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JANUARY 28, 2007
 Cover Story
 BT Special
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Taxing Times
The phase-out of central sales tax is yet another move towards ushering in the national goods and services tax (GST). The compensation to the states, in lieu of CST phase-out, will include revenue proceeds from 33 services currently being taxed by the Centre as well as 44 new services of an intra-state nature that will be traded by the states. However, VAT is the way forward, though much needs to be done to iron out the anomalies in the current VAT regime.

India, Ahoy!
Indian investments overseas are growing and how. For instance, total Indian investment in Latin America and the Caribbean has topped $3 billion (Rs 13,500 crore) so far. The latest investment is by ONGC Videsh, which acquired an oilfield in Colombia for $425 million (Rs 1,912.5 crore). Earlier, ONGC bought an offshore oilfield in Brazil for $410 million (Rs 1,845 crore).
More Net Specials
Business Today,  January 14, 2007
The All New FMCG Juniors
They are acquiring manufacturing facilities abroad, cracking open consumer markets outside India, and mulling more launches at their unbeatable price points. FMCG's HLL wannabes have caught their second wind.

Life has been extremely hectic for Girish Patel over the past two decades and it shows no signs of slowing down yet. The 46-year-old Chairman and Managing Director of Ahmedabad-based Paras Pharmaceuticals, a fast-moving consumer goods (FMCG) company, works over 12 hours a day, six days a week. The result of his unrelenting schedule is that the company that he and his father had started in 1987 with a capital of Rs 57 lakh now has sales of Rs 330 crore and a presence in 40 countries. Yet, Patel insists he has a long way to go.

Indeed, he does. Paras Pharma is still a minnow compared to the Indian arm of FMCG whales like Hindustan Lever (Rs 12,000 crore) and Colgate-Palmolive (Rs 1,200 crore). So Paras's workaholic boss has raised the bar for his company: he wants it to become a Rs 1,000-crore entity within five years. "When I started two decades ago, I had nothing to lose. Today, I cannot afford to lose. A lot of grit and toil have gone into creating what we have now," says Patel.

Patel's story epitomises what is happening at a slew of small (and some not-so-small) Indian FMCG companies like CavinKare, Jyothy Laboratories, Emami Group, Kanpur Detergents, Himalaya Drug Company and VVF. Most of these companies hit the FMCG mainstream just a couple of decades ago with nothing more than a steadfast determination to make it big. Himalaya and VVF have a hoarier history but even they entered the consumer markets as recently as the newer crop.

It has been a tough journey. Pitted against strong national brands from their much bigger competitors, the small FMCG players have had to fight to capture the fickle loyalty of consumers and, most importantly, fight with deep-pocketed giants, many times their sizes, that were only too keen to gobble them up. Some weaker brands even sold out: like All-Out mosquito repellant, Captain Cook salt, Uncle Chipps snackfoods and Chandrika soap.

This resolute bunch, however, stood its ground. In the past two decades, they have consolidated their business by building and even stealing market share from the biggies, so much so that some of them are the market leaders in their categories (Jyothy Labs' Ujala brand has over 70 per cent market share in the fabric whitener category, VVF's lime soap has toppled older brands like Liril and Cinthol, and CavinKare leads the shampoo sachet market with a 22 per cent market share). The size of their enterprises is still small but each of them runs an extremely profitable business. Says C.K. Ranganathan, Chairman and Managing Director, CavinKare: "All our brands today earn 40-50 per cent gross margins. We couldn't have survived and scaled up if we didn't make good profits."

The Beginning: CMD Girish Patel (above) diversified into the FMCG sector in 1987 with a solitary product, Moov, after the OTC business that his father ran started showing signs of fatigue. Today, the company that started with Rs 57 lakh capital has 15 products in its portfolio.
Current Turnover: Rs 330 crore
Profits: Rs 50 crore
Strategic investors: Actis ($42 million) and Sequoia Capital ($12 million)
Categories present in: Over-the-counter drugs and personal care consumer products
Future plans: To be a Rs 1,000-crore company through organic and inorganic route. Keenly looking at global expansion; products already available in 40 countries.

