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All Eyes On FMCG
Sanjiv Goenka’s RP-SG Group, initially comprising a bunch of loss-making units from RPG Enterprises, is on a winning streak. But the question is: will its latest bet on the FMCG sector pay off?
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From making movies for Netflix, Hotstar and Amazon Prime to foraying into fast-moving consumer goods (FMCG) – the fourth largest sector of the Indian economy – Sanjiv Goenka is ready to carve out a shining future for the group of businesses he inherited from his late father, Rama Prasad Goenka. He has already been successful in pulling most of them out of the depths of debts and losses. He now sets his sights on FMCG and plans to take the business to new heights.
While power generation and distribution remains the most dominant business of the RP-SG Group, Goenka aims to make his company relevant for the new-age consumer. Sample this: revenues from Saregama, its music production arm (and also the most relevant business for the young consumer) have increased by 134 per cent year-on-year. “For long, the company did not know what to do with this part of the business,” admits Goenka while adding that Saregama has been the most underestimated part of his group.
But things are changing now. Recently, the group launched its first ever digital and television film for its portable digital audio player, Saregama’s Carvaan. It is also aggressively making movies for online consumers and a few even for theatrical releases. Additionally, RP-SG is looking to acquire sporting properties and build more malls in a bid to make his company more relevant to the young and aspirational consumer.
“Sanjiv took charge of the group companies that were disproportionate in size and in focus. In his portfolio, CESC was humongous and he has been able to hold it very well. On the other hand, Spencer’s Retail hasn’t lived up to the potential,” observes Arvind Singhal, Chairman of management consultancy, Technopak.
In the last seven years, RP-SG has registered a jump of over 157 per cent in its gross revenues and over 148 per cent in gross assets. The loss-making businesses are either on the verge of break even or have turned profitable.
In every business, Goenka is focussing on the bottom line. “But the final aim is to boost profitability,” says Goenka.
Compared to financial year 2011-12, RP-SG’s gross revenues more than doubled to Rs 20,529 crore in FY16-17. Its EBITDA grew more than three times to Rs 4,231 crore. The growth in revenues was accompanied by a robust rise in profitability; the group’s profit before tax more than doubled to Rs 1,652 crore. The gross asset base also grew by nearly three times to around Rs 40,355 crore in the last five years.
With a solid base to proceed further, Goenka now aims to double the group’s revenues to Rs 42,000 crore, expand the gross asset base to Rs 60,000 crore, and zoom profitability to Rs 5,000 crore in the next five years from Rs 1,600 crore at present.
But for that to happen, the group needs a game changing business, which it sees in the new FMCG vertical. The group is betting big on FMCG. It expects the six-month-old venture to contribute 25 per cent to the total group turnover by year 2022 — which would approximately be Rs 10,000 crore.
The RP-SG Group marked its entry in the power-packed sector with the launch of its new brand of low-calorie snacks, ‘Too Yumm!’ According to a report by India Brand Equity Foundation, the business grew from $31.6 billion in 2011 to $49 billion in 2016, and is expected to grow at a compound annual growth rate (CAGR) of 20.6 per cent to reach $103.7 billion by 2020.
The RP-SG Group is bullish about the sector and claims that the segment is growing at 100 per cent month on month. “Six months ago, we did not have this segment. But I see exiting March 2018, with a consolidated Rs 30 crore turnover from the FMCG vertical,” says Goenka. He says the group has been doing research on the business model and working on product development for many years.
It finds the business lucrative as it is low on capital expenditure, high on valuations and, most importantly, it is consumer facing. Also, it involves less interference from the government, unlike the group’s other businesses.
The potential of the sector makes RP-SG aim higher. “We expect Rs 10,000 crore in revenues in the next five years from the FMCG business,” says a confident Goenka.
Is it feasible? Well, the group is basically looking to ride a tiger, and it may even succeed, given its past record. “But since riding a tiger is not the same as riding a horse, it has to acquire the right set of skills before going ahead full-steam into these impulse buying segments of the Indian market,” says Yasho. V. Verma, former Chief Operating Officer of LG India.
Chasing The FMCG Dream Run
Interestingly, the Goenkas are not the only ones dreaming of being the next FMCG major. Others are waiting in the wings too. There are many more. For instance, billionaire Kishore Biyani is aiming to transform his retailing empire Future Group into an FMCG firm. And with Baba Ramdev’s Patanjali having disrupted the FMCG market, biggies such as Hindustan Unilever and Colgate Palmolive India are rejigging their business models.
