Jyothy Laboratories’ men in white — chairman and managing director M P Ramachandran and deputy managing director K Ullas Kamath — had Henkel India on their radar for nearly five years before they spotted a chance to swoop down and grab it.

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Reminiscing on his trip to Henkel’s headquarters in Dusseldorf, Germany about five years back, Kamath says his company had approached the German consumer goods giant take over its beleaguered India division, or at least form a joint venture. But the prey had shown its predator instincts, by wanting to buy out Jyothy instead. Jyothy was then just a ¤200 crore consumer goods firm, with just one flagship brand — Ujala — that had a 50% share of the whitener market in India. Henkel’s Indian subsidiary was twice its size.

“With Henkel, both could grow faster and do business of Rs2,000 crore in no time,” believed Kamath.

Using a metaphor, he said, “I was looking at the girl (Henkel India) for five years. But the father-in-law (parent Henkel AG) was too demanding. They wanted us to be a part of their family, become a ghar-jamai.”

Years went by and Henkel India continued to be a loss-making subsidiary with most of its brands declining and available only in the urban markets, while Jyothy went on to reach a turnover of Rs750 crore last year with three brands — Ujala, Maxo and Exo — alone.

That’s when luck came calling. A C Muthiah, a south-based tycoon with businesses such as Secals and Tamil Nadu Petrochemicals, who at one point even controlled Automobile Products of India, alerted a boutique investment bank called Mape Advisory in January this year about the possibility of Henkel putting its Indian unit on the block. Muthiah was an interested party and also concerned as he owned 16.9% in Henkel India.

M Ramprasad, chairman, Mape Advisory, who got the tip-off from Muthiah, in turn alerted Kamath about the sale. For Kamath and his boss, the interest and faith in Henkel brands was resolute and unflagging. Kamath and Ramprasad immediately booked a flight to Dusseldorf to present a turnaround proposal to the top management of Henkel.

Not much had changed in Dusseldorf since his last visit and he recognised familiar faces in the board room. Kamath’s presentation had many takers and managed to draw the interest of Henkel AG’s board member Jan-Dirk Auris and his team of finance and legal professionals.

“We made a presentation because we knew very well that for a €20 billion company, Rs400 crore was nothing, so why would they even sell it? We needed to convince them to sell off.”

Convincing the Germans took some time. “We told them that you may not give us the company, but keep this presentation and give it to your existing management team, but do not leave the country especially at a time when every global major is looking at India.”

Though happy at Jyothy’s serious intent to take over the distressed entity, Henkel AG continued to play hardball. This time around Henkel offered to forge a joint venture, which Kamath instantly refused and in turn made a counter offer that had them flummoxed. He asked the Germans to take a sabbatical from India for five years and offered an option to return after five years in a merged entity at 26%.

The German consumer goods major had given a mandate to HSBC in London and Mumbai, in order to discover the real value of the Indian unit. Kamath made it clear that Jyothy would not take a part in the bidding process.

After handing over his proposal in a sealed envelope, Kamath and Ramprasad left Henkel’s Germany office. But the fact that the Henkel’s management had already spent five hours with Kamath instead of an hour that was initially promised, gave him enough confidence that they were taking the Indian suitor seriously. It almost came to naught.

Henkel feared a hostile attempt. In early March, Henkel AG officials flew down to India. A Jyothy official took Jan-Dirk Auris on a tour to a few retail outlets in the city to give him an insight into how fast moving consumer goods (FMCG) are bought and sold in India’s traditional and modern stores.

In a twist, Henkel did not involve its Indian partner Muthiah, when it gave a sell mandate to HSBC. It was only for its 50.9% stake, which meant Muthiah had to fend for himself.

Naturally, Muthiah was wary as he had to find a buyer, either before or after Henkel sold its 50.9% in the business. His worry was legitimate as with a minority stake he couldn’t wrangle a deal on his own and the value for his stake would thus be depending on the whim of the acquirer.

As a canny businessman, on March 14, Muttiah offered to sell his stake in Henkel India to Jyothy, which was lapped up in no time. Jyothy pegged the purchase at 14.9% stake at Rs35 per share for Rs60.73 crore — in order not to trigger a public offer or derail the bidding process.

With 14.9%, Jyothy got a foot at the door and an edge over other bidders like ITC, Godrej Consumer Products, Emami, CavinKare and several private equity players, who were willing to pay much more for the stake.

“Other bidders grudgingly admitted we were smart, Germany felt it was a hostile takeover.” Dirk and his colleagues were upset and shocked that Jyothy could do this behind their back.

