If one has to rank India-born companies according to the number of Indian citizens they can count as consumers, Godrej Consumer Products Limited (GCPL), probably, will take the top slot. Be it Good knight or Hit, Cinthol or Nupur, GCPL’s products have always been a big hit in India. But did you know, GCPL now earns almost half of its revenue from foreign consumers?

Shakti Shankar Patra | August 2015 Issue | The Dollar Business 

Even before liberalisation, the Indian FMCG space was dominated by MNCs. Be it Procter & Gamble and Unilever, or Colgate-Palmolive and Nestle, western MNCs and their subsidiaries had a stranglehold over the Indian market. Giving them competition, however, even before the turn of the 20th century was the Godrej family. From being a part of the freedom movement to introducing vegetable oil-based soaps to cater to large sections of the Hindu community, the Godrej family, led by Ardeshir and Piorjsha Godrej, were flag bearers of the Indian economy. And while the Godrej’s businesses have evolved over the decades and expanded across sectors, the one sector that they are almost synonymous with is FMCG, with brands like Cinthol and Good Knight almost becoming parts of the Indian DNA.

Measured moves  

Being a dominant player in the Indian FMCG space, GCPL for decades stayed away from expanding overseas. It had a dominant market share in many segments in India and was fully aware of the challenges that come with trying to eat into the markets of strong incumbents in the West. It was content being an Indian company catering to the Indian masses. The turn of the millennium, however, changed this. The emergence of newer markets in Africa and Latin America provided the window of opportunities GCPL was long scouting for, since neither did these markets had strong and entrenched incumbents, nor was getting a foothold in them a very expensive proposition. And so in FY2006, began the international chapter of GCPL’s journey, which a decade later, accounts for almost half of its consolidated revenues.

At a cost

Overseas markets are always very challenging, particularly if you are a consumer brand from a developing country as is the case with GCPL. Being aware of this, the company, despite making its first major acquisition in the United Kingdom (that of Keyline Brands in FY2006), started concentrating on emerging markets in Africa and Latin America, which had demographics and spending patterns that were similar to that of India. This, along with several strategic acquisitions, particularly in FY2011, when it made several large acquisitions like that of Tura in Nigeria, Megasari in Indonesia and Issue Group and Argencos in Argentina, have ensured an astounding 30.8% CAGR of its topline. However, despite the fact that emerging markets that GCPL ventured into were very similar to India, the company’s bottom line growth has consistently trailed its topline growth as margins have taken a hit. “Typically, in the first few years of an acquisition, integration and brand building require a bit of investment. Given that, it is not unusual that our profit growth has trailed our sales growth,” GCPL’s Managing Director Vivek Gambhir tells The Dollar Business during an exclusive interaction and adds, “However, over time, we are confident that in our portfolio, profit growth will be ahead of sales growth.    

Overlooked

In many ways, GCPL is the antithesis of ‘Make in India’. While a decade back, almost all of its revenue from overseas markets used to come via exports from India, today, the same accounts for less than 5% of its overseas revenue. This, even as overseas markets’ share in its total revenue has surged from almost nothing 10 years back to about 50% now. While the main reason for this is the fact that the company has taken the inorganic route to expand overseas, it has meant that it is missing out on hefty export incentives of 3% (perhaps even 5%!)under MEIS and duty drawbacks of up to 2.8% – big misses for a company operating at sub-teen EBITDA margins. But it’s not something the company is not aware of. “Driving exports more aggressively is a critical opportunity for us. It is something that we haven’t leveraged fully over the last two years. We have just created a global exports organisation with a new exports head. So, I expect to see a lot more momentum and push in terms of driving our exports from our India business,” Gambhir adds.   

