The Hindu Business Line : Brand buyouts boost homegrown FMCGs

THE LARGE war chests of homegrown FMCG companies are finally being put to work. Companies such as Dabur, Godrej Consumer Products and Marico Industries, for long on the "prowl" for acquisitions, have engaged in some frenzied deal-making over the past year.

They have bought a slew of smaller brands and products in FMCG space, both in India and abroad.

Dabur acquired Balsara Hygiene Products — maker of Promise, Babool toothpaste and several household hygiene products. Godrej Consumer snapped up 100 per cent in UK based Keyline Brands (Erasmic, Cuticura, Nulon). Marico Industries has made a string of acquisitions — skincare company Sundari LLC, two aromatic soap brands in Bangladesh, and Nihar coconut oil from Hindustan Lever.

Why acquire

Building a brand from scratch in the FMCG space can be quite an expensive exercise. Mature categories such as personal care or household products are already dominated by one or two strong incumbents and wresting market share away from them is quite a challenge. With growth rates in markets such as skin care, hair care and household products suddenly moving into high gear, companies also cannot afford to lose time on the trial-and-error method that usually accompanies new launches.

Bigger portfolio

Given this scenario, domestic players seem to view brand acquisitions as the quickest way to step into new categories and acquire a well-rounded product basket, without squandering their surpluses on brand-building expenses.

With a clutch of brands such as Sanifresh, Odonil and, Odomos, Balsara Hygiene Products, for instance, has given Dabur a foothold in the lucrative household products segment, where Reckitt Benckiser is an entrenched player. The company has been quick to relaunch these brands and put them back on the shelves, backed by aggressive promotions.

Godrej Consumer could similarly use its Keyline Brands acquisition to chart a foray into segments such as skin care, shampoos and conditioners. Right at the time when analysts were beginning to question if Godrej's limited product portfolio — consisting mainly of soaps and hair colour — was setting limits to its growth.

Distribution reach

Market shares apart, many of the buyouts have been motivated by the need to acquire better distribution reach whether within India or overseas. If the acquired company's distribution network is complementary to the company's own, it can easily be leveraged to vend existing brands to new consumers.

Dabur India pursued Balsara for its distribution reach in the West and the South; its existing distribution network had better penetration in the Northern and Western regions. Similarly Marico is eyeing Nihar's strong presence in states such as Bihar and Jharkand, complementary to its own strong foothold in the west and the south.

Godrej Consumer hopes that Keyline Brands' relationships with retailers such as Boots and Tesco in the European markets will allow it better access to these markets. Marico is seeking similar footprint in Bangladesh, where it has bought two soap brands.

India is already a low cost manufacturing base for several FMCG products and the recent capacity additions in tax havens such as Himachal Pradesh have made the economics of sourcing from here, more attractive. Having put up sizeable capacities in soaps and personal products over the past couple of years, Godrej hopes to shift part of Keyline's manufacturing to India, thus reaping margin gains.

More reasonably priced

Despite their benefits, one trend clearly emerging from the recent buyouts is that inorganic growth cab be pursued only if it comes at a reasonable price. While it was not unusual in the 1990s for consumer brands to be valued at two to three times their sales during buyouts, the recent deals have happened at much lower valuations. Godrej Consumer has acquired Keyline brands at about 8 times its earnings, a substantial discount to the valuation of 18-20 times enjoyed by listed FMCG companies in India.

Dabur paid Rs143 crore for Balsara Hygiene Products when it clocked revenues of about Rs 200 crore.

Marico Industries is reported to have shelled out about Rs120 crore for the Nihar brand with similar revenues. In none of these cases has the acquisition price amounted to more than a fourth of the acquiring company's sales. This reduces the possibility that the acquisition could strain the finances of the company if all does not go well with the integration.

Despite their obvious benefits, these acquisitions do change the equation for investors in homegrown FMCG stocks. For one, investors may need to tone down their dividend expectations from some of these companies. Over the past few years, Godrej has paid out liberal dividends and consistently returned cash to shareholders through buyback programmes. Now, the slew of buyouts has run down the substantial cash chests of companies such as Marico Industriers, Godrej Consumer and Dabur.

With resources over the next few years likely to be deployed in sustaining a much larger product basket, payout ratios may fall. These stocks may now have to be viewed purely as "growth" stocks rather than as "dividend yield" plays.

Second, a wider product basket and distribution reach may expose these companies to greater competition. Focusing on niche markets and products has helped some of these players sustain high growth rates even as the market was in a sluggish mode over the preceding three years. Shaking off market influences could be more difficult when your product basket is large and has a national footprint.

The string of acquisitions by the homegrown FMCG players does up the stakes for FMCG multinationals who have a presence in India. Given their superior growth rates, the stock markets have already rewarded listed Indian players such as Dabur India and Godrej Consumer with premium valuations, earlier enjoyed only by multinationals. Listed MNC arms such as P&G Hygiene and Glaxosmithkline Consumer who have been nurturing a limited basket of products and brands, for a few years now, may have to pep up their growth rates, if they are to catch up.

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