Goenkas, for the time being, plan to focus more on food-based FMCG – apparently the most difficult model to succeed in. According to market watchers, very few in the FMCG food business have succeeded. “Goenka has taken directionally correct route as food is an attractive business option. But the case-studies are discouraging. HUL had struggled to create stronger food business despite regular and massive investments. Conglomerate CavinKare too had forayed into food category, but did not do well,” says Singhal of Technopak.
“ITC too has invested intensively for over a decade to establish a successful food-based FMCG business. Knowing Sanjiv, who has an eye for detail and an applaud able business sense, it will be interesting to see how RP-SG will play out its strategy,” adds Singhal.
The late Rama Prasad Goenka, Sanjiv’s father, was the “king of acquisitions”. His company RPG Enterprises was known for its aggressive inorganic growth strategy. Goenka, too, has been aggressive in acquisitions.
Recently, he announced acquisition of Gujarat-based firm Apricot Foods, which has a portfolio of 30 to 40 products priced at not more than Rs 5. However, the catch is, acquisition-based strategies do not work in FMCG (for a longer period) as valuations are very high, say experts. “They have to build their own products, which is a time consuming proposition. Survival on acquisitions in FMCG is not possible,” cautions Singhal.
Verma, also a business and strategy consultant says, “While I don’t doubt the self-assuredness and astuteness of the Goenka family, the challenges of dealing directly with the consumer in FMCG, entertainment or malls is not similar to the challenges the group has excelled in the past.” Perhaps the group is conscious of these facts as for the first time, it is chasing a popular cricketer to promote its range of snacks. As the deal is yet not signed, the company couldn’t divulge details. Industry veterans believe the FMCG market will change more in the next five to ten years than it has in the past 200 years. Goenka with son Shashwat, who heads the FMCG vertical, has set the ball rolling. But only time will tell if their bet will disrupt the billion dollar market the way Patanjali did.
Sanjiv Goenka : The Turnaround Master
‘Cholche Cholbe’ – a Bengali phrase that means ‘whatever is happening will continue’ – was among the first things that Goenka got rid of after carving out a separate corporate entity – The RP-Sanjiv Goenka (SG) Group – of the Kolkata-based RPG empire built by his late father.
However, turning around the companies wasn’t really possible with this one move. RPG Enterprises was sitting on a bouquet of businesses reeling under losses. Phillips Carbon Black, Spencer’s, CESC, Saregama and Firstsource Solutions – taken over by Goenka – were all in the red. Ironically, the top management was comfortable with the year-on-year surging losses. One reason behind the slack was the fact that Goenka’s father didn’t believe in sacking employees. Even a poor performer would get a salary hike of over 13 per cent every year.
Goenka decided to take some tough decisions. He followed a simple Baniya approach (as he puts it) – weeding inefficiencies and focussing on bottom lines. “Pull up your socks, shape up or ship out,” was the message he sent across the board after he took over. It wasn’t easy to change the work culture overnight. Resistance from long-standing employees was inevitable.Fiercely ambitious and strong headed Goenka let the people who hindered the process of change at the organisation go. The results are here to tell the rest of the story (see The Upward Journey).
Today, all their businesses, except CESC, are set to turn debt free. Goenka, who was ranked 91 on the 2016 Forbes India Rich List with a wealth of $1.4 billion, was ready for another leap when the company announced CESC’s demerger plan. “We let go several people in the process. The business requirements were different when my father started in the era of Licence Raj, but today, the competition is immense and we cannot waste time on handling legacy issues,” says Goenka.
Businesses such as power generation, power distribution, retail, FMCG will be spun off as separately-listed entities (see The Group-Wide Demerger Plan).
According to a recent report by domestic brokerage firm IIFL, the demerger may not lead to earnings accretion, but will lead to a significant improvement in valuation multiples for the core power business. “This is because, under the (current) structure, the power business has funded diversification initiatives, which depressed valuation multiples despite CESC having one of the best operating matrices,” the report states. It also points out that the combined market capitalisation of the separately-listed entities after the demerger could be 40-50 per cent higher than CESC’s current market capitalisation.
For Goenka, the main reason for demerger was to ensure a focussed management. “Apart from the strict focus, demerger would also help investors’ thought process,” he says. The Securities and Exchange Board of India has cleared the demerger. Only the shareholders’ resolution is pending. “I am hopeful that in the next six to seven months, the process will be completed,” says Goenka.
Power Generation & Power Distribution
CESC’s soon-to-be-listed power generation business now has a capacity of 2,500 MW. “About Rs 11,000 crore have been invested in boosting power generation businesses in the last four to five years. Hence, investments in generation are on pause for a while,” says Goenka.
