I n March this year, Jyothy Laborato-ries snapped up Henkel AG and CoKGaA’s 50.97 per cent stake in its In-dian unit for ̀ 142.9 crore. At oneshot, the three-brand company leapt

into the big league with six new brandsin its stable, namely, Henko, Mr White,Fa, Pril, Margo and Neem. Revenues al-so doubled: Consolidated revenues stoodat ̀ 1,100 crore from the standalone JyothyLabs figures of ̀ 675 for 2010-11.

Snapping up the beleaguered multi-national is one thing; turning it aroundwould be quite another. For one, the com-pany’s books are splashed with red. Forthe year closing December 31, 2010,Henkel India posted a net loss of ̀ 51.84crore on sales of ̀ 533.90 crore. (For thesame period, Jyothy Labs posted a netprofit of ̀ 85.17 crore on sales of ̀ 647.13crore.) The cost of debt at ̀ 28.89 crorewas higher than the ̀ 25.92 crore re-ported in 2009.

Moothedath Panjan Ramachandran,promoter chairman and managing di-rector, Jyothy Laboratories, is aiming high.“We want to be the third or fourth largestFMCG (fast moving consumer goods)player in India by 2015. We will be prof-itable by March 2012,” he asserts. GivenJyothy’s track record of being a debt-freeand profitable company since inception,his confidence is not entirely misplaced.Spearheading the rebound effort will beUllas Kamath, deputy managing direc-tor, Jyothy Laboratories. “Indian compa-nies are extremely cost conscious and wewant to impart that discipline to turnaround Henkel India,” he says.

Analysts say the acquisition fulfilsJyothy’s primary aim of de-risking itsportfolio, which relies in a big way on asingle brand, Ujala Supreme fabricwhitener, which contributes 32 per centto its turnover. Operating in a low-mar-gin, low-involvement segment adds tothe risk. It can’t ride the pony too longand Jyothy knows it. In the last few years,Jyothy has tried diversifying into deter-gents (Ujala washing powder, Ujala Stiffand Shine and Ujala Technobright), dish-wash (Exo) and mosquito repellents(Maxo), but competition in these cate-gories has made the going tough.

With a product portfolio close to itsown, Henkel fits perfectly with Jyothy’sambitious growth plans. “The Indian lovefor all things foreign means internation-al brands command a loftier image,” ad-mits Ramachandran. But then the oper-ational turnaround is a big challenge initself; plus the ̀ 600-crore borrowings onJyothy’s books will further test the soapand detergent maker’s ability to turn thenew venture profitable.

Chop and churnManufacturing will be the first area of re-work. Product formulations will remainthe same, but manufacturing will bedecentralised for Henkel brands. Kamathis certain that the 28 factories that JyothyLabs has at its disposal can absorb theHenkel brands. “While we operate on sin-gle shift, we can step up to a second or athird shift. Investments are to the tune of`5-10 crore on packaging lines and a high-end laboratory facility.”

By trimming the 20-odd contract man-ufacturers of Henkel and moving pro-duction of Henkel brands in-house, Ka-math expects gross margins to touch 38per cent by the end of this year. “Decen-

tralising operations will bring about oth-er benefits,” notes Manoj Menon, analyst(consumer), Kotak Institutional Equities.With a reconfigured supply chain, logis-tics costs will drop drastically. Kamath’starget is to reduce logistics costs from 7-8 per cent of sales to 4 per cent.

Henkel’s gross margins are currently

26 per cent and capacity utilisation in thelast three months was 25 per cent, re-flecting high cost of operations. In con-trast, the gross margins in the FMCG in-dustry are to the tune of 50 per cent andJyothy’s stand at 48 per cent. The twoHenkel plants at Karaikal (Tamil Nadu)and Kolkata (West Bengal) may be shut

down if they continue to be unproductive.Kamath is also eyeing raw material

synergies to reduce costs. Unlike in thepast, Jyothy does not have the obligationto source a key ingredient for detergents,LAB (linear alkyl benzene), from Tamil-nadu Petroproducts (Jyothy Labs pickedup Tamilnadu Petroproducts’ 14.9 per

cent stake in Henkel India earlier this year).Purchases for both the companies willfollow the Jyothy way — cash and carry— to ensure better leverage at the time ofnegotiation. This will, over a period oftime, drive down material and procure-ment costs, positively impacting overallEBITDA (earnings before interest tax de-preciation and amortisation) marginswhich have been in the negative forHenkel India since inception.

Sales and distribution costs whichhave punished Henkel’s profits will seestreamlining. “Henkel India’s sales anddistribution costs were 35 per cent of sales.Even big FMCG players incur a cost of 18-20 per cent of sales,” points out NaveenTrivedi, research analyst (consumer),PINC research.

