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Henkel’s consumer business under strain

Henkel’s consumer business under strain
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First Published: Sun, Mar 13 2011. 10 58 PM IST
Updated: Sun, Mar 13 2011. 10 58 PM IST
The Indian home and personal care market has become a favoured hunting ground for global multinationals to tap into the subcontinent’s growing appetite for consumer products.
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Henkel AG and Co. KGaA’s purported move to exit the Indian market thus seems a mystery. The company owns a 51% stake in Henkel India Ltd, with about 17% owned by the A.C. Muthiah-promoted Tamilnadu Petroproducts Ltd.
Henkel India said in a statement on Friday that its business was not on the block. It also said the parent cannot sell the detergents and personal care businesses, but that these decisions could be taken only by Henkel India’s board and shareholders. This isn’t a categorical denial from the parent company. As a result, the rumours will keep simmering for some time.
The pertinent question here is whether Henkel has a good reason to exit one of the most exciting consumer markets in the world.
Henkel is a mid-size firm with a consolidated turnover of Rs534 crore in the calendar year 2010; but sales declined by 10% and it incurred a loss of Rs52 crore before exceptional items compared with a loss of Rs24 crore in 2009.
Henkel India’s business comprises detergents and cleansers, which accounted for about two-thirds of sales in 2010, and cosmetics that contributed the rest. Its main brands are Henko and Mr White in detergents, Pril in cleansers, Margo in soaps and Fa in deodorants.
Both segments saw sales fall by 9-10%. Detergents and cleansers reported a segment loss of about Rs20 crore and cosmetics about Rs8 crore.
The segments it operates in are experiencing fierce competition, marked by price cuts, volume discounts and higher marketing spends. Margins for the industry have fallen, and in Henkel India’s case, it has even meant incurring losses. This is made worse by its debt burden with the interest cost of Rs29 crore contributing to over half of its loss.
The way forward could be to get equity infusion from the parent to repay debt and deploy sufficient capital to fund growth. It will also require a different strategy to prosper in an attractive but hyper-competitive market, as the current one does not seem to be working. A decision to sell could indicate that Henkel believes that the business could do better in the hands of a new management.
The Henkel India stock is up by 15% since the beginning of March, but investors would be disappointed if rumours of a sale do not materialize.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Sun, Mar 13 2011. 10 58 PM IST