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The world has been the playground for Indian fast-moving consumer goods companies, as they move to new geographies and buy companies in a bid to expand. For Dabur India, Emami, Godrej Consumer and Marico, overseas business accounting for an increasingly larger share of revenues. Meanwhile, they turned up heat on the home front too, driving rural sales, lining up product launches and acquiring domestic brands.
All this has pushed up their stock market valuations, narrowing the gap between them and their multinational counterparts. For example, Godrej Consumer was at a price-earnings multiple of 26 times at the start of 2005 trailing behemoth HUL, which traded at 31 times then. Godrej's valuations are now at 34 times, on par with that of HUL.
Acquisitions to the fore
The domestic market is fiercely competitive, especially in categories such as soaps and shampoos. Some segments are also dominated by a few players. For instance, GSK Consumer Healthcare has cornered malted drinks and Colgate Palmolive controls over half the toothpaste market.
Breaking into such markets would thus require immense investment in product development and advertising to build up share. Options for acquiring domestic brands too were limited.
Domestic companies thus looked overseas to grow revenues. Emami, Dabur and Marico had already taken their own brands — Boroplus, Vatika and Parachute — into smaller, less penetrated markets such as Bangladesh and Nepal. They have also designed products specifically for those markets.
But in the past couple of years, domestic companies have turned aggressive on acquisitions to drive rapid growth.
With strong cash flows and low debt, financing acquisitions would hardly be an obstacle. In fiscal 2010-11, Dabur acquired Turkish Hobi Kosmetik Group and the US-based Namaste Group. The two acquisitions gave the company a footing in the US, Eastern Europe, West Asia and North Africa.
Marico entered South Africa, Egypt, Malaysia and Vietnam by buying up majority stake in companies, the latter two countries in 2010-11 alone.
Godrej Consumer made its international foray by buying Indonesia's Megasari Makmur, besides a clutch of brands in South Africa, Chile and Argentina, all in a span of two years. Emami has bought manufacturing units in Egypt to cater to its export market, primarily in West Asia. The company is reportedly scouting for more international buys.
Synergies
In their acquisitions, the companies have followed similar paths. One, they have mostly picked up companies in emerging, growing markets of South-East Asia, Africa and Latin America. Similar to Indian markets, consumer penetration in most of these regions is lower, offering scope for healthy growth. Two, they have bought companies which are well-established and are either market leaders or have a sizeable portion of the market. This enables quick addition to revenues, besides calling for lesser investments in infrastructure and promotion.
For instance, Vietnam-based ICP, acquired by Marico, has through X-men captured over 35 per cent of the men's shampoo category. Three, they have broadly stuck to those segments in which they operate in domestic markets and thus know and understand well.
It offers scope for cross-selling products besides sharing product technology and innovation. It also allows companies the leeway to shift manufacture to low-cost regions, or consolidate sourcing to lower costs across the board.
For example, Godrej used domestic sources to supply cheaper raw material for hair colourant to Rapidol in South Africa. Megasari is a leader in household care and insecticide market in Indonesia — this segment is Godrej's largest in domestic markets.
Last year, Megasari introduced a sticky paper-based mosquito repellent which could be adapted to Indian markets. Similarly, Marico and Dabur's buys too relate mostly to hair care and personal care.
Higher contributions
Quickly integrating acquisitions into their fold have helped domestic companies keep up healthy growth rates. Godrej Consumer, for example, clocked a scorching 52 per cent compounded annual consolidated sales growth in the past three years, with all its acquisitions taking place in this period. In contrast, standalone revenues were up a much lower 39 per cent in the same period.
Contributions to revenues by international businesses have also seen sharp increases.
For instance, international business contributed 22 per cent to Dabur's consolidated sales in fiscal 2010-11.
That has jumped to 31 per cent now, with the segment expanding 78 per cent. Marico's 19 per cent overseas consolidated revenue contribution three years ago has grown to 24 per cent now.
Cash flows from integration also helped the companies bring down their debt, some of which was taken on to finance the acquisitions.
Lower farm output on muted monsoons could hurt the hitherto robust rural demand. Inflation and high fuel prices remain urban demand constraints. The consumer demand picture, therefore, may turn cloudy.
A growing international presence can help shield companies from a domestic demand slowdown.
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