FMCG company Henkel India has been in the news for all the wrong reasons. A poor record in the past couple of years has seen the company's MD, Mr Jayant Singh, resigning, with both partners, Henkel AG and Tamil Nadu Petroproducts Ltd, reported to be ‘unhappy' with the performance of the company.

While the company has intimated the Bombay Stock Exchange that it intends to hive off its professional hair colour business Schwarzkopf into a separate subsidiary, top sources in the company say that no intended sale of the company's brands or assets has been placed before the Board, as yet. The brands, they insist, still have a lot of “intrinsic value” and the company will have to rejuvenate them. This analysis takes stock of the FMCG stock that didn't quite click while its peers in the industry showed red-hot growth.

For a multinational company operating in the fancied FMCG sector, the stock of Henkel India hasn't done much in the past five years. Investors can, in fact, today buy the stock at a price very similar to levels it traded five years ago. While the Henkel stock has remained more or less range-bound in the five-year period, the BSE FMCG Index has gained 12 per cent a year. Companies such as Godrej Consumer Products have done even better, managing an 18 per cent annual return in this period.

A rapid scaling up of size is what investors usually look forward to from smaller and mid-sized FMCG companies. However, Henkel India, which has managed to expand its sales only by 40 per cent over the last five years, has not met these expectations. Consider these numbers: Helped by a slew of acquisitions and launches, soaps and hair colours maker Godrej Consumer has seen its consolidated sales more than treble in the last five years from Rs 700 crore in 2005-06 to an annualised Rs 3,400 crore in 2010-11. Marico Industries too has managed to expand its topline from Rs 1,143 crore to Rs 3,200 crore (annualised). Those growth rates of 37 per cent and 25 per cent put in shade Henkel India's single digit growth rate of 7 per cent. Its topline, which remained nearly flat for the last three years, is at about Rs 530 crore for the year ended December 2010.

No consistency

Henkel India's profits too have charted a rather bumpy path, failing to show the consistency usually expected of FMCG companies. On a standalone basis, the company's marginal net profits of Rs 4.2 crore in 2008, for instance, turned into losses of Rs 12.6 crore in 2009 as the company took one-off restructuring costs relating to closure of one of its factories. The company was just about back into the black in 2010, with a marginal profit of Rs 1.13 crore. Heavy costs incurred on advertising and promotion, as Henkel India has sought to defend its shares and build new brands in segments such as laundry and household care, have contributed in big measure to its low profitability.

Detergents segment

What made the going so difficult for Henkel India is its significant focus on the fiercely competed detergents segment of the FMCG market. Even as most large segments of the FMCG market have seen rising competition over the past five years, it is detergents that have borne the brunt of price wars and fierce battle for turf between market leader Hindustan Unilever and challenger P&G.

The pressure to lower selling prices combined with the significant escalation in input costs for detergents (they are strongly linked to the crude oil price table), have decimated the operating profit margins for detergent makers over the past five years. Behemoths such as HUL have managed to offset margin pressures in the detergents segment, through product mix changes by virtue of a huge product and brand portfolio.

However, Henkel with its focus on premium detergents, has faced significant pressure to play the price game, even as it invested heavily in brand–building.

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