Signs of turnaround at Henkel India after cost-cutting drive5 min read . Updated: 03 Jul 2011, 11:16 PM IST
Signs of turnaround at Henkel India after cost-cutting drive
Signs of turnaround at Henkel India after cost-cutting drive
Mumbai: Jyothy Laboratories Ltd, the maker of Ujala fabric whitener and Maxo insect repellents, said Henkel India has posted an operating profit in less than two months after Jyothy bought the money-losing local unit of German consumer goods maker Henkel AG and Co. KGaA.
Henkel India will report a net profit by the end of September, said Ullas Kamath, deputy managing director at Jyothy Lab, who expects to save the equivalent of 10% of Henkel India’s revenue over the next year because of synergies, cost reductions and increasing prices by 5% to boost profitability. Jyothy Lab bought Henkel’s 50.97% stake in its Indian unit for ₹ 118.72 crore in May, a couple of months after it acquired Tamilnadu Petroproducts Ltd’s 14.9% stake in the unit for ₹ 60.73 crore, giving it access to brands such as Henko, Pril and Mr White.
“With the economies of scale kicking in on advertising and distribution, the turnaround will be much faster," said Ritesh Chandra, executive director and head (consumer group) at investment bank Avendus Capital Pvt. Ltd.
“Some people are staying back, some are leaving. We are not asking the people to stay. Because there will be cultural difference and cultural shift. We will be tightening the belt, no doubt about it," said Kamath, who compared the measures to a painful surgery.
Jyothy founder and chairman M.P. Ramachandran, 65, has set a target of more than tripling the revenue of the combined entity to ₹ 5,000 crore in four years from the ₹ 1,100 crore in the year ended March 2011, which could give it a place among the top four consumer goods companies in Asia’s third-largest economy.
“We are in the adolescent stage now and have a long way to go," Ramachandran said in an interview. Thereafter, Jyothy plans to double revenue to ₹ 10,000 crore, he said, without specifying the timeframe in which it plans to achieve the goal.
“To achieve this (Rs 5,000 crore in four years) they will have to be disruptive, that is you have to change the rules of the game," said Anand Mour, vice president at Indiabulls Securities Ltd.
For instance, in December 2009, Procter and Gamble, the maker of Tide and Ariel detergents, tried to gain marketshare with disruptive pricing of a new variant of Tide, 30% cheaper than the original. Hindustan Unilever Ltd, which owns the Surf and Wheel brands, retaliated with lower prices. The price war between the two companies saw them increase their market share by 5% at the expense of smaller regional and unorganized companies.
For now, Ramachandran is focusing on integrating the two companies, which includes setting up a new management structure, identifying synergies and reducing costs.
Jyothy has already identified a professional chief executive and it will also have brand managers and category heads as part of the new management structure that will come into effect in September. Its 10 brands will be divided under four broad categories of personal care, household care, fabric care and surface care. Fabric care, which includes detergents and whiteners, will have brands such as Ujala, Henko, Mr White and Chek, representing a range of products across various price categories.
“Once the two companies are merged (March 2012), the starting point will be ₹ 1,400 crore. What we couldn’t afford or what we felt is not required at Jyothy’s level of ₹ 800 crore at ₹ 1,400 crore it becomes necessary, it becomes desirable," said Kamath, explaining that the increased management bandwidth will help it gain scale faster.
The growth will also come from synergies in distribution and manufacturing. Henkel predominantly caters to urban centres with a reach of about 25% of the country. Jyothy is a mid-market and economy segment company with a strong rural reach. The company plans to increase Henkel’s reach to cover 80% of India’s market by next year. Henkel India’s production will also shift from contract manufacturers to Jyothy’s factories that are exempted from tax.
Jyothy has earmarked ₹ 100 crore for marketing and repositioning. “For the last two years they have not done anything as there was no one to take any decisions," said Ramachandran, explaining why Henkel did not even make price increases even though input costs of crude and palm oil had risen in the period.
Jyothy also plans to shift the corporate office to Henkel India’s Mumbai premises in September from Chennai, saving the company ₹ 1.5 crore in rent a year. For the quarter ended 31 March, Henkel India had posted a loss of ₹ 18.33 crore on sales of ₹ 119 crore.
Jyothy, which started with an initial investment of ₹ 5,000 in 1983, doesn’t face any dearth of capital, it said. Emblem FII, a fund advised by MCap Fund Advisors Pvt. Ltd, picked up a 1% stake in the company from the market at the end of May. “We are in talks with three-four companies for private equity placement of 10-12% in the company and expect it to close in the next six months," said Kamath.
As part of the acquisition, Jyothy Lab also acquired ₹ 600 crore of Henkel India’s liabilities.
“The priority right now is to get Henkel on track, reduce the debt and get more money in," said Kamath, who will once again start looking for acquisitions. “Now we have got the taste. Once the management team is in place, my role will be only hunting for acquisitions, nothing else."
To be sure, the aggression is not new to the company. Jyothy’s Ujala, a late entrant in the fabric whitener space, has a 72% market share despite the presence of brands such as Reckitt Benckiser’s Robin Blue. Its Maxo mosquito repellent has a 22% marketshare, in the face of competition from established brands such as Mortein and All Out.
“They (Jyothy) are to be considered formidable competition," said Anand Ramanathan, manager, KPMG Advisory Services Pvt. Ltd. Jyothy is good at tactical manoeuvres, below-the-line promotions, negotiations such as media buying and have strong partnering capabilities, he said.
The Jyothy-Henkel deal is not without its sceptics. Jyothy missed earnings expectations in the quarter ended March. Net sales for the quarter dropped 18% to ₹ 156.96 crore and profit fell 18.1% to ₹ 22.21 crore.
“We continue to believe that it would be difficult for Jyothy to turn around the loss-making Henkel India business in the near term," brokerage house Religare Institutional Research said in a report on 5 June. The brokerage lowered Jyothy’s earnings estimates in FY12 and FY13 because of the integration risk of the Henkel India acquisition. For the quarter ended 30 June, Jyothy’s stock dropped 1.6% compared with Marico Ltd and Godrej Consumers Products Ltd, which gained 12.3% and 17.8% respectively. On Friday, Jyothy Laboratories Ltd lost 1.1% to end trading at ₹ 214 on the Bombay Stock Exchange, more than the 0.4% decline in the benchmark Sensex.