Show biz

Advertising is an integral part of the FMCG business. Not only is it a major expense for most companies, but also has the capacity to make or mar the prospects of even the best of brands. So, GCPL’s advertisement expense (as a percentage of net sales) remaining stable at single digits for most of the last decade, despite it foraying overseas in a big manner, is definitely commendable. At the heart of it, probably, is a very sound acquisition strategy of existing brands that didn’t require an advertising blitzkrieg. So, what caused a sudden spike in GCPL’s advertisement expense in FY2013 and FY2014? In FY2014, our advertisement expense was unusually high at 14%. This is because we had introduced a number of new products and innovations and in order to appropriately back them, we over-invested in advertising. Our advertising is driven by our innovation calendar and the number of innovations we have in each of our geographies. Now, we have a steady stream of innovations planned and hence, I believe that in FY2016, our advertisement expense will be between 11% and 12% of sales,” Gambhir answers.

GCPL has a clear strategy of not taking on strong incumbents in developed markets, but concentrating on high growth EMs.

Welcome change

Although GCPL’s incredible growth over the last decade has come on the back of inorganic growth overseas as is the case with many Indian companies, unlike most others, the company hasn’t buried itself in debt to make this possible. For, although its total debt has continuously risen from almost nothing 10 years back to Rs.1,701.7 crore in FY2014, neither has this seen any spike in its cost of debt, which was very healthy at just 6.3% in FY2014, nor has its interest coverage ratio (capacity to service debt) seen any dent. In fact, at 7.4%, GCPL’s FY2015 interest outgo (as a percentage of EBITDA) was at its lowest since FY2011 – the year the company had made several large acquisitions overseas. Does it mean we are soon going to see another round of inorganic growth for GCPL? “I am hopeful of us continuing to make value-accretive acquisitions,” Gambhir answers, without any ambiguity.  

Flag bearers, again

GCPL’s overseas expansion over the last decade has almost been inconspicuous. Although the company aspires to be an emerging markets FMCG leader, and is well on its course to become the same, it hasn’t gone around blowing its own trumpet. Its topline growing almost 12x and bottomline over 8x, without any pressure on its Balance Sheet, are truly remarkable. The only sour point in GCPL’s global expansion is the fact it has almost stopped exporting from India. But as the government tries to jumpstart the country’s export engines, there’s a clear sense of realisation. And going by the Godrej’s history of being flag bearers of the Indian economy even during British Raj, one can safely assume that this small little aberration in an otherwise incredible journey will soon be taken care of.  

“Driving exports more aggressively is a critical opportunity for us” - Vivek Gambhir, Managing Director, Godrej Consumer Products Limited (GCPL)

The challenges that GCPL faces today are very different from those it dealt with a decade back. That’s the price of going global. In an exclusive interaction with The Dollar Business, Vivek Gambhir, Managing Director, GCPL, speaks about such new challenges, the company’s new target markets and more...

Interview by Shakti Shankar Patra | August 2015 Issue | The Dollar Business

TDB: It’s exactly been a decade since GCPL made its international foray. Tell us how the experience has been.

Vivek Gambhir (VG): It has been quite a transformational journey for us at GCPL. The scope and scale of our business has significantly changed over the last decade. Back then, almost none of our revenues used to come from outside India. Today, close to 48% of our revenue comes from outside the country. It has also been a great learning opportunity for us. We have scaled up our portfolio, are cross-pollinating ideas and technology across geographies and adding a lot of value overall.

TDB: GCPL’s first major global acquisition was that of Keyline Brands in the UK. Despite this, Africa and Latin America have become your primary international markets. Is it because Indian brands suffer from low brand equity in Europe?

VG: Our strategy has been to focus on emerging markets, because we believe that our approach resonates well with mass consumers in these markets. As we see it, there are tremendous long-term growth opportunities in emerging markets. These geographies are exhibiting the highest growths. They are home to 80% of the world’s population and are also slated to account for over half of the increase in global consumption, going ahead. Generally speaking, Indian brands are not very relevant in the developed world because Indian companies haven’t really focused on brand building. Typically, brand building can take up to multiple decades in the developed world, since the entrenched brands have been there for decades, if not centuries.  

