Africa foray is no walk in park, find Indian firms

Indian corporates that have been betting big bucks on the great African safari through acquisitions have realised that it is no walk in the park, given the market’s unique challenges.

Consumer goods companies such as Godrej Consumers, Emami, Dabur and Marico entered the African market a decade ago through acquisition of brands and businesses on the back of rapid urbanisation and rising per capita income of the middle class in the continent. However, most of these acquisitions have not translated into earnings growth or profits, according to investment bank and research firm Espirito Santo and Macquarie Equities Research.

In their respective reports, the agencies have said that these FMCG firms might witness decline in sales in the African market in the coming quarters, as there have been few synergies in the acquisitions made, given the disparate market dynamics and unrelated categories.

Nitin Mathur of Espirito Santo said in his report that the nascent stage of modern retail, a key factor for the growth of FMCG firms, is detrimental to the growth of consumer firms. Besides, production is another major challenge, he said

“The power sector in Africa is in a very bad shape. With companies setting up manufacturing units there, they end up spending 10 per cent of their sales on power,” Mathur said. Besides, the companies have to invest heavily on supply chain, distribution system and promotional activities as most of the countries such as Kenya, Nigeria and in the Sub-Saharan region have low penetration of TV sets and face frequent power cuts, he added.

Moreover, multinationals such as Unilever and GSK Consumer are also giving tough competition to Indian firms by offering lower-priced products. Citing a Coca-Cola case study, Mathur said that, “Despite being present in Africa since 1929, the cola major has not been able to penetrate, even as key rival Pepsi continues to be absent in most of the African markets. This clearly shows the market is still under-penetrated.”

Omar Momin, EVP, Mergers and Acquisition and Business Development, Godrej Industries Ltd and Associated Companies, told Business Line , “Despite challenges, Godrej Consumer has been able to work strongly with the local communities, consumers and stakeholders.” Some of the learnings from India also have been cross pollinated for local benefits, he added. Officials at Emami and Marico were unavailable for comments.

Meanwhile, in a report, Macquarie said that despite growth in the overseas businesses, the return on equity has declined sharply in the last seven years for most domestic companies. While for GCPL it has come down from 138 per cent in FY 07 to 25 per cent in FY 13, for Marico it has slid from 43 per cent to 25 per cent, and for Dabur from 60 per cent to 41 per cent.

At present, Indian FMCG companies enjoy a high percentage of revenues (12 per cent to 44 per cent) from outside India, aided by the acquisition of brands. Of the total income from overseas business, more than 40 per cent comes from Africa for these Indian corporates.

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