Industry observers believe the biggeststrength Jyothy brings to the table is dis-tribution, an area where Henkel has fal-tered. “Continuous churn within thesales team impacted distribution,” saysan ex-Henkel hand who prefers not to beidentified in the story. Also Jyothy’s reachin rural India is tremendous. Today, 70per cent of its sales come from rural In-dia. For Henkel it’s the reverse: 70 percent is from urban India. Jyothy hopesto capitalise on this and cross pollinateproducts across networks. “It is an ad-vantage but the benefits of such syner-gies will take time to materialise” saysShirish Pardeshi, co-head, research,Anand Rathi Financial Services.

Jyothy plans to retain the existing dis-tributors of Henkel. Adding that networkto its own will give it a wider footprint.

Kamath is also reworking dealer marginsto push Henkel products deeper. A 1 percent margin (from 5 to 6) jump for Henkelbrands is on the cards. Jyothy dealers willsee a 2 per cent drop in margins from theexisting 8 per cent. The reduced marginsare expected to be compensated by wayof increasing business from Henkelbrands, according to Kamath. Despiteproviding a larger basket of products, thereturn on investment for dealers mightdrop, say analysts. This will prove to bea tough sell to dealers.

Kamath will also change the adver-tising and marketing mix for the Henkelbrands. At Henkel, of the 4 per cent ofsales assigned for marketing, 10 per centwas spent on advertising and 90 per centon sales promotions. Compare this toJyothy which spent higher (7-8 per centof sales) on advertising and marketing,and the mix is skewed towards adver-tising (75 per cent), rather than sales pro-motion (25 per cent).

Reposition, rehaulJyothy has a lot of catching up to do interms of brand building. As AsheeshNigam, general manager, sales and mar-keting, Galla Foods, a unit of Amara RajaGroup, who had worked with Henkel fora few years, explains, “Henkel brandshave always harped on product technol-ogy and never built an emotional connectwith the Indian consumer.” Menon of Ko-tak Securities agrees. “Take Fa deodorantwhich has a good recall but is still only a`25 crore brand. Compare that to HUL’sAxe that has become a ̀ 350 crore brandwith the help of concerted investments.”

Experts say Jyothy can leverage itsknowledge of the Indian consumer towork its magic on Henkel brands. “Ujalawas built through sharp advertising, andunderstanding of the Indian consumer,”says Dheeraj Sinha, regional planning di-rector, Bates 141. “In the process, Jyothyhelped resurrect a category where ReckittBenckiser’s Robin Blue was the onlybranded player.”

Arvind Mohan, founder of cultureand branding firm Religious, agrees:“Ujala Supreme tapped into the emerg-ing class value system and made whitea powerful sign of social mobility. Thisquestioned the Brahmanical status quowhere white was coded as a reflectionof the inner self.” “For Jyothy, the nextstep will be to build power brands with-in Henkel,” adds Sinha.

The company is already orchestrat-ing a new branding strategy. “Our pri-ority will be Henko Champion and MrWhite which are the largest contribu-tors to Henkel’s business,” says Kamath.The next wave will include Pril, Margoand Fa. Of Henkel India’s ̀ 400 croreturnover from its brands, Henko Cham-pion rakes in 35 per cent, Margo bringsin 20 per cent, 17.5 per cent comes fromPril, 14 per cent from Mr White, where-as Fa, Chek and Neem are miniscule andbring in 6 per cent, 5 per cent and 2.5per cent each.

Kamath is clear that some of the ex-isting advertising agencies will have tofight in the coming months to keep theirassignments. “Going forward, we will

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The acquisition of Henkel India can provide new opportunities for Jyothy Laboratories to flourish

Preeti Khicha

KAMLESH PEDNEKAR

M O N D A Y 1 1 J U L Y 2 0 1 1

NEW, IMPROVED THE BIG PICTURECATEGORY COMPANY BRANDS MARKET SHARE COMPETITORS

Fabric care Jyothy Labs Ujala Supreme 72% of fabric Robin Blue (Reckitt Benckiser): 5-8%

(Total size: ̀̀ 13,000 cr) (fabric whitener) whitener market and balance with regional players

(`̀250 cr)

Ujala Stiff and Shine 3.4% Comfort (HUL): 5%(fabric conditioner)

Ujala Technobright Negligible Surf (HUL): 11%(detergent)

Henkel India Henko (detergent) 1% Surf (HUL): 11%; Ariel (HUL) : 4%

Mr White (detergent) Less than 1% Tide (P&G); Rin and Sunlight (HUL)Chek (detergent) Less than 1% Wheel (HUL); Ghari; Nirma

Mosquito repellent Jyothy Labs Maxo 22-24% Goodknight (Godrej): 30%; Mortein (Reckitt

