Godrej CFO: Brand takeover opportunities in India are limited

P Ganesh of Godrej Consumer Products, says few opportunities for inorganic growth in the country results in valuations being high. Godrej is looking for acquisitions at home and abroad that will be a strategic fit and accretive

In 2010 the fast-moving consumer goods (FMCG) sector grew and Indian companies undertook acquisitions overseas. But increasing input costs put pressure on margins. In an interview to Moneylife, P Ganesh, chief financial officer, Godrej Consumer Products Limited (GCPL), discussed these experiences from the year gone by and the possibility of price increases due to high oil prices. Excerpt from the interview.

Moneylife (ML): In 2010, we saw the Indian FMCG sector go overseas, with GCPL, and other firms like Marico, Dabur and Emami acquiring quite a few foreign brands, especially in Africa, South-East Asia and Turkey. Do you see more such acquisitions this year too?

P Ganesh (PG): Currently the focus is on integrating our recent acquisitions. However, we will definitely consider any opportunity if it is a strategic fit and is accretive, whether in India or overseas.

ML: When it is being said that India is the place to be, why go abroad for acquisitions?

PG: Inorganic growth opportunities are limited in India and with few opportunities valuations tend to be high at times. At GCPL, we look at EVA (economic value added) accretive acquisitions in the medium term (about two-three years timeframe).

ML: Apart from Genteel, which GCPL acquired recently, were you interested in any other Indian brands?

PG: Yes, we have been looking at opportunities both in India as well as abroad. But we have to consider whether the move will be a strategic fit.

ML: The soaps sector, which has been the stronghold for GCPL, has seen muted growth. What could be the possible reason?

Consolidated Godrej consumer growth has been excellent this year. However, our domestic soaps growth was impacted by the prevailing high food inflation as well as the correction in the pipeline stocks. Things are looking up now. The base effect will also help the growth number.

ML: What about hair colour, the other invincible Godrej segment? With so many new brands entering the market, has Godrej been affected?

PG: In hair colour, we are the market leaders. In this category, we have a range of offerings, including Godrej powder hair dye, Godrej expert powder and liquid hair colours, Renew and Nupur. Godrej has been one of the early pioneers in the hair colourants category. Providing unmatched quality at affordable pricing is the USP of our products. The industry is attracting a lot of attention from international players. We are currently not present in the high end of the category, say the top 10% of the market, where you'll find the likes of L'Oreal. Our products are in the Rs10 to Rs100 price band which itself has a lot of opportunities for growth.

ML: Almost all FMCG companies are feeling the pressure due to increased input cost and rise in cost of raw materials. Then, there is the issue of rising price of food items. How has GCPL handled cost increases?

PG: Vegetable oil prices globally have risen over the last few months, as have prices of other agricultural products. At GCPL, we are covered at reasonable prices for our requirements in the next three to four months. Food inflation has been a worry over the last few months. But with renewed attention on this front and prospects of a good winter crop, things should start easing over the next few months.

ML: So what do you expect in 2011?

PG: Given the high oil prices, we are seeing some upward price corrections. This will take care of the pressure on margins.


Sensex rose 17% for the year—exactly the same as the 20-year annual average !

While the Sensex climbed a huge 76% in 2009, it added 17% this year. Experts expect modest gains of 10-12% next year which will take the market to an all-time high

The Indian stock markets registered not-so-exciting gains in the calendar year 2010, although there were a lot of expectations after the fantastic gains in the previous year.

The Sensex made a solid start on the first trading day of the year, to close at its highest level in 20 months. It was a very positive time. The government promised higher growth, corporates were beginning to see a revival in business, and analysts saw good domestic demand that could spur the markets.

However, after repeated twists and turns, the Sensex has settled with a 17% gain. That's not much to cheer about, especially because the Sensex climbed a huge 76% in 2009. But remarkably, 17-18% is the 20-year annual average rise in the Sensex.

Corporate results have more or less been up to expectations this year, but the stocks were already expensive at the beginning of the year. To get to a higher Sensex target, market players are now extending the horizon of their projections to 2012.

