'The FMCG sector should grow at a compounded rate of 25% over the next ten years' - Views on News from Equitymaster

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  • Dec 18, 2000 - 'The FMCG sector should grow at a compounded rate of 25% over the next ten years'

'The FMCG sector should grow at a compounded rate of 25% over the next ten years'

Dec 18, 2000

Adi Godrej - the name needs no introduction. As the man in charge of the Godrej Group of companies, he is quite well known. Under him, the Godrej Group seems to be driven by only one aim - that of unlocking shareholder value. Mr. Godrej was in the news recently. This time, it was as a result of the demerger announcement of Godrej Soaps. We caught up with Mr. Godrej to get his views on the demerger. He spoke at length on Godrej Soaps' future plans and the FMCG sector's prospects in India.

EQM: Please shed light on the recent announcement of Godrej Soaps demerger plan. What drove the management to do the same?

Mr. Godrej : Well, there is only one reason, and that is to add to share holder value. We feel there is tremendous value in our consumer products business that has not been unlocked as a division in Godrej Soaps.

EQM: What happens to the other part of Godrej Soaps (i.e. Godrej Industries), which will be present in chemicals, medical, diagnostics, real estate and strategic investment businesses? Will the company be able to handle such diversified businesses?

Mr. Godrej : It's a good company and will continue as a good company. Today, we feel it is Godrej Soaps that is grossly undervalued.

EQM: If you go back, Godrej Soaps has done a lot of restructuring in the past in one year or so. For example, the sale of stake in Godrej Sara Lee...

Mr. Godrej : That was a sale of a part of Godrej Soaps stake in Godrej Sara Lee to Godrej & Boyce. This was done to reduce Godrej Soaps debts. Godrej Soaps is the publicly quoted company and we want to provide shareholder value.

EQM: Your comments on the FMCG sector in India and how is it likely to evolve in the next decade, and more importantly, Godrej Consumer Products Ltd.'s role in that scenario?

Mr. Godrej : There is a tremendous growth opportunity for the FMCG sector in India. I think good brands will provide tremendous value. The FMCG sector should grow at a compounded rate of 25% over the next ten years.

We feel Godrej Soaps is an excellent FMCG company and it has a very strong brand portfolio. It has done very well in the recent past after our restructuring. It had done well during the joint venture with Procter & Gamble. During the restructuring it went through a couple of slow years but now again it has started doing very well. Demerging it into a focused consumer products company will result in an improvement in growth rates, profit to sales ratio, return on net worth, return on capital employed and EVA (economic value added), which will be equal to or better than the best consumer products companies in India. Therefore, we see a tremendous future for Godrej Soaps.

EQM: What will be your growth strategy after the demerger? Are you planning to introduce more brands or get into more product segments?

Mr. Godrej : Our growth strategy is to introduce innovative products and give tremendous emphasis behind our existing brands and businesses, which have strong potential. We will strongly back Cinthol, which is our flagship brand and our hair colour business. We are the leaders in hair colour segment in India. We have a 40% market share in the business. The segment is fast growing and has low penetration. Therefore it offers tremendous future in term of higher penetration.

We are in every segment in this business. From the lower segment which is hair dye powder sachet of about Rs 7 to the top end, which constitutes of hair colours of different shades in which we have an offering, called Godrej ‘Colour Soft'. So we are present in the entire gamut of offerings. In this segment we are introducing new products and new concepts (like a Hair and Care Institute), all this will lead to rapid growth.

EQM: What is your rural presence and what is the contribution of rural markets?

Mr. Godrej : At present, 30% of our turnover comes from the rural segment. We expect this percentage will keep growing in the future. We are taking initiatives to improve our rural presence.

EQM: Which of the two segments do you feel will drive the growth in the FMCG sector: the urban or the rural markets?

Mr. Godrej : It depends on which segment of the markets you are talking about. For the high penetration segments like soaps or detergents, I think rural India will contribute largely to the growth. For the lower penetration categories, urban India will be the driver. There are many FMCG categories where only a small percentage of the urban population uses that category. So penetration improvement will provide for growth.

The other major driver for FMCG growth will be the demographic changes India goes through. As already predicted by the NCAER (National Council for Applied Economic Research) demographic changes in terms of moving up the income ladder is going to be tremendous in India over the next ten years. The number of the very rich, the number of consuming classes, is dramatically going to improve. The number of people who are poor and who are not able to afford is consequently going to decrease.

EQM: Do you think government can do anything for the FMCG sector? Is there anything lacking in the current policy?

Mr. Godrej : There are a lot of things, which the government can do. There are various committees like the CII's FMCG committee, various associations that are taking this up with the government. The main problem in growth of FMCG today is the high rate of taxation. The taxes on FMCG products are very high.

We have excise duties and sales taxes that are very high in certain states, apart from the octroi charges. Like other countries, we should move to a VAT (value added tax) system where there will be one tax and not 10 different taxes, and this should be moderate. High tax rates lead to lower revenues. The government has consistently found that when it cut income tax rates it has collected more income tax. So, it is a false belief that high tax rates lead to higher realisation. Currently in India, especially in the FMCG sector, tax rates are ridiculously high. For many FMCG products, excise can be as high has 30%, the sales tax can be 15% to 18% and the octroi can vary from 4% to 8%, and if you add all this together it is ridiculously high. So we must move to a reasonable VAT tax regime. That I think is the main reform required for the FMCG sector.

EQM: Apart from managing the Godrej group of companies what else takes up your time?

Mr. Godrej : I have a lot of interests. I like to play bridge and am fond of horse riding. I like water sports that include water-skiing and swimming. In my younger days I used to play squash, but now I don't. I also used to do paragliding, parachuting and windsurf.

EQM: Any personalities that you admire?

Mr. Godrej : I have been a great admirer Gandhiji, JRD Tata and Margaret Thatcher.

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