Meanwhile, the company is betting big on distribution for its future growth. “Distribution will be our way of growth,” says Goenka. At present, it has power distribution networks in Kolkata, Greater Noida, Bharatpur, Kota and Bikaner. The company is vying for opportunities to bid for other distribution franchises.
The company has spent Rs 5,000 crore in distribution over the last four to five years to make systems robust. For instance, over 31 per cent of bill payments are received digitally today. The company claims that the numbers are increasing every month. Today, power connections are given within a day compared to a six-month waiting period earlier. Also, thanks to the booming apartments and mall culture, the subscriber base is increasing by three to four per cent annually.
“With China capturing majority of the electrical equipment market, I was clearly told by Sanjiv that we should not buy Chinese products even if the other equipment are slightly expensive,” recalls Rabi Chowdhury, who will take over as the Managing Director of CESC’s soon-to-be-listed power generation business. The company now uses artificial intelligence for hassle-free power distribution to further enhance CESC’s distribution arm. “We also offer discounts on downloading music from Saregama, if our customers pay bills online. Moreover, the convenience fee is also waived off for online payments,” says Aniruddha Basu, Managing Director of CESC.
Phillips Carbon Black
Phillips Carbon Black (PCBL)– acquired in the year 1962 – posted a four-fold jump in net profit to Rs 50.78 crore in the quarter ended September 2017 from Rs 12.49 crore in the corresponding period a year ago. Net sales of the carbon black major rose 17 per cent year-on-year to Rs 597.58 crore in the quarter under review. The plants of PCBL registered 99 per cent capacity during the quarter. As a result, the company is aiming to trim its total debt to Rs 700 crore by 31 March, 2018 from Rs 1,200 crore in March, 2017.
The company, however, wasn’t doing well until recently. Despite being the largest supplier of carbon black in India, and one of the largest in the world, it struggled with low profitability and even incurred losses in FY13 and FY14. But what changed its fortune was the move to start exporting carbon black across countries apart from entering the specialised carbon black category, for instance, food grade products. The company is now also customising its product as per client requirements. “We did take difficult decisions in mending the flawed top management at PCBL. We amicably parted ways with several senior colleagues here,” says Kaushik Roy, Managing Director, PCBL.
The debt-ridden BPO Firstsource Solutions, was acquired in 2012 for Rs 400 crore. Goenka, who had then told the Press that the group would scout for further buys in the IT space, soon followed its plan.
First, in 2014, Firstsource acquired a stake in Bengaluru-based Nanobi Data and Analytics. Then two years later, it acquired the BPO division of US-based ISGN Corp, a solutions provider for the US mortgage industry.
In the last four years, the company’s outstanding debt was brought down to Rs 600 crore from Rs 2,500 crore. “Our margins have doubled in the last four years. We also won a major contract in February when we signed a Rs 14,000 crore deal with Sky Subscriber Services for ten years,” says Rajesh Subramaniam, Managing Director and CEO, Firstsource Solutions.
The company, which owns and operates a chain of organised retail stores across the country, was making losses until recently. The group adopted a similar course of treatment as it did for its other businesses. The consolidation centres have been pruned to seven from 14; it may go down even further. The number of vice-presidents in the vertical, a total of 17 earlier, has been brought down to four. “The cost per annum has reduced by Rs 300 crore. We are saving Rs 25 crore per month,” asserts Goenka. Further, the size of hypermarkets has been squeezed from over 30,000 sq ft to around 18,000 sq ft.
The company’s previous management didn’t want to add apparels, which is one of the high-contributing categories, to its portfolio. “I asked our former CEO to leave, who I was very fond of personally. You can’t have a situation when a CEO is too relaxed and cool about the losses. Your capability must translate into results. We changed large parts of our team at Spencer’s,” says Goenka.
Spencer’s is now focussing on large-format stores apart from high-contributing categories. It has been ruthless about closing stores that were not making money. Shashwat, who like his father, believes in driving arguments through logic, has finally got a grip on Spencer’s. “From 125 stores today, our aim is to establish 200 stores within the next five years,” he says. The first lesson, he says, he learnt out of the classroom was not to run behind the scale of business to achieve profitability, but “Expansion should be done thoughtfully, so the economies of scale don’t get lost,” concludes Shashwat.
Goenka has remade his group by extricating it from the clutches of old traditions. After making sweeping changes in several areas of the group in the last seven years of transformation, Goenka is now waiting to unlock the value of his flagship business along with the newer ones, especially FMCG.