In fact, the Sensex has beaten the S&P 500 by only 4% this year. According to most commentators, the US continues to be down in the dumps. And with very little opportunities elsewhere, a lot of money has been gushing into the Indian markets. Over Rs62,370 crore of foreign money came into the Indian markets this year.

Brakes to the Sensex rally came from fears of monetary tightening in order to curb inflation. The central bank hiked the cash reserve ratio from 5% to 6% in stages, the repo rate to 6.25%, reverse repo rate to 5.25% and decreased the statutory liquidity ratio to 24% from 25%, which was continuing since November 2009.
Early in the year, the government began to withdraw stimulus measures through its budget proposals, which hurt the auto and IT sectors. Still bank stocks were upbeat over the lower borrowing programme. The government hiked central excise duty on non-petroleum products across the board from 8% to 10% as well as the basic duty on crude and petroleum products, and also increased the price of petrol and diesel by Re1 a litre.

The Sensex closed at 16,430 on the Budget day, up 0.44% over its January close of 16,358, whereas the Nifty was up 0.82% end-February at 4,922 against its January closing of 4,882.

In April, worries set in globally over sovereign debt repayments in some key European countries like Portugal, Ireland, Italy, Greece, Spain (commonly referred to as PIIGS) and Belgium. Till the International Monetary Fund stepped in to bail out Greece with a 110 billion euro loan package.

In November, the IMF together with the European Union worked out assistance for Ireland to contain the contagion, while some of the other names also had to accept restrictive conditions. The global developments in April may not have had a great impact on the Indian markets, but in November the Sensex and the Nifty declined 2.5% on global concerns and some domestic uncertainty.

With Western economies struggling to revive and companies either re-structuring or shutting down, Indian corporates were expected to take advantage of the opportunity. However, the first quarter performance of the top 100 companies was a disappointment. While revenues witnessed a strong 22% aggregate growth, operating profits barely budged an inch, up by a mere 1%. This performance was contrary to the market's expectations of a 20% growth in operating profit for the entire fiscal year 2011.

Names like Ranbaxy Laboratories, Adani Enterprises, Reliance Natural Resources, Reliance Capital and India Cements put up a poor show. Some others like Financial Technologies, Ashok Leyland, Indian Hotels, GMR Infrastructure and Sun Pharmaceutical caught the attention of investors in the June quarter.

The performance in the September quarter was decent, albeit slightly lower than anticipated. Steel products, real estate and auto ancillaries posted robust growth, while cement and IT companies fell short. Among the Moneylife sample of 1,334 listed entities, 878 companies managed to post a revenue growth of 18%, while operating profit growth was at 17% over that in the previous corresponding quarter.

Importantly, this year India Inc raised a record Rs71,000 crore through 70 public issues. Of these, 62 were initial public offerings (IPOs) and eight were follow-on public offers (FPOs), according to data complied by brokerage firm SMC Global Securities.

Companies like SKS Microfinance, Coal India-that had the biggest IPO of the year-and Manganese Ore India Ltd received a huge response from investors. Engineers India Ltd, Talwalkars, Career Point and some others also made their mark on the stock market.

Merger and acquisition (M&A) deals by Indian companies stood at $67.2 billion during the year (as of November 2010), up from $21.3 billion in 2009, according to Thomson Reuters data. The average deal-size was also higher. There were 1,047 deals with an average ticket-size of $51.4 million, compared to 1,235 deals with an average ticket-size of $16.5 million in 2009.

Strangely, despite the record foreign money flowing into the market and such large fund-raising activity, brokerage stocks have been down through most of this period. While the real estate and power sectors have also languished, auto, consumer durables and healthcare have done well overall. The BSE Consumer Durables index surged 58%, the Auto index gained 32% and the Healthcare index rose 31%. On the other hand, the BSE Realty index tanked 29%, the BSE Power index declined 8% and the BSE Public Sector Undertaking index lost 3%.

After a generally dull first half, expectations of a pickup in demand beginning with the festive season saw the market register its best performance in a month, as the Sensex and the Nifty each gained over 11% in September.

But in November, the bribes-for-loans case and the 2G spectrum allocation scam, which blew in the face of many big realty, financial and telecom companies, rocked the market. The Sensex and Nifty each declined 2.5% in the month.

