When a relatively small home-grown FMCG company decides to buy out a German multinational, at a good price, there is always curiosity surrounding the deal. But it was the long-standing relationship the Mumbai-based Jyothy Labs had with the 25-year-old Henkel India which helped it clinch one of the biggest deals in the country's FMCG space. Last week, the Jyothy Labs' Board of Directors approved the buyout of a 50.97 per cent controlling stake in Henkel AG for Rs 118.7 crore at Rs 20 per share. The first task for Jyothy Labs would be to orchestrate a turnaround of the loss-making Henkel India. The deal also requires Jyothy Labs to take on debt worth Rs 454 crore on Henkel India's balance sheet. Hitherto debt-free, Jyothy Labs has borrowed Rs 600 crore to service this debt.

“Getting the controlling stake in Henkel is going to be the way forward for us,'' states company Chairman M. P. Ramachandran, who began Jyothy (named after his daughter) back in 1983 with a seed capital of Rs 5,000 and a single brand - Ujala. Today the driving force behind the company is Ullas Kamath, a chartered accountant who has been with the company for the past 20 years and is currently its Managing Director.

In fact, it was Kamath who ensured Jyothy did not overspend. “We were probably the lowest bidders for Henkel and we offered what we could afford although there were plenty of private equity players prepared to help us. So we decided to quickly take a loan to start strengthening the business and today we are probably the only Indian company to acquire the assets of a foreign company.'' Considering there were synergies as well as challenges, Henkel AG chose Jyothy as its partner to grow the ailing business while it decided to exit the operations with the option of coming back with a 26 per cent stake after a period of five years if needed.

“Henkel realised its brands were in safe hands and knew that we were a company which could grow brands from scratch. Both of us had common backgrounds, starting as family-driven businesses. The 135-year-old company of Henkel wanted to leave the country a winner,'' says Kamath.

Turning the Henkel brands around

Explaining what went wrong with the German multinational, which is profitable in other markets, a former employee says, “Quick management changes did not help in the understanding of the brands. Also, given the disparate nature of the Indian market, with hundreds of small kirana stores, a distribution model geared for modern trade was found wanting. Also, India is a small speck for Henkel worldwide and did not get the attention it needed. The local partner also wanted to exit.”

However, many are glad Henkel India's brands have gone to one entity. As this executive says, “At least now the whole business has been taken over and will go into the hands of one buyer who can nurture the brands and make the right investments.”

But analysts are still sceptical whether Jyothy can succeed in becoming a debt-free company again. According to Sagarika Mukherjee, Research Analyst, SBI Cap Securities, “The fact that Jyothy took on Henkel's debt is what made it get a good price for the deal. But whether it would be able to reduce expenses in the merged entity remains doubtful.”

So now Jyothy has to prove it can clear up the debt and restructure operations to bring the Henkel brands back on track.

After emerging as the owner of Henkel India, the home-grown FMCG player is planning to create a special task force to turn around the loss-making company in the next six months. It would comprise eminent marketing professionals from the industry to improve the growth rates and market share, and find new pricing and positioning for the ailing Henkel brands. “We should see a real turnaround for the Henkel business in the next six months, which is going to be a tough period for us. We also intend bringing down Henkel's debt between Rs 200 crore and Rs 300 crore within the same time,” added Kamath.

Tapping into synergies, Jyothy intends bringing down manufacturing costs and using the respective distribution strengths of both the companies. He points out that in many respects, the two companies complement each other. For one, Henkel's high shares in urban markets and modern trade may aid Jyothy, which is stronger in rural markets. Seventy per cent of Henkel's revenues comes from the urban markets comprising defence stores and modern trade. Rural markets contribute an almost similar percentage of Jyothy's sales. “Through Henkel we would be able to get into modern trade more easily while Henkel could take its brands across the country through our distribution network,” says Kamath. Jyothy has 28 factories and 3,500 distributors, which is almost double that of Henkel's (it has a single manufacturing base). Together, the entity is expected to generate Rs 1,300 crore in revenues, generating significant cash flows to manage a 10-brand portfolio comprising Ujala, Maxo, Exo, Henko, Margo, Chek, Neem, Mr. White, Fa and Pril.

However it would be the Rs 12,000-crore detergent category which will be the most challenging for Jyothy with a mix of popular and premium brands such as Ujala, Mr. White and Henko.

“There is huge competition in the detergent market but today we have crossed Rs 100 crore in the detergent business with more than 10 per cent EBIDTA margin. We would be re-aligning our pricing in detergents with a brand for every price point from Rs 40 to Rs 160 and become a full-service provider of detergent powders,'' adds Kamath. But with big competitors such as Hindustan Unilever and Procter & Gamble in the category, it will not be easy to give Henkel's languishing portfolio a new lease of life. “While it may seem a good deal for Jyothy to expand its portfolio, it is extremely difficult to build brands in the detergent category,” says Sudhanshu Vats, in charge of HUL's detergent portfolio for the region.

Outlook

Analysts claims Jyothy's (Ujala Techno Bright) and Henkel's (Henko) detergent brands may clash in the premium segment of the detergent category. “Ujala Techno Bright is in the mid-premium segment while Henko is now positioned in the premium segment. We have to rethink the brand positioning and the company will take a final call soon.'' Jyothy and Henkel would have a combined market share of 6 per cent in the detergent category. Jyothy is banking on the equity of its largest selling Rs 500-crore Ujala brand of fabric whitener to make an impact in the detergent category by extending it as Ujala Techno Bright and recently roped in Sachin Tendulkar as the brand ambassador.

The cluttered soaps category is going to be another challenging category. Jyothy has not managed to take its Jeeva brand of soap national and the addition of stagnant Ayurvedic brands such as Margo and Neem (in spite of their national presence) may not prove too easy a ride in a saturated category.

However, Kamath is certain of nursing the Henkel portfolio back to health by investing in it considerably. “As of now none of the Henkel brands are growing but each one of them has potential and would get relaunched in a new avatar,'' claims Kamath. With plans to ‘reinvent' the Henkel brands , Jyothy would be taking a call on the pricing as some of them still have premium positioning with a popular pricing. “We would spend between Rs 70 crore and Rs 80 crore in the first year on improving the brand health of the Henkel brands, adds Kamath. Jyothy already has the rights to all the Henkel brands, except Pril and Fa where it would be paying a 2 per cent royalty on the sales of these brands to Henkel.

With big ambitions of emerging among the top five FMCG companies in the country, Jyothy Labs, after merging with Henkel, has targeted a turnover of Rs 3,000 crore in the next five years. Hopefully it should reach this target before Henkel AG has to make its decision to re-enter the country to pick up a stake once again in the reinvented entity.

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