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Godrej Properties will be the future profit machine
Monday, 10 September 2007 - 5:22am IST
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Adi B Godrej believes that the biggest challenge before the Rs 7,500 crore group in the coming days is to get its focus right in addition
to the talent crunch.
Adi B Godrej believes that the biggest challenge before the Rs 7,500 crore group in the coming days is to get its focus right in addition to the talent
crunch. The group with interests in toiletries, edible oil, poultry, animal feeds, real estate, furniture, retail and heavy engineering probably realises
he has a bit too many businesses.
But hes comfortable and expects Godrej Properties, the real estate business to deliver much of the profits in the coming years. He talked to DNA
Moneys Satish John on a wide range of topics including the groups strategy, growth plans, real estate and the next generation of the Godrej
family.
Are acquisitions the way to grow for the Godrej group?
Definitely. We think our group sales compounded annually should grow at about 25-30% over the next five years.
And organically we can achieve about 15-20% sales growth. The rest will accrue from acquisitions. We prefer them in India. But
acquisitions in India are not easy. In some industries there are a lot of local acquisitions in play.
For example in cement & telecom sectors, M&As are taking place. In consumer products theres very little. In the past two years we
made only two acquisitions in India one is Nutrine (Indias largest hardboiled candy business) and then Sara Lee Household and
Bottle Care in July last year.
Godrej Consumer Care has been aggressive in growing its share in soaps. In fact, you have outpaced the industry. How did you
do it?
In soaps our key differentiator is quality. We have high quality products that are very reasonably priced. Our Number One soap is the
third-highest selling brand in the country after Lifebuoy and Lux. It is biggest selling Grade One soap in the country. Number One is
very reasonably priced. Consumers appreciate that. So we feel thats one of the major reasons for our success.
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We have a very efficient logistics and manufacturing chain. That helps too. Godrej Consumer Care works on negative working capital.
So our costs are low. We are able to pass on the low costs to consumers. We have three factories. Two in Himachal Pradesh and one in
Madhya Pradesh. That has helped. We were the first to move to Himachal. Others followed.
What about bringing in Keyline brands to India that have some local recall such as Erasmic and Cuticura?
We acquired Keyline some two years ago. Keyline owns Cuticura in most part of the world. But not in India. Before we acquired Keyline,
the Cuticura brand was sold in certain countries. Cholayil, the Medimix soap people, owns the brand in India. So we cannot introduce it
here. We own it in Middle East and Pakistan. We plan to introduce it in Middle East. We dont own it in South Africa, where Novartis
owns it.
Godrej Industries, your flagship company, at times acts as a venture capital firm
The group has investments in other companies. We own 19% of a company called CBay Systems & Services, an American firm quoted
on the London Stock Exchange. It is the third-largest medical transcription company in the world. It outsources all businesses to India
and Middle East. This is a fast-growing company.
We also own 20% of a British BPO called Compass Connection which is also into the BPO space. We own 5% of Avesthagen, which is a
Indian biotech company based in Bangalore. We own 8% in Silicon Valley-based Version.
Is Godrej Industries the main holding company in the group?
Godrej & Boyce also owns stakes in other companies. Thus there are two holding companies in the group.
Tell us about Godrej Properties..
It is a fast growing company. But because the rapid growth of Godrej Properties needs funding, we are looking at a 10% dilution in the
IPO. What that 10% listing will fetch will depends on the market condition at that time.
What about valuation, and how will it benefit Godrej Industries?
The valuation of Godrej Properties cannot be taken from its landbank alone. Real valuation is its ability to continuously generate new
business. Thats the real value. Its a very well-known brand in property business. The other brands are not well-known in the business.
The Godrej brand will be known by 100s of millions. 400 million Indians or 40% of our population, use one Godrej product every day.
Even non-users know of our brand. So thats our unique branding. I think it will help in branding our business.
Whats the business model you follow in real estate?
We have 3 models. One, we do joint ventures with land owners. This is a strong model. We share the profits. The other model is to buy
land and develop it. The third model is joint ventures with group companies. A lot of group companies will move out of existing
properties and we have already signed one such joint venture with a group company in Thane. And I expect two or three more will be
signed very soon.
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The Godrej group owns some prime real estate
I dont want to talk about it. Let us put it this way. Various group companies own very large tracts of real estate for their existing
manufacturing activities. For instance, Godrej Agrovet has a poultry breeding farm in the outskirts of Bangalore.
This is over 120 acres on the outskirts of Bangalore, and was established many years ago. Now, the proximity to an urban land is a bio-
security risk because these are highly bred poultry, pureline birds.
So we are moving our base 70 kms away. So this became an ideal property. Negotiations are on between Godrej Properties and Godrej
Agrovet. I expect many such opportunities (to come up) over the next 10 years.
We (the Godrej group) are major source of growth for Godrej Properties - in addition to the normal property development we do.
