Soon after homegrown Jyothy Laboratories acquired Henkel’s India business in May 2011, joint managing director Ullas Kamath went on a month-long road trip across the country. Kamath remembers that as being a lonely time, with only his driver for company. Just as well, though, as it was also a time for introspection and ideation.
Consider that Kamath, along with his boss MP Ramachandran, the chairman-promoter of Jyothy, had just engineered a takeover that left many in the industry stunned. For a bargain basement price of Rs 685 crore, Henkel AG had sold its Indian consumer products business to Jyothy, which hadn’t yet completed three decades of operations.
No one doubted that Jyothy had come a long way since it was founded in 1983. However, it was still considered a one-hit wonder with Ujala, its fabric whitener, as the cash cow. The markets feared that Jyothy had bitten off more than it could chew. How could a domestic company successfully revive an ailing multinational that had accumulated losses of around Rs 600 crore? Did they have the management bandwidth or the marketing budgets? What about the R&D set up that would spur innovation—a key factor in the success of consumer franchises?
In the months that followed, the doubts manifested in Jyothy’s stock price which took a beating, erasing almost 40 percent of its market cap. The sceptics were vindicated—but not for long.
Not one to be fazed by the noise around him, Kamath, who had been keeping a close eye on Henkel, had an integration plan all laid out in his head. But to begin with, he knew that rallying the sales force (known internally in the company as its ‘white army’) was what would eventually make the difference between success and failure. On that journey, Kamath crisscrossed the country, making it a point to spend the nights in the homes of his salespersons. “I wanted them to feel like they were the most important people in the company,” he says.
Two-and-a-half years on, his efforts have borne fruit. Jyothy is on course to cross Rs 1,000 crore in revenue. Its EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins—a key measure of a consumer goods company’s health—are at 14.5 percent, up from 9 percent. It has also charted out an aggressive growth path. So much so that Ramachandran and Kamath are already mapping out the road ahead. Their destination: Rs 5,000 crore in sales in the next five years.
Integrating Henkel
When Jyothy inked the Henkel deal in May 2011, here’s what it bought: The Indian subsidiary of a German multinational that had been operating in India for the last 22 years. During that time it had never been profitable and, with a top line of Rs 400 crore, its losses stood at Rs 40 crore a year. Over the years, it had lost over Rs 600 crore, a sorry legacy for a prospective buyer to have to take over. Its brands, Henko (detergent), Pril (utensil cleaner) and Margo (soap), were seen as laggards and had never been backed up with significant marketing spends.
But for Kamath all that mattered was the gross margin. And all of Henkel’s brands had gross margins of over 25 percent. Some like Margo, a small soap brand with a fanatical following, exceeded 50 percent. A state-of-the-art detergent plant in Karaikal near Pondicherry was part of the deal too. Henkel’s accumulated losses of Rs 600 crore were also transferred to Jyothy’s books.
This, however, was not a worry for Kamath. Jyothy, which had followed a dispersed manufacturing model, had 22 plants across the country. While setting these up, the company had been granted tax breaks that would expire over the next few years.
Kamath could set off the Rs 600 crore against this tax liability. The company also had real estate worth at least Rs 100 crore. Further, from Henkel’s staff strength of 475 people, Kamath believed he would need to retain no more than 50.
“This was the time when Paras had been sold for eight times its sales [to Reckitt Benckiser]. And here I was buying a company for one-and-a-half times its sales value… no one was convinced,” says Kamath.
Particularly the investor community. Sure, consumer stocks were on fire and other homegrown peers such as Dabur had also made acquisitions, but here was a company buying a business two-thirds its size! There were doubts on whether the two distinct and disparate cultures could be seamlessly integrated. To boot, detergents remain a very crowded category and P&G and Hindustan Unilever, which together control 52 percent of the market, have not hesitated in fighting bruising detergent wars. Did Henko stand a chance? And lastly, there was the debt overhang for the Rs 685 crore that Jyothy had borrowed for the acquisition. By the end of 2011, the stock was quoting at Rs 77, down from Rs 105 when the deal was announced.
Raghu also wanted to add a layer of zonal sales managers. When Kamath handled the business, each state sales manager had reported to him directly. Raghu believed there needed to be one more layer to provide leadership and strategy on the field. It was here that the relationship between Kamath and Raghu played a key role. Ordinarily, there would have been a conflict, as Kamath had nurtured many of these state sales managers. But he stepped aside and gave Raghu a chance to make changes. “It was a painful period for me as many left, but I made sure I did not interfere in the new structure,” says Kamath. The CEO was in charge: That was the signal sent down the rank and file.
(This story appears in the 18 April, 2014 issue of Forbes India. To visit our Archives, click here.)