TDB: Would you say it’s much more expensive to build a brand in, say, the UK as compared to, say, in Latin America?

VG: Since the developed markets are more penetrated and offer less growth, entering these markets with a new brand will require taking away share from very strong incumbents. This is always a much more expensive proposition than growing with a growing market.

TDB: Is GCPL absolutely clear about and comfortable with this strategy to focus largely on emerging markets?

VG: Our approach to international expansion follows?what we call a 3-by-3 strategy – building a presence in three emerging geographies (Asia, Africa and Latin America) across three categories (personal care, hair care and home care). Outside India, our biggest focus is on Indonesia and Africa. These markets have tremendous growth potential and their consumer demographics are similar to those in India. We believe that there is a lot of value and synergy that we can benefit from to gain share and grow in these markets. There are also opportunities for us to take our existing portfolios to these markets.

TDB: FY2011 was a landmark year for GCPL because it saw several acquisitions – Tura in Nigeria, Megasari in Indonesia and Issue Group and Argencos in Argentina. Four years later, how would you describe their integration with GCPL? Which geography is GCPL the most bullish on going forward?

VG: Our integrations have gone very well. If you look at the companies we have acquired, in almost every single case, we have been able to accelerate both their top and the bottom line growth. We have been able to add a lot of value; our teams have delivered and our brands are much stronger. Today, we feel very excited about our international portfolio. In terms of scale, Indonesia was our largest acquisition and today, contributes roughly $225 million to our topline.

TDB: Over the last decade, as the share of overseas revenue in your total sales has increased, your profit margins have continued to decrease. Are you comfortable with this strategy of sacrificing a bit of margin for higher volume growth?

VG: Typically, in the first few years of an acquisition, integration and brand building require a bit of investment. Given that, it is not unusual that our profit growth has trailed our sales growth. However, over time, we are confident that in our portfolio, profit growth will be ahead of sales growth.

TDB: Given that in FY2015, GCPL’s interest outgo accounted for just 7.4% of its EBITDA – the lowest since FY2011 – can we expect another round of acquisitions in the near future?

VG: We are very open to further acquisitions in India, Indonesia and Africa. While it is difficult to give a sense of timing, I am hopeful of us continuing to make value-accretive acquisitions.

TDB: In FY2015, both GCPL’s EBITDA as well as profit margins saw a reversal from a two-year downtrend. Would you consider this the start of a new trend? Did this turnaround come thanks to India or because of your international operations?

VG: While our international operations have been improving every year, last year was a bit challenging in India, simply because of the macroeconomic conditions and the general slowdown that we saw in the FMCG sector. Despite that, our profit growth in India was good, as our brands continued to gain market share. Going forward, I expect both our Indian and international operations to grow very strongly. So, I expect FY2016 to be better than FY2015 – both in India and abroad.

TDB: Given the hefty incentives Government of India provides for exporting soaps and other personal care products (MEIS@3%, duty drawback rate up to 2.8%), are there plans to cater to more of your international markets through exports from India?

VG: Driving exports more aggressively is a critical opportunity for us. It is something that we haven’t leveraged fully over the last two years. We have just created a global exports organisation with a new exports head. So, I expect to see a lot more momentum and push in terms of driving our exports from our India business. Increasing exports is therefore definitely a key area of focus for us.

TDB: GCPL’s advertisement expense as a percentage of sales hit an all-time high of 14.6% in FY2014, before dropping to 11% in FY2015. Where do you expect this to settle going forward?

VG: Typically, we expect our advertisement expense to be between 11% and 12% of sales. In FY2014, this expense was unusually high. This is because we had introduced a number of new products and innovations and in order to appropriately back them, we over-invested in advertising. Our advertising is driven by our innovation calendar and the number of innovations we have in each of our geographies. Now, we have a steady stream of innovations planned and hence, I believe that in FY2016, our advertisement expenses will be between 11% and 12% of sales.