In Mumbai you are sitting on a lot of property
But there are regulatory hurdles. There will be opportunities when these are removed. For example, the Urban land Ceiling Act. We
hear it is going but not gone. Going, going, but not gone (Laughs). So well wait. In a way it helps us because there is a shortage of
property in Mumbai so valuations will be very strong.
How would it flow to Godrej Industries?
It will not flow to Godrej Industries. It will accrue to Godrej Properties. They will do a joint venture with Godrej Industries. For example,
we are doing a joint venture with Simplex Mills called Planet Godrej, that is building five 48-storey towers. Two are almost ready for
delivery now. This is a profit-sharing venture. When occupied these will be the tallest residential buildings in India.
How much does Godrej Industries own in Godrej Properties?
83%, and balance 17% is owned by the family. And the Godrej family owns 86% of Godrej Industries.
On Godrej Agrovet, do you have any plans to shift more plants as also alter their holding structure?
They are leaders in animal feeds. They are leaders in oil palm in India, they are leaders in packaged branded chicken and now snack-
chicken packs. There are lot of growth opportunities. It has many factories. A lot of it is real estate acquired over the last 30 years and
will appreciate in value. We can shift the operations or the plants farther away from cities. It is owned 70% by Godrej Industries and
30% by Godrej family.
Why is the FMCG sector languishing even as the economy is growing at over 9%?
I tend to disagree. The economy is growing at 9% in real terms. In nominal terms the economy is growing at 13% with 4% inflation. In
rupee terms the economy is growing at 13%. This year, the FMCG industry is growing at that level. So somewhere around 12-13%, the
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FMCG sector is growing at the same rate as nominal GDP. But we have been growing at a faster rate. Our organic growth rate is about
18%. All our FMCG business including acquisitions grew at 35%.
Have you got a handle on the pricing power?
We do have reasonable pricing power. Nobody has absolute pricing power. We have competitors and consumers to contend with.
Clearly we cant just raise prices. Obviously if costs go up and competitors are also affected we are able to raise prices. Let us put it this
way:
Nobody is going to irresponsibly raise prices. Price increases, to my mind, will come only as a result of cost increases. Productivity wise
we are improving all the time. For example vegetable oil prices have risen and that has affected soap costs; crude oil has risen so it
affects freight, and to a certain extent plastic packets
So there are cost pressures. So in the last year or so, there have been price increases in the FMCG sector. Before that, there was
largely no price increases because there wasnt any cost pressures.
What happened to Godrej Tea?
Godrej Tea was an investment made in a new company with a person called Pranab Barua. He is now with the Aditya Birla group. Barua
was earlier the head of tea business of Hindustan Unilever and later he was the managing director of Reckitt Benckiser. So he started a
venture in tea. We took a 70% stake in the company.
Then we merged the businesses. Subsequently we got IL&FS as a partner and used that money to buy Nutrine. So now Godrej
Industries has a 43% stake in the company. Subsequently IL&FS sold their equity to Hershey. So now the company is called Godrej
Hershey. Godrej Hershey is into tea, food drinks, soya milk and confectionery. Hershey products will soon appear in Indian retail
shelves more prominently in the coming days.
Your branded edible oil business is very low-margin? Do you plan to exit this line?
Branded edible oil is a good sustenance business. It is a volume game. Margins are not very high and there is a lot of competition.
There are consumers who still prefer to buy loose, unbranded, unpackaged. So I would think it is the least attractive of our FMCG
businesses.
Can you make it more attractive?
It is difficult. It gives us volumes. So it helps spread our overhead. But it is low-margin.
What are your retail plans?
We have Natures Basket. It is very upmarket retail chain. The recent Warden Road store (in south Mumbai) is perhaps the most
upmarket store in India. We have a lot of growth models.
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We are into tissue culture so we think this will be one of our rapidly growing businesses. And we feel that 10 years from today, Godrej
Agrovet would be an extremely value-creating and valuable business for us.
Reports suggest that you are getting out of retail
Not at all. I was clearly misquoted. But we are not getting into mainline where we could end up competing with our customers. We still
are very strong in rural retailing. A lot of our sales is agri-inputs. Natures Basket is a very focused business. We retail vegetable
products sourced from our rural contacts.
What about succession planning?
We have non-family professionals running each of our businesses. The family does not run any of our businesses on a day-to-day
basis. The family will primarily look at roles in the supervisory, strategic, corporate governance, human resource development
spheres.
What about the next generation of Godrejs?
From the next generation we have enlisted four family members. Three are my children. My son Pirojsha, who was working in Godrej
Properties, has now gone to do an MBA in Columbia University. When he comes back he willl again join Godrej Properties. My
daughters have completed their education and are now in the business.
One of my nephews is in the business. He may also go for further education later. So yes, the family will play a supervisory role.
Ownership and management will be separated. Thankfully, our family is not very big. So in the next generation we have the same
number of people as in this generation.
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