It's something that the group's been obsessed with for a long time, but hasn't been able to do much about. But giving up doesn't come easily to Chairman Adi Godrej as his newest efforts at enhancing shareholder value reveal.

By Brian Carvalho 

You can blame him for plenty: for not being able to make his joint ventures work, for failing to get his distribution act together, for not providing value to his shareholders, for not being able to attract good people... It's a different matter whether Adi Godrej agrees, but there's one thing you just can't crucify Adi Godrej for: for not trying. Ever since he took two of his companies, Godrej Soaps and Godrej Foods, public in the mid-nineties, the Chairman of this Rs 3,500-crore group has not hesitated to try out the unfamiliar in a bid to improve performance. Other than the much-touted JV with Procter & Gamble, over the years, the group hitched on to Pacific Technology, Pillsbury, Sara Lee and General Electric. Even as a few of them went their own way-or are in the process of doing so-Godrej would like to believe that he has absorbed plenty of learning from them, although equity analysts read the end of many of those alliances as failures (for Godrej). Then, financial and management consultants-at one time Kotak Mahindra or Booz Allen, at another Lazard or Andersen Consulting-have strutted their stuff, be it for cost-cutting or financial restructuring but, again, the stock markets didn't seem to care. And the chairman has always ensured his presence at various global business management forums, on the look out for new techniques to implement, like the Total Quality Management that's in vogue these days at Godrej's expansive manufacturing facilities at Vikhroli, a central Mumbai suburb.

2 Turnarounds

Adi Godrej hasn't exactly had much to write to his shareholders about. Last year, he was able to guide flagship Godrej Soaps Ltd (GSL) back into the black. Yet, despite a steep run-up in the stock over the past five months, it still trades woefully below its listing price of Rs 160 and its all-time high of Rs 225. But the turnaround at the Cinthol manufacturer is easily the best piece of good news Godrej has had for his shareholders in some time.

The other listed company Godrej Foods has once again crashed into the red, with losses of close to Rs 25 crore for the nine months ended December, 2000. Says Rajani Sinha, an equity analyst at myiris.com: ''The group is focusing on businesses where ROCE and EVA are high. That explains the demerger of the consumer products division. But whilst I don't see a major focus on foods, Godrej is also trying to turn around low-EVA activities like chemicals.''

To the chairman's credit, the turnaround at GSL is nothing to be sneezed at. After all, as of March, 1999, the company appeared down and out with a net loss of Rs 34 crore. A year later, GSL was back with a bang, in the black with a Rs 61-crore net profit. And indications are that the good showing will be repeated this year, with earnings for the quarter ended December 31 surging by 43 per cent. Does that please Adi Godrej? Not really. ''Our market cap is still low relative to our performance,'' he shrugs. Indeed, whilst Godrej's peers in the fast-moving consumer goods business show price-earnings ratios of between 15 and 50, Godrej Soaps' P-E is a humble 7-8. It's unsurprising, therefore, not to find any Godrej company figuring in BT's top 500 companies, by market value-added (MVA).

Today, however, you can be sure that valuation is a priority for Godrej. And he stresses that shareholder value isn't exactly a new fad, as it might be for many of India Inc. ''We've been tracking parameters like return on capital employed (ROCE), return on net worth (RONW), and economic rent for over 10 years now,'' he says.

What is relatively new at Vikhroli is yet another concept Godrej has cottoned on to: that of economic value-added (EVA), courtesy its pioneers Stern Stewart & Co of the US. The exercise, which began in October, will be completed by this July. Godrej has just completed the first phase, and he's obviously kicked by the experience. Group company Godrej & Boyce, will also implement EVA, for which brother Nadir will attend a worldwide conference on the subject next month. The exercise may be only for nine months, but Godrej is clear that its full-blown results will be visible in three-four years. ''But every year, we should see an improvement,'' he adds.

The EVA exercise at the group has to be put in the perspective of the other attempts being made by Godrej to improve operational efficiencies. Like the TQM project, for instance. Or the cost-cutting exercise being implemented along with Andersen Consulting, thanks to which GSL shaved off Rs 20 crore of his costs last year.

3 Focus Areas

Then, Godrej has identified three focus areas, which he thinks are imperative to sprucing up his operations: marketing, research and new product development. And he's got a taskforce working on these areas, headed by his daughter, Tanya Dubash. Although this exercise is across companies, its results are most visible at GSL, which has identified soaps for skincare as its core focus. The product development process begins with an idea entering the 'innovation funnel'. It is then filtered to see how feasible it is on the research and development, technical, manufacturing, and commercial fronts. If the idea does pass through these filters successfully, it is market-researched to check out its volumes potential. The biggest headway, according to Godrej, is that they've managed to crunch this entire process into six months, as against the three years it would take earlier. That probably explains why GSL has finally been able to show double-digit growth in the soaps business, as against just 2-3 per cent in the previous year. That growth in turn has come on the back of products like Fair Glow, which has become a Rs 100-crore brand, and which was the first to flow out of the funnel last year.