The Beginning: Founder-Chairman M.P. Ramachandran started Jyothy in 1984 from Kerala with one brand-Ujala, a liquid fabric whitener. It was launched nationally in 1997 and the size of the brand then was Rs 150 crore
Current Turnover: Rs 400 crore
Profits: Rs 70 crore
Strategic investors: Currently, 19.75 per cent stake held by ICICI Canada & ICICI UK. In the past, Baring Private Equity Partners, CDC (now Actis) and CLSA have had significant investments in the company.
Categories present in: Fabric care, ayurvedic personal care, mosquito repellents, surface cleaning preparations and dishwasher bar. Market leader in the fabric whitener segment-the Ujala brand enjoys over 70 per cent market share, and accounts for over 90 per cent of the company's total revenues.
Future plans: To diversify into newer product categories and geographies beyond southern states.

The Beginning: CMD C.K. Ranganathan (above) parted ways with his family, which was in the FMCG business, and set up CavinKare around 1986. He started off with shampoos with an initial investment of Rs 15,000; the shampoo brands currently enjoy 22 per cent market share.
Current Turnover: Rs 500 crore
Strategic investors: None
Brand promise: Value for money
Categories present in: Hair care, skin care and home care
Future plans: To consolidate the foods category, to acquire businesses (around Rs 200-250 crore in size) that make a strategic fit and to launch an IPO to fund expansion and diversification. Global expansion is big on the agenda; already present in most Asian countries and the US.
The Beginning: Set up over six decades ago, the company mainly dabbled in contract manufacturing for MNCs like J&J, Reckitt Benckiser, JL Morrison and Colgate-Palmolive and oleochemicals business. It launched its own brand of personal care products, mainly bathing soaps, two years ago and some of its brands are already the market leaders in their categories.
Current Turnover: Rs 700 crore; of this the personal care business accounts for Rs 100 crore
Strategic investors: None
Categories present in: Personal care
Future plans: To diversify further in the personal care category with the launch of shower gels, handwash and skin care products. Keen on global expansion; recently bought Colgate-Palmolive's soap manufacturing facility in the US.
The Beginning: Set up in 1930 by MM Manal, but now managed by CEO Ravi Prasad (left), the company largely remained confined to ayurvedic drugs till the late 1990s. It diversified into ayurvedic/medicinal personal care products in 1999 and today boasts a wide range of personal care products.
Current Turnover: Around Rs 500 crore; of this personal care business accounts for around Rs 100-150 crore
Strategic investors: None
Categories present in: Hair care and skin care
Future plans: To diversify further in the personal care category and grow globally. Products already available in 70 countries.

Now, having built moderate-sized businesses and a bigger presence, they have set their sights higher, looking at product diversification and geographical expansion, not only within the country but even globally. Quite a few of them are even eyeing acquisitions, thereby, turning into predators from being, not so long ago, the prey. VVF, for instance, recently acquired Colgate-Palmolive's soap manufacturing facility in Kansas, us. Says Piyush Jindal, Senior Vice President, Personal Care, VVF: "We have been manufacturing soaps for leading MNCs like Johnson & Johnson, Reckitt Benckiser and Colgate-Palmolive for decades now. We want to use our expertise for our own benefit now and, hence, the plunge into the personal care industry and the efforts to augment the business."

The Second Coming

Scaling up-either through acquisitions or expansion and diversification-will need much more resources (financial, technological and management) than these small entrepreneurs had at their disposal the first time round. But most of them are unfazed by that. Partly because success breeds, well, success. And, of course, because of a booming economy. Says Rahul Bhasin, Managing Partner, Baring Private Equity Partners, a leading private equity group: "Unlike two decades ago, India today stands at the threshold of fast growth. Today, there is a sizeable middle class (around 300 million) with rising disposable incomes and a younger population inclined towards consumption."

