Chennai: For years, CavinKare Pvt. Ltd’s C.K. Ranganathan, whose company once threatened consumer products heavyweight Hindustan Unilever Ltd’s (HUL’s) dominance with low-cost offerings from whitening creams to shampoos, resisted pitches from private equity (PE) funds keen to take a slice of his upstart start-up.

Now, years of underinvestment in the brands, the lack of management bandwidth, and an unwise diversification into foods and dairy products have taken their toll, and it is Ranganathan—one of the three C.K. brothers who are behind the sachet revolution in India’s consumer goods industry—who is doing the pitching.

Ranganathan declined comment for this story and said he wouldn’t answer an email questionnaire sent to him on 6 May. In a March interaction, he confirmed the attempt to raise money and said it would be used to expand all businesses and repay debt. Back then, he mentioned that CavinKare was looking to raise around 350 crore by selling 10% of the company.

A person familiar with the matter and a Chennai-based investment banker, both of whom didn’t want to be identified, questioned the valuation.

The person said CavinKare’s implied valuation of 3,500 crore was at least two times what the company was worth and added that Ranganathan was looking to raise close to 800-1,000 crore, which would mean selling nearly 50% of the company.

The investment banker said the valuation was aggressive. “If CavinKare is diluting 10% for 350 crore, the company is valued at 3,500 crore, which is a premium for a consumer goods company whose margins have been shrinking and has debt on its books."

As of 31 March, Chennai-based CavinKare had debt of 241 crore on its books, of which close to 149 crore represents foreign currency loans.

To be sure, CavinKare was profitable, but only just, in 2011-12. According to filings with the Registrar of Companies, the company earned a profit of 13.3 crore on revenue of 980 crore. The previous year, it had a loss of 18.5 crore on revenue of 908 crore. In 2009-10, it had a profit of 36 crore on revenue of 764 crore.

The numbers reflect a significant comedown for a poster boy of the local consumer goods business that was wooed by the who’s who of the country’s PE funds. Several months ago, as the debt started to pinch, Ranganathan appointed Mumbai-based JM Financial to find an investor. JM Financial did not respond to an email from Mint.

The first person said that while several funds had talked to CavinKare, some had walked away citing the high valuation.

Undoing the harm

A third person familiar with the matter said the company’s whitening cream Fairever gave HUL, which has a competing product called Fair & Lovely, sleepless nights in the 1990s and early 2000s. Yet, CavinKare failed to translate Fairever’s potential into market gains.

Fair & Lovely’s share of the market was 46.9% in 2012, declining from 50.9% in 2007, according to market research firm Euromonitor International. The second leading brand was L’Oreal’s Garnier, which raised its share to 7.3% in 2012 from 4.2% in 2007. Fairever’s share of the market declined to 3.5% from 3.7%.

In the last five years, the face and skincare market more than doubled to 11,789 crore from 5,051 crore, according to Euromonitor.

Still, with several strong, but sub-scale brands, CavinKare can effect a turnaround, experts said.

Ranganathan is also clearly trying to strengthen the company’s management and hired N. Thiruambalam as director and chief executive officer of the personal care and foods business last month.

Thiruambalam was previously chairman and managing director of the Indian unit of HJ Heinz Co., which makes Heinz tomato ketchup, energy drink Complan, Nycil prickly heat powder and Sampriti ghee. At the time of his appointment, he said: “It is my ambition to help make CavinKare a top three player in the personal care and food segments in India."

Ranganathan is also trying to undo the harm done by a move by the company to create an alternative distribution network by employing 550 sales people. The exercise cost around 35 crore and didn’t work, said a former employee who didn’t want to be identified.

It was a good try, said an expert.

CavinKare has always been disruptive with its ideas and it was trying to do something similar in distribution, said Ankur Bisen, vice-president and head of consumer and retail products at Technopak Advisors Pvt. Ltd, a retail consultancy.

Describing the attempt as brave, Bisen said it wasn’t a model that could be scaled “over large geographies".

In the March interaction, Ranganathan said the company was reviewing the new distribution model and would take a decision on continuing with it.

That willingness to remain open to new ideas and drop them when they don’t work may well help the company. A Chennai-based entrepreneur describes Ranganathan as a “role model" who is neither “flashy" nor “arrogant". He doesn’t behave like a person who has built a 1,000 crore business, added this entrepreneur, who didn’t want to be identified.

Ranganathan is part of the entrepreneurship cell of industry lobby Confederation of Indian Industry (CII). (Mint has been working closely with Ranganathan and CII to profile relatively unknown entrepreneurs from the southern part of the country.)

Pitfalls of diversification

The company that is CavinKare began life as Chik India in 1983 with a single product—a shampoo called Chik that was also available in a satchet.

It then became Beauty Cosmetics Ltd before finally taking its current name in 1998. The company owns brands including Nyle shampoo, Meera and Kathika soap nut powder, Fairever fairness cream, and Spinz talc and deodorant.

In 2009, it diversified into the dairy business and restaurants (branded Veg Nation; the three that were part of the chain were sold last year). It also set itself an ambitious goal of doubling revenue to 1,500 crore by 2011.

CavinKare had already entered the foods business by buying out Andhra Pradesh-based Ruchi Agro Foods’ Ruchi brand in 2003; Salem-based soft drinks maker Maa Fruits India Pvt. Ltd for 27.6 crore in 2008; and Mumbai-based Garden Namkeens, a snack food maker, in 2009.

Its entry into the dairy business was also acquisition-led. In 2009, it bought a small sick dairy farm in Kanchipuram. The idea was to scale up the milk business by buying such units as it would take time to set the business up from scratch, Ranganathan said in a 2009 interview.

CavinKare is a classic example of a company that understood its customers deeply and tasted success before entering non-core businesses and being caught up in operational issues, said Abraham Koshy, a professor of marketing at the Indian Institute of Management, Ahmedabad (IIM-A). As a result, it seems to have lost focus on personal care products, he added.

Indeed, many of the diversifications required skills the company didn’t have.

An executive at a PE firm that focuses on consumer products said CavinKare had no business diversifying into restaurants because they require “a different set of skills".

The former employee said the company’s assumption that it could leverage its distribution network for dairy products was proved wrong because “time is a key factor in the distribution of perishables".

Again, dairy isn’t an entirely bad idea, said Bisen of Technopak. It is capital-intensive, but lucrative, and largely unorganized, he said.

IIM-A’s Koshy points to a larger issue—of a focus on what the company was not capable of doing at the cost of what it had done well in the past.

And the personal care business needs constant focus, said an analyst.

Companies in the business need to launch new products every six months, said V. Srinivasan, who tracks packaged consumer goods companies at Angel Broking Ltd.

Deepti Chaudhary in Mumbai contributed to this story.

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