Rock Solid Empire
A slowdown in the economy and rising acquisition costs have derailed the Godrej Group’s plans to achieve a 10-fold growth in 10 years. But Adi Godrej isn’t the one to complain
The vast landscape, which once housed soap factories in Pirojshanagar in Vikhroli, is now giving way to state-of-the-art swanky office buildings and residential houses akin to those in Dubai and Manhattan. New spacious buildings house the senior management of the Godrej empire where strategic decisions worth millions of dollars are taking place. Deals are being signed and projects worth crores are taking off.
Of the many office towers, Godrej One is a sprawling building teeming with youngsters. On the fifth floor, enroute to the chairman’s office, these bright youngsters are busy poring over blueprints and drawings of new property projects coming up across the country. They are testing new design techniques and making prototypes, which will soon turn to real, large concrete buildings, in Pirojshanagar, and in properties across the country.
In fact, Chairman Adi Godrej is extremely busy these days because each of his businesses are in sectors that are seeing rapid growth. For the patriarch, Godrej Properties will be one of the fastest-growing businesses because the real-estate sector all over the world contributes the most to GDP in a country. Therefore, major plans are afoot for the expansion of the Godrej Group’s real estate arm.
“Real estate is the biggest single business in every country of the world, larger even than steel,” says Chairman Adi Godrej. “In India, the needs are tremendous because of high population; people need it. Eighty per cent of the real-estate business in India is residential; so there is a tremendous need,” he adds.
Back in 2011, the 119-year-old Godrej empire with businesses in food processing, animal feed, chemicals, plantations, soaps and personal-care products, and even software development, had unveiled a target of multiplying the group’s businesses by 10 times in 10 years.
Global slowdown, demonetisation and various external and internal forces put together could derail the group’s target. For instance, in its holding company Godrej Industries (GIL), growth has been just about two times to Rs 11,172 crore in 2016. Back in 2012, GIL clocked revenues of Rs 5,803 crore consolidated as per its annual report. Godrej Properties too has faced slowing sales, and Godrej Consumers has also barely come close to doubling its revenues in the last four years to Rs 5,117 crore.
“We have noticed that in the last couple of years, the business growth has slowed down a bit, and acquisitions have become more difficult. So, we have missed the target in the last couple of years,” admits Godrej.
Still, slowly but surely Godrej is looking at growing the group’s revenues and reaching closer to that target by 2021. One of the routes to achieving this target has been to make acquisitions across continents for faster growth. And true to its plan, strategic acquisitions have been made in countries including Indonesia, Uruguay and South Africa. Driven by the company’s overall business vision and to keep the 10-years-10-times-plan intact, the group is now taking more calculated risks and making only strategic expansions and acquisitions. But Godrej says he is not affected by the possibility of not achieving the target. “If we grow eight times,” says Godrej “we won’t cry about it. We won’t grow by acquiring not-so-good companies. We have made acquisitions only in areas where we have strengths, and where we can add value.”
The businesses that will contribute to the company’s growth are expected to be in Godrej Properties, Godrej Consumer Products and Godrej Agrovet (manufactures animal feed and runs oil plantations). These companies are crucial to the expansion plans of the Godrej Group.
The Change Channels
The group has benefited from foreign acquisitions in different ways. The strategy is not to launch the foreign brands into new markets, but to only launch the products through a local brand strategy. In Indonesia, for instance, the paper-based mosquito repellent product has been launched for the first time in the form of Good Knight Fast Cards.
As the corporate world is moving towards change and reaping in the benefits it brings, the Godrej Group too hasn’t shied away from transformational ideas. And the change in the empire is palpable even in companies that have traditionally been slow to change. For instance, Godrej & Boyce, the company more famous for its locks and which also manufacturers furniture and consumer appliances, acquired a 51 per cent stake in India Circus, an online home décor and furnishings e-tailer.
Online business has also been a part of the Godrej group’s strategic tool kit. However, unlike his peers who have invested heavily in online startups, Godrej is crystal clear that the group will not look at only e-commerce, but will only enter businesses with a strategic fit and conduct online commerce if it complements its present businesses.
Says Godrej: “We don’t go online as a business. We want to leverage online for our existing business. We have enough businesses already, so we don’t want to expand into totally new businesses. We will add on adjacently to our businesses.” Among its online businesses, the Godrej Group has invested heavily in the online platform of Godrej Nature’s Basket, a grocery store.
Another pivotal change in the group’s business plan has been to expand companies within the group. For instance, Godrej Agrovet acquired an additional 25 per cent in Cream line Dairy for Rs 550 crore to raise it’s stake to 51 per cent. GIL also increased its stake in Godrej Agrovet by 2.7 per cent in April for an unknown sum.
The group is also not going to make any undiversified expansions into businesses that are not a strategic fit or even expand horizontally. For instance, Godrej says, “If you ask me, are you planning to go into telecoms or insurance, the answer is NO.” Godrej also repeats an emphatic ‘No’ for investing in new startups. He has his reasons: “We did invest in some startups initially, but we find that the needs of our own business are so large. We understand our businesses much better, and returns to shareholders have been much better,” says Godrej.
For the past few years, the group has been focusing on improving shareholder return and return-on-capital-employed. Since January 2010, just a little prior to unveiling the 10x10 vision, the group’s market capitalisation increased by Rs 69,177 crore. This includes firms such as Godrej Consumer Products (GCPL), Godrej Properties, Godrej Industries and Geometric. Much of this increase in the group’s market value has come from just a single company — GCPL — which accounts for nearly Rs 49,185 crore in market cap increase since 20 January till date.
GCPL has had a huge role to play in improving shareholder returns. GCPL was formed in 2001 by hiving off the soaps and consumer products division from the erstwhile Godrej Soaps, while its chemicals business was moved to GIL. Now, some of GCPL’s key revenue drivers are companies based in Indonesia and Africa where growth rates are faster and profit margins thicker. In fact, these diversifications are providing the cushion against de-growth in some geographies and against the negative fallouts of demonetisation. Despite lower volume growth due to demonetisation, GCPL eked out decent gains the last quarter. Its focus on key brands, overseas acquisitions and the increasing penetration of consumer goods has been instrumental in driving the company’s market value ever since its inception in 2001. “From that time,” states Godrej “the CAGR from GCPL has been 35 per cent in market cap, while the rest of the businesses have also grown well.”
The overall market cap of some of the listed companies now stands at about Rs 86,871 crore. Godrej’s foremost agenda is also to improve shareholder return. In the last few years, the group has learnt to sail through business turbulences. For instance, companies such as Godrej Properties were impacted hard in the slowdown. Lower sales saw capital stuck in some projects, leading to slower growth and falling market values.
Still, much of the bad times and the Group’s business is expected to grow at a better clip as economic growth in India is gathering newfound momentum due to reforms. Godrej feels that the economy will begin to revive by the second half of next year but, even more importantly, he believes that India will become the biggest economy in the world by purchasing power parity in 2050. It is believed that one of the biggest reforms rolled out in the recent times is the GST and Godrej feels that GST will contribute to substantial savings in the economy. “It will save Rs 20 crore in logistics costs in our company, so imagine how much it will save the country,” remarks Godrej.
Godrej also points out that the GST rates need to be kept low to drive consumption and also expand production. “If the government is smart, it will keep the GST rates low,” says Godrej.
The overall economic growth itself will power the need for more houses, soaps, animal feed, and in areas where the Godrej Group has built a sizeable base. This naturally puts much of the group’s businesses in a bright spot, something the company has been earnestly working to achieve all along.
Top themes and market attention on: