Godrej Consumer will increase ad spend: Adi Godrej

Last Saturday, the homegrown toilet soap and hair dye major Godrej Consumer Products (GCP) decided to sell a 4.9% stake to Singapore’s Temasek Holdings through the latter’s wholly-owned subsidiary Baytree Investments for Rs685 crore. It plans to spend a portion of this inflow on a 60% stake in Cosmetica Nacional (2011 turnover: $36 million), the market leader in the hair colour market in Chile, South America. This will mark GCP’s tenth acquisition in the last five years. GCP will pay nine times Cosmetica’s EBIDTA of 20% (about Rs200 crore) for the stake.

Since 2006, GCP has acquired hair colour company Rapidol and hair accessory maker Kinky in South Africa, personal care company Tura in Nigeria, household insecticide major Megasari in Indonesia, South American hair care companies Issue Group and Argencos, Indian personal and fabric care brands Swastik and Genteel, and more recently, African hair care firm Darling.

For the December-ended quarter, the company reported a 36% increase in net sales at Rs1,344 crore, and a net profit growth of 41% at Rs167 crore, with volume growth of 12% in the Indian business. 

Adi Godrej, chairman of GCP, spoke to DNA while making the announcements about Temasek and Cosmetica. Excerpts from the interview:

What prompted stake sale to Temasek at this stage?
We have done a lot of acquisitions. We have done a major acquisition in Africa called the Darling Group. The first phase is being completed. The second phase will be done in September of this year and the third phase will be in September 2013. With the Chilean acquisition, we will need more funding in order to ensure that our balance sheet remains very healthy and the debt-equity ratio is under control. We thought this was a good time to raise equity. Temasek showed interest in a private placement at a premium. It also saves us on cost instead of raising a QIP, et cetera. So our board accepted the Temasek offer and we will go ahead with it over the next two months. 

You have scooped ten acquisitions in the last five years with half of them in the last year alone. What has changed at the company? Has it become more ambitious or are opportunities seen more now?
There are a lot of opportunities and clearly we are fortunate that many of these possibilities arrived at the right time for us. Many of them fitted in very well with us. And the very good news is that all of them have been extremely accretive, it has helped our results.

In our third quarter results, our sales increased by 36%. Our profit, after taking the cost of acquisitions into account, increased 41%. I think what has changed (at GCP) is, we have acquired a lot of very good young talent. We are a very strong management team and they have done excellent work and are able to drive very successfully the growth of the company. Normally, it’s not easy when you are growing at such a rapid pace, but our team has done a very good job.  

When would the actual richness of payback start coming in from the acquisitions?
It’s already starting. We’re very happy with our performance and the acquisitions. Our stock price has gone up, our sales and our profits have gone up.

You added a lot of new faces to the company and a lot many new people would have come under the company as a result of your recent acquisitions. Are there any challenges in managing people?

Oh yes, of course many people have (joined GCP). There are always challenges. There are always a lot of learnings also. We have learnt a lot also from our acquisitions. Overall, however, we have done exceedingly well. 

Strong growth and a spate of acquisitions. Have you taken people by surprise?
Well, I don’t want to comment. Only they can comment. But Godrej Consumer Products has had the good fortune to increase shareholder value very considerably, in terms of market capitalisation and share price over the last ten years, over the last five years as well as over the last three years. So, in the fast moving consumer goods space in India, we have been the fastest growing (company), in terms of shareholder value creation, 

In a highly penetrated category like toilet soaps, you have seen 18% volume growth in the third quarter. Is that sustainable?
That is difficult to say. I don’t want to predict the future. But we have increased our market share very considerably over the last five years. Overall, the category hasn’t grown that much, but in soaps, we are doing extremely well because we provide really good value for money to the consumer. We produce only pure soap; a lot of our competitors add talc to soap. We don’t. I think consumers are realising  the better quality of our soaps and using more of our products. 

What kind of investments will go towards innovation in the near future?
We have very strong teams working on innovations. We are working on product innovation; we are working on process innovation, strategy innovations. Our R&D team is extremely strong. We have a lot of innovations coming out of the international companies we have bought. For instance, in Indonesia, the company (Megasari) has developed a tremendous new household insecticide — it’s a paper which you just burn for five minutes, and it keeps the room free of mosquitoes for six-eight hours. It is very economical. It has already captured 10% of the market from coils in Indonesia. In Argentina, we are the world’s largest manufacturer of creme hair colour in sachets which is doing very well. There is a lot of innovation coming out of our Indian laboratories and marketing groups. We spend between 1-2% of our sales on R&D. 

How do you see the company in the next decade?
We have a ten-by-ten strategy in Godrej Consumer Products. We want to be ten times our present size in ten years’ time. Which means compounded annual growth rate (CAGR) of 26%. 

Will that also prove challenging?
Yes, challenging but doable. 

What would be your concerns?
There are challenges. Clearly, the euro zone crisis is affecting global growth. Our reform programme hasn’t moved as fast as one would have liked to see it. We’ve been growing well in spite of the situation. But if the situation improves, as I think it will, and if the Indian GDP growth improves, as I think it will in 2012, we could do even better. 

Most of your brands fall in the mass segment. A lot of consumer companies now are focusing on serving the ‘bottom-of-the-pyramid’ consumer. Why now?
Bottom-of-the-pyramid is extremely important because a large part of the Indian population is still (in the) low-income (bracket). Every family wants to consume a lot of products. What is constraining is their income. If you can provide value-for-money products which are good in quality, which satisfy their requirements, then there is a huge market. For example, our hair colour sachets sell for Rs12 and they compete with international products which sell for Rs300 - something difficult for most Indians to even think of, leave alone buy. 

Are advertising spends likely headed for moderation?
No, we are increasing our advertising spends all the time. We spend about 8-10% of our revenues on it. There will not be any moderation. We will probably increase our advertising spends.

Can you throw some light on the pro-gress you’ve made in the ongoing efforts to increase penetration in rural India?
The Godrej Group has about 500 million consumers who use one or the other of our products each day. And there are about three million stores which stock our products. Most of them are in rural areas. Penetrating into rural India is very important. The rural consumers’ income is growing. And what’s most important is, the rural Indians’ discretionary income is growing tremendously. In other words, 20 years ago, most of them earned enough to just keep body and soul together. Now there is considerable discretionary income beyond what is just required for basic living. This discretionary income is growing for the purchase of products we make. We want to serve that both with products, delivery, distribution and an understanding of the rural consumer.