Software major Wipro is set to hive off its profitable consumer care division into a separate unlisted company. Will it work for the division to plough a lone furrow?

Bespectacled Vineet Agrawal, 51, President of Wipro Consumer Care and Lighting division of the $6.4-billion software major Wipro Ltd, is not flamboyant. Surprising. For, he has several distinctions to his credit: Under his watch, Wipro Consumer Care made one of the biggest international acquisitions in the consumer goods space in 2007 when it bought Unza, the Singapore-based personal care company with operations in 21 countries. The deal size was $300 million. Including Unza, Wipro has so far made eight acquisitions in nine years for a total price tag of about $500 million.

A yen for acquisitions

Agrawal will rather talk more about how humbling the experience of acquiring companies has been than how big Wipro’s consumer division has become. For the record: Wipro Consumer has grown at a robust 38 per cent CAGR (compounded annual growth rate) since Agrawal took over. It is present in some 40 countries with over 6,500 employees worldwide and has eight plants in India and five overseas.

Acquisitions have come to define Wipro Consumer Care. So much so that, as Agrawal says, if there is a deal on the table, “people do contact us. They know we are an interested party.” He, however, hastens to add that the acquisitions have happened more because of the division’s track record. “If we don’t grow organically, the board is not going to allow us to invest in acquisitions.”

He also admits that acquisitions have allowed Wipro to quickly scale up operations in countries where otherwise it would have taken the company years to grow to this level. A regional player till a few years ago, one big foreign buy made Wipro more confident to buy more. “When you work out a strategy, there may be gaps, and that’s when you start looking at acquisitions. Assuming there is a deal on the table, you find out whether it fits into your strategy. If it does, then we go ahead with it.”

People skills

But Agrawal admits that each acquisition throws up new challenges. For one, people issues are important. “It is very easy to slip into a syndrome like ‘we know better. We have acquired you.’ It is something one has to guard against. It is important to respect the organisation and its people,” explains Agrawal.

For example, in case one acquires a small company, one assumes that its employees will be happy to work for a bigger entity but sometimes that may not be the case at all.

Sometimes employees feel they will lose their importance in the hierarchy. “Hence, we tell our officials that their body language should not give them the message that we have acquired them,” says Agrawal. He also says one should guard against a major restructuring of the organisation or closing down a factory or two at least in the initial years.

Charting new territory

Unza is a case in point. It was not just another regular acquisition. When talks were on to buy it, Wipro had little experience in the categories it operated in or the countries where it had a footprint. Deodorants were just beginning to make their presence felt in India, while the body wash category was not even here.

“It was a totally different experience for us. Therefore, it was critical that people in the company stayed back,” notes Agrawal. He says employees obviously knew much more about the company and the countries it was operating in. It was very unlike the acquisition of Chandrika soap, which was a home-grown brand and was, therefore, easier to navigate.

But Agrawal says that among all the companies and the brands Wipro acquired, Yardley has been the most successful. The brand was acquired for the West Asian market, but it did surprisingly well in India too. That was because of two reasons: Wipro changed its positioning from being a “fuddy-duddy” to a youth brand and focused more on deos rather than soap or talc.

Wipro roped in Bollywood star Katrina Kaif for promotions and gave distribution a new life leading to the brand performing better than expected.

Analysts tracking the sector as well as the company will tell you that Wipro Consumer is a little underrated.

It could be because of the IT services division of Wipro, which is the third largest in India. So, it sort of dwarfs every other division in the company. More so consumer care as it contributes just about 9 per cent of the total revenues of the company and 6 per cent of PBIT.

An analyst with Edelweiss Capital, Abneesh Roy, says Wipro should, in fact, list the consumer care division. “Indian FMCG companies get the highest PE multiples among all countries and it would turn out to be a good move if Wipro does list it,” Roy says.

But if one were to look at the division’s performance alone, the picture becomes much better. In Malaysia, in the toiletries category, the division has a dominant share of 48 per cent while in fragrances, it leads the pack with a 24 per cent share; in facial cleansers, it has a 27 per cent share while hand and body lotion with 17 per cent gives it a number two position in the pecking order.

In India, Wipro’s Santoor soap ranks third with a market share of 8.8 per cent (Hindustan Unilever’s Lux and Lifebuoy are at 14.5 per cent). In deodorants, it is No 3. Company-wise, however, the gap between the first and the next two widens significantly. HUL, if one includes all its soap brands, has a total market share of about 45 per cent, Godrej has about 11 per cent while Wipro comes third with a market share of 9 per cent. But Edelweiss’ Roy says that Santoor, in fact, is doing much better than its peers. It is growing at double digit in the soap category which itself is growing in single digits.

Staying focused

Unlike some of its peers, Wipro does not play in all the FMCG categories. “I think we still have a lot on our table. So you can’t open up a battle on every front,” argues the head of Wipro’s consumer care division. Agarwal readily admits though that there is intense competition in categories such as toothpaste and “we have a lot of battles to fight and why create more?”

But a stronger reason for staying away from such mass products, Agrawal says, is because it is necessary to make a mark in the category you are in. “You can’t be in bits and pieces in every category. If you are everywhere, you are going to be butchered everywhere.”

A marketing head of a rival FMCG company, who did not wish to be named, says Wipro will be keenly watched. “You never know where they will reach because FMCG companies in the international markets are available and at fairly low prices,” says the marketing honcho.

The analyst from Edelweiss, however, wants Wipro to shop in countries which are similar to India. “Singapore and countries in Europe aren’t growing so well but Indonesia and Africa are the places which have high potential,” says Roy.

Wipro believes it wants to stay focused on categories such as personal wash, deos, fragrances, male toiletries and skin care, but outside India.

The consumer care division also plays in the furniture as well as lighting space and within a reasonable amount of time, has done well in them.

Life after delisting

But the big question for consumer care is how well it will perform once it gets delisted. Wipro recently announced that all its non-IT businesses will be spun off into a separate unlisted company called Wipro Enterprises. This is being done to give a clear focus to the IT business. But some analysts have not taken kindly to such a decision, especially on how the valuation has been worked out for the shareholders.

But Agrawal insists he will run the division as if it was part of a listed entity. “We will still follow the IFRS standards though we may not be required to do so by law.”

He wants the division to follow the same rigour of quarter-to-quarter cycles. The only change he sees is that instead of taking decisions based on quarterly performance, the division will look at business cycles to make changes.

Kannan Sitaram, former Chief Operating Officer of FMCG major Dabur India and now Operating Partner of private equity fund India Equity Partners, says the company has shown it can build strong brands as it has with Santoor and the revival of the Yardley brand it acquired. “But I would like to see a larger game plan which is organic (growth) in nature. Also, I don’t see the company addressing the large consumer markets in the North.”

Sitaram says a good brand in soaps will only drive it so far and ultimately consumers look at price, especially in a slowdown. “If big daddy HUL gets aggressive on pricing, they have to show they can manage. Godrej too is another player which has the ability to manage with price cuts.”

His view is that it’s a good time for this Wipro division to delist as each business has its own competitive dynamics, and now shareholders can assess Wipro’s pure play software business for what it is.

Even Wipro Consumer, he says, is a bit of a mishmash with a lighting and furniture business thrown in along with consumer goods, each segment with its own set of dynamics. “They are actually three separate businesses so there is no clarity for an investor. But, if each gets scale independently, each of them can be spun off with separate funding.”

And maybe some time in the future Wipro Enterprises might be the next blue chip to look forward to in the stock market if the company chooses to list again.

(With inputs from Vinay Kamath)

(This article was published on March 3, 2013)
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