paras Pharmaceuticals Ltd and Dabur India Ltd.
Since May, Raghunandan has put in place his team of 25 people which includes recruiting the manufacturing head from Hindustan Unilever Ltd and people from other consumer packaged products companies like Dabur India Ltd, Marico Ltd, Colgate-Palmolive (India) Ltd as quality control managers, zonal managers, R&D (research and development) head and supply chain head.
Raghunandan has started consolidation of distribution in larger towns and he plans to eventually cut the distribution channel from approximately 5,500 people to 1,500 people. Moreover, trade margins which were higher than the industry have also been rationalized by 2-4% and distribution margin by approximately 2% to be at par with other companies. The savings made from this will be ploughed back into higher advertising and marketing, said Raghunandan.
The company is in the midst of finalizing its manufacturing strategy as it looks at outsourcing some of it. The advertising campaign on the brands will kick off this year, reflecting increased spends. “We have been told that the company will increase its sales as they invest in brand building and our income will go up as a result we are waiting to see that happen,” said Srikanta Sadhukan, a distributor in West Bengal who has been with the company for close to 20 years.
The changes have caused some disruption with sales slowing down.
Analysts expect the sales slowdown to continue and margins to remain under pressure in the December quarter.
“Expect 15% YoY growth in sales, Ebitda margin likely to decline 75bps YoY on account of pressure on gross margins and higher advertising and promotions,” said Religare Capital Markets in a January report on India Consumer companies.
Kamath said the company’s promoters are clear that it is time to engage the “second generation” of the family with “professionals” as the company “plans ahead for the next 25 years”.