Godrej sees the EVA exercise as a logical progression of these efforts. He's got a three-person team spearheading the project, which includes Shankar Vaidya, Executive Director (Personnel) of the group, and Sunil Sapre, Head of Finance and Company Secretary of GSL. As Godrej himself puts it, the choice of the team indicates that EVA has as much to do with people as with finance. In the first phase, the team has started off by analysing the various businesses on EVA parameters like ROCE and MVA. So, for instance, two businesses with sound EVAs and EVA/sales ratios have been identified: Godrej Soaps (without the chemicals business and the investment portfolio), and Godrej Sara Lee.

Come April 1, the consumer products division of GSL (soaps, hair care) will be demerged into a separate company, called Godrej Consumer Products. The chemicals business and investments (valued at Rs 200 crore at book value) will remain in the current company, which will be rechristened Godrej Industries. As Godrej points out, Godrej Consumer Products is a high ROCE, high RONW, high EVA/sales business, and hence should command a higher valuation. ''There's no chance of a high EVA at the oleochemicals and investments business,'' he adds.

Godrej pegs GSL's current EVA at Rs 18 crore, and its ROCE at 50 per cent. The surprise in the pack is the EVA of Godrej Sara Lee, at Rs 30 crore. Its ROCE is in the 70 per cent range.

But that doesn't mean that the other poorly-performing businesses-with EVA as a parameter-will be given the go-by. In edible oils, the main business of Godrej Foods, the company faces stiff competition from ITC Agrotech (which has the backing of global oil trader ConAgra) and HLL. Godrej himself agrees that the chemicals business will never enjoy an EVA as that of consumer products. He doesn't rule out divesting from such areas, but that doesn't mean he's going to sell the chemicals business tomorrow and foods the day after. ''Sometimes it makes more sense to continue with a business and milk the returns rather than sell it at a throwaway price, which is what you will get when the business isn't performing,'' says Godrej. He adds that the only offers he gets from competitors and investment bankers are for his flagship activities.

Godrej's point is that EVA isn't only pertinent to the performing businesses, but in fact is more relevant to the slackers. Indeed, reducing a division's negative EVA-or, to put it in another way, increasing EVA incrementally-is top priority. And the process has already started. For instance, both the profit before tax (PBT) and the EVA of the chemicals business were negative three years ago; the EVA stood at Rs 40 crore. This year, the PBT has turned positive, although the EVA will enter the black only next year. Yet, Godrej has managed to improve it to Rs 10 crore.

The People-challenge

Eva, RONW, ROCE, MVA and the rest will make little sense if Godrej's employees don't come on board. Godrej agrees that what's needed is a major change in mindset. The key to acceptance of course lies in how the chairman structures the EVA-linked compensation package he's currently working out.

Broadly, here's how it works out. Incentives will be doled out annually in part, the rest will be credited in a bank account. Of course, there will be a credit only if the employee is part of a team creating value. If the team is destroying value, a debit will be made accordingly.

The advantage of such a scheme is that employees will be discouraged from chasing short-term results. Instead, it will encourage consistent behaviour in the medium-to-long term. And don't forget the loyalty factor-if an employee leaves the organisation before completing, say, three years (the actual duration has still to be decided), he won't have any access to the bank.

Godrej is counting on this new compensation system discouraging any attempts at gunshot growth, from those with an eye on short-term benefits. ''In the past there have been irrational expansions, which didn't work out too profitable. Growth for its sake is not desirable. Growth is for profits,'' he asserts.

Yet, Godrej does see the danger of the flip side: the danger of a decline in growth, as employees go easy on the risk. For instance, brand teams may decide to go slow on advertising and promotions if they fear that the spend may result in the EVA being hit. Don't forget that GSL itself will be splurging Rs 100 crore on advertising and promotion this year, twice what it did in 1999-2000.

Similarly, investment in research and development (R&D)could hit a roadblock. But there is a way out. To ensure that launches don't dry out, brand managers are allowed to capitalise their ad spend over six quarters (this won't happen on the company books, of course). Similarly, R&D expenditure can be capitalised over three years.

So will Godrej's EVA experiment work out? The initial results appear encouraging. But the question marks continue to linger. Why, for instance, does Godrej end up not just losing his JV partners but also his distribution networks? What hope in hell does Godrej Foods have in the volumes-based edible oil market? And what about consumer products itself? Yes, GSL has grown handsomely, but remember it has come on a small base-not quite that of a Hindustan Lever, competing against whom will always prove a Herculean challenge for Godrej.

But you have to give credit to Godrej for venturing into territory uncharted by Indian corporates. The Godrejs are only the third Indian group to adopt Stern Stewart's EVA concept, after TCS and NIIT (although almost half of the US' Fortune 500 do so). And Godrej has been quick to learn from their experiences. ''I met up with the CEOs of both TCS and NIIT, and they advised be not to complicate the exercise in the beginning. A compromise has to be made between decision-making and theoretical complexities,'' he says. Now, it's up to Godrej's workforce to understand that.

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