While the RBI kept interest rates on hold in December, it warned that rising inflation might force it to take harsher steps in 2011.

Clearly, neither the high 9% economic growth, nor the flood of foreign funds, or the improved performance by India Inc has helped make any significant difference to the stock market. If the US economy continues to grow as it is now being expected, we should see a positive bias and certainly a new all-time high for the market.


Weekly Market Report: Subject to small dips, a major rally has started

The last week of 2010 saw the domestic market post respectable gains despite low volumes, as institutional participation picked up towards the end of the week. The market ended the year with a gain of 17% on the Sensex and 18% on the Nifty.

The market opened with a gap of 23.69 points at 20,412.76, to hit an intra-day high of 20,552.03, and closed the day at a one-and-a-half-month high of 20,509.09. We may soon cross the level of 21,004.96 achieved on 5 November 2010. The indicators of the moving averages and institutional investors’ net inflows show that the rally will continue for some time to come.

A high degree of choppiness interlaced with regular bouts of selling resulted in a subdued close on Monday. The market kept dipping in and out of the red on Tuesday leading to a flat close with a negative bias. Support from consumer durables, banking and metal stocks ensured a decent close on Wednesday, with the key indices closing above their psychological levels. On Thursday, despite food inflation touching a 10-month high of 14.44% in the week ended 18th December, the market posted gains of around 1%.

The last trading day of the week as also the last trading day of 2010 extended the winning streak. The market started in the green in the absence of cues from its Asian peers, most of which were closed for trading on account of the New Year’s Eve holiday. The market gained 2% in the week ended 31st December with the Sensex surging 435.43 points and the Nifty up 122.90 points.

Leading the gainers, Bajaj Auto was up by 7%, followed by HDFC Bank, Hindustan Unilever (up 6% each), Tata Power (up 5%) and HDFC (4%). On the other hand, Reliance Industries, ONGC and Tata Motors remained at the bottom of the list, ending flat this week.

Among the sectors, BSE Consumer Durables index (up 4%) and BSE Realty index (up 3%) were the notable sectoral gainers in the week, while the BSE Oil & Gas ended flat.

Ms Madhabi Puri-Buch, the MD-CEO of ICICI Securities said, “We expect strong earnings growth to take precedence over multiple expansion with Sensex target of 23,165 by December 2011. Accordingly, we bank on sectors which are likely to exhibit superior earnings growth. We prefer large-caps to mid-caps, given their enhanced ability to endure negative undercurrents if any. We bank on outperforming sectors of last year like IT (reaping benefits of global growth, revival of discretionary spending), pharma (strong domestic and US led growth, M&A opportunity), banks (strong base growth to make up for rich valuation), capital goods (strong Tier-I led growth).”

Soaring onion prices pushed food inflation to a 10-week high of 14.44% for the week ended 18th December, a development that may prompt the Reserve Bank of India to hike key policy rates next month, to check price rise. Food inflation rose for the fifth consecutive week on the back of high onion prices, which rose by almost 40% on an annual basis, touching Rs75-Rs80 per kg in the retail markets.

Growth in key infrastructure sectors dropped to a 21-month low of 2.3% in November, over the same month last year, and from 8.6% in October this year, raising apprehensions about the momentum of expansion in the country’s total factory output.

The lacklustre growth of the six infrastructure sectors, which have a weightage of 26.68% in the overall industrial output, was largely on account of a dip in petroleum refinery and cement output.

The textiles ministry said it will soon seek Cabinet clearance for a National Fibre Policy, which is aimed at ending the tax disparity between cotton and man-made (synthetic) fibre. In its draft policy, which has been in the public domain since June, the ministry had expressed concerns over the “historical discrimination” of man-made fibres and textiles vis-à-vis cotton and cotton textiles in the form of higher excise duties.

In international news, China’s manufacturing activity continued to expand in December, but the pace of growth slowed to a three-month low, according to the outcome of a survey by HSBC released on Thursday. China’s purchasing managers’ index for December came in at 54.4, above the threshold of 50 that separates expansion from contraction, but below the November reading of 55.3.


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