Like other Argus-eyed private equity players, Baring, in fact, had sensed this opportunity way back in 1999 when it picked up a 10 per cent stake in Jyothy for around Rs 40 crore. Four years later, it earned more than 50 per cent return on its investment when it sold its stake to Actis and clsa, two other leading private equity firms. Eventually, Actis and CLSA also sold their stakes to ICICI UK and ICICI Canada, who currently hold 19.75 per cent stake in the company. Similarly, Paras Pharma attracted investments from Actis (Rs 190 crore for a 24-25 per cent stake) and Sequoia Partners (Rs 54 crore for over 10 per cent) last year. Now, the market is abuzz that Citi Venture Capital is keenly looking at picking up a stake in Kanpur Detergents, which owns the fast-growing detergent brand, Ghari. "Increasing interest from strategic investors highlights two facts: one, the confidence in our business acumen and growth prospects and two, raising funds for expansion is not a challenge anymore," says Ullas Kamath, Deputy Managing Director, Jyothy Labs.

Then, those not wanting to have "outsiders" in their boardrooms have other options. "We are open to the idea of going to the market (IPO) as and when we need funds for expansion or acquisition," says Ranganathan. Indeed, with the sun shining bright on the markets, those with credible businesses stand a good chance of making hay. In fact, markets are rife with speculation that even Paras and Jyothy might be looking at an IPO sometime soon.

Building on the Past

One reason for investors' confidence in the future of these companies lies in their past. Most of these companies have a foundation that is rooted in robust marketing strategies. Says Donald Peck, Managing Director, Actis Capital: "The smaller FMCG brands have defied most commonly-accepted marketing principles. Creation and innovation on all fronts, be it product offering, pricing or marketing and communication, have been at the core of their gradual evolution. They have their fingers on the pulse of Indian consumer. And they have the determination to succeed." Indeed, each of these companies has had a distinct strategy that followed the four Ps (product, pricing, positioning and promotions) of marketing in its own unique styles.

To start with, each one of them created a niche for itself by giving its products a unique positioning. Says Manish Goenka, Director, Emami Group of Companies: "Our key philosophy over the years has been to look at the gaps in the market and come up with new ideas. Our men's fairness cream, Navratna oil and Sona-Chandi chyawanprash are all products of this philosophy." Similarly, Paras' products have scientifically proven medicinal benefits and Himalaya offers do-good herbal concepts based on strong research and development. "While we position our products in niches, our pricing is very mass-like," says Ravi Prasad, President and CEO, Himalaya Drugs Company. This was a unique strategy that helped it catch consumers' attention. Others like Jyothy, CavinKare, Ghari, Emami and Anchor offer "value-for-money' products that were a hit in the mass market at prices that big FMCG companies couldn't match. Also, many of these players began at the bottom of the pyramid, creating markets where there were none before moving up to the urban and upwardly mobile consumers. Their bigger rivals, on the other hand, focussed for decades on urban pockets till they were saturated before trying to tap the rural markets-a strategy that, in many instances, got less-than-satisfactory results. "We started with one product from one state, Kerala, then, took it to other southern states and went national only after we had consolidated our base in these markets and also created enough buzz around our brand," says Jyothy's Kamath.

Their initial regional or rural focus didn't mean these marketers were wanting in terms of promoting or advertising their brands. And, Ghari Detergent's Pehle Istemal Karen Phir Vishwas Karen and Ujala's Aya Naya Ujala, Chaar Boondon Wala were some of the most popular jingles of their times. In its initial years, Paras spent more than 80 per cent of its turnover on advertising and promotions. "Brand building is a must in the FMCG business. There is no escaping this route," says Patel, adding that "even now, we spend a considerable portion of our revenues on communication". Splurging on advertising meant cutting costs elsewhere. You'll find few high-flying MBA whizkids with 7-or 8-digit paychecks in the corridors of these homegrown FMCG firms. And that has probably helped them get where they are. "We have only a sales force and no marketing team. We do not spend money on maintaining media buying agencies but we go by the feedback from our salesmen (a field force of 1,200) on what is being watched and read in their territories," says Jyothy's Kamath.

Where they haven't cut corners is in distribution, with most of them penetrating the smallest of towns through a direct sales force and sub-stockists. Most, like CavinKare, Paras, and Jyothy, have a presence across 2.5-3 million retail outlets.

Says Jagdeep Kapoor, Managing Director, Samsika Marketing: "The story of small FMCG brands in India is both of evolution and revolution. The credit for their success goes to their innovative business models, unrelenting focus on their niches and the pure and relevant marketing processes." The fact that their brands are now going and winning global markets goes to show that their strength and success are for real.

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