(coil only) (`̀800 cr) Benckiser): 26%; All Out (SC Johnson): 10%

Dishwashing Jyothy Labs Exo (bar) 6-7% Vim (HUL): 60%; rest fragmented among

(`̀700-800 cr) players like Nip (FENA), Expert (Rohit Surfactants)

Henkel India Pril (liquid) 4-5%

Personal care

Deodorants Henkel India Fa 4% Axe, Rexona, Dove (HUL): 25%; Set Wet Zatak (`̀1,000 cr) (Paras): 9%; balance with other players

Soap Henkel India Margo 1% Medimix (Cholayil): 2%; Chandrika (Wipro): 1%;

(`̀10,000 cr) Hamam (HUL): 3%

Jyothy Jeeva Negligible Source: Industry estimates

MONEY MATTERSCOST OF ACQUIRING HENKEL `̀788 crore, funded primarily by debt(`̀600 crore) and part cash

% Value (`̀ ccrr))

Bought from TPL 14.9 60.7Bought from Henkel Germany 50.97 142.9Market 3.29 15.6Open offer 20 95.9Preference shares 43.9Debt 429.6

788.7

JYOTHY’S THREE PRONGED STRATEGYTO SERVICE THE ̀̀ 600 CRORE DEBT �Monetise the unproductive assets at Jyothy and Henkel (`150-200 crore)

�Use internal accruals (`100 crore cash profit)

�Dilute 10% stake held by promoters tobring in equity. Talks with PE investors are on

Source: Jyothy Labs

� CONTINUED ON PAGE 4

EXPERT TAKE

The good news for JyothyLaboratories is that its

Henkel acquisition offersmany complementary ad-vantages in terms of prod-uct range and distribution.The bad news is that it hasacquired an embarrassmentof mediocrities. The Henkelbrands have spluttered fordecades in the Indian mar-ketplace, never really ful-filling their promise, andeventually frittering awaysome of the gains theymade. The portfolio is a bits-and-pieces one, and the re-al problem is that thetoplines for the brands hideweakness rather than latent strength.The biggest issue with the Henkel brands,with the possible exception of Margo, is

that their volume is not re-ally a reflection of thestrength of their equity andhas been cobbled togetherscratchily.

In many ways, Jyothyneeds to see its task as thatof brand re-creation ratherthan that of exploiting thesebrands as ready assets. Thisis something it is good at,given its track record withUjala and to a lesser extentwith Maxo, in what is ad-mittedly a more fragment-ed and competitive catego-ry. Ujala created a new dye-based liquid blue categoryin fabric wash that was suit-

ed to local conditions and took on themight of Robin Blue, which it has all butdismantled. The Jyothy success story

has many components, but the key in-gredient has been its ability to focus itsefforts sharply on its key brands, andbuild volumes market by market. Thishas allowed it an ability to invest in thesebrands as well to keep its eye on sus-taining a product advantage vis-à-visits competitors.

The challenge for Jyothy is to displaythe same intensity of effort behind theHenkel brands. It would perhaps makesense for it to clearly spell its ambitionsfor each brand and category and to sharplyprioritise its actions. For a company likeJyothy, it would be a mistake to spread itsefforts thinly, and to toggle between thenew brand assets it has acquired. That iswhat the problem with Henkel was andthat is also what Jyothy is not naturallygood at. It needs to take things categoryby category and aim for significant sharegains in selected categories.

Having set its priorities, there is aneed to build powerful ideas behind theselected brands. The current Henkel ap-proach has been a pronouncedly me-too

one, staying content with mimickingcategory leaders weakly and that is sim-ply not good enough to continue. Jyothywill need to be braver and take morechances; it needs to try and redefine someaccepted category truths and operate asa feisty challenger that is at the forefrontof innovation, be it in terms of the prod-uct or its marketing. This is easier saidthan done, for the categories in questionare extremely mature and well-estab-lished and do not offer too many easyopportunities for change.

Jyothy needs to trust its native in-stinct for that’s what has got it where itis and eschew a desire to become a cloneof its larger competitors. It also needsfocus, patience and a fierce desire to cre-ate discontinuity in the marketplace. Inmany ways, this is a bold acquisition,which takes the company out of its com-fort zone. The good news is that if theHenkel brands have any chance of suc-ceeding, they will need the kind of en-ergy and focus that Jyothy has broughtto its brands.

Focus, focus, focus

SANTOSH DESAIMANAGING DIRECTOR &CEO, FUTURE BRANDS

Jyothy needs to see its task forHenkel as that ofbrand re-creation

“INDIAN COMPANIES AREEXTREMELY COSTCONSCIOUS AND WE WANTTO IMPART THATDISCIPLINE TO TURNAROUND HENKEL INDIA”ULLAS KAMATHDeputy managing director, Jyothy Laboratories