Kamath had to rush to Dusseldorf to save the deal. “We bought 14.9% and invested Rs60.73 crore of our hard-earned money. Give us Rs60.73 crore and keep our stake intact in one place,” he told them. This had a huge impact on the Germans, but they were again concerned that Jyothy’s proposal for their stake was just Rs20 a share, whereas they paid Rs35 a share to Muthiah.

“Muthiah gave us a blessing, you gave us a loan,” Kamath said brushing off their concerns. To fund the acquisition of Henkel India, Jyothy, a debt-free company since its inception in 1983, would have to raise a debt of Rs600 crore. The Germans were placated and decided to sign on the dotted line.

Integration woesClinching the deal might have been easier than getting the German company’s staff to adjust to the Jyothy culture. Most of Henkel India’s top management left soon after the takeover, while others at its corporate office in Chennai have refused to engage with it. Indeed, even as an entire unoccupied floor in Ujala House in Andheri, Jyothy’s corporate office building, awaits the migration from Chennai to Mumbai, the Jyothy management isn’t sure the staff will move.

DNA could not reach Henkel staffers for their views. “Germans are willing to meet us. They are willing to eat Sarvana Bhavan (restaurant in Chennai) idli, wada, dosa; but Indians, because they are working in a German company, want to eat only at McDonald’s. They want to have meetings in Bangkok not in Chennai,” says Kamath.

In sharp contrast, most of the middle management at Jyothy have worked with the company for over 20-25 years.More nasty surprises awaited Jyothy after the takeover.

About 60 employees and 400 contract labourers working at Henkel’s Karaikal factory in South India together wrote to Henkel’s chairman in Germany saying they were paid a paltry sum of €410 per month compared with €20 per hour that workers in Germany earned. They also wrote that they were happy working under a German company but could not work under an Indian company like Jyothy Laboratories. “€410, which is Rs26,000! Imagine the expectation of people at that level of a loss-making company,” exclaims Kamath.

All Jyothy wants from Henkel is its brands and formulation, “and nothing else,” says Kamath. The turnaround story is very simple here, unlike in any other acquisition. In business, when you don’t want anything, it is very easy to integrate, he says.

Jyothy has 28 factories across the country and would try to eliminate the burden from having factories like the one in Karaikal that results in huge logistics cost owing to its location.

“Our primary advantage is being in the same category for the last so many years, knowing how to produce those products very efficiently and having gathered so many factories across the country, I do not need anybody from Henkel. Collectively, I hold the 475 people responsible for incurring a loss of Rs435 crore.”

Now that the python has eaten an antelope, it needs to digest MP Ramchandran is confident of turning the Henkel business positive in the September quarter. Since the takeover, he has been looking to save at least Rs7-8 crore per quarter, and on an annualised basis about Rs30 crore.

“When you shake the tree, some fruits will fall, then only you start climbing. We have just done that shaking,” Kamath says. The turnaround and integration of Jyothy with Henkel will take place in parts.

In Ramchandran’s words, the acquisition has been like a snake eating an antelope. “We are now in a digestion mode,” Ramachandran says. The immediate plan, in his mind, is to identify the reasons for Henkel’s losses and eliminate them to make the business profitable, and give more punch to the brands. Ramachandran is very much hands on and still takes calls from depots and branch offices.

The turnaround plan has a set timetable with set milestones to be achieved, including moving Henkel’s headquarters to Mumbai from Chennai. Where June was dedicated towards learning, from July to September, the middle managers at Henkel India will state their business plan to be followed. From October to December, Jyothy will write its business plan for the entity that Henkel will have the option to carry out or just observe.

From January 2012 till March, Jyothy plans to work together with Henkel on strategising the turnaround. Once the merger of Jyothy and Henkel materialises, there won’t be separate distributors for either — they will all come together. Kamath expects everything to be in order by March 2013 when both businesses together should do Rs1800 crore sales.

First, Jyothy will observe how Henkel has been manufacturing the products, to pin-point where they have gone wrong logically, and bring the production costs to the least minimum. Henkel lacked bargaining power with suppliers and spent the money without questioning.

“For example, they have been buying LAB (linear alkyl benzene, a raw material for detergents) at Rs90-92. We can easily bring that down by Rs10 at least,” Ramachandran says.

Jyothy has started to look at the brand health of Henkel products, which fortunately did not experience any tampering of quality over the last 25 years.

“Their health, I would say, is not fantastic. All brands are live, none of them has gone in coma, but all of them are in ICU,” Kamath says.

Then, the company will eliminate all ‘me too’ sales promotions, like the one on its premium brand Fa that has so far been pushed in the market at ‘buy one get one free’ promotion.

With the removal of these promotions, Jyothy will be able to make a good 40% margin on the sales and put the money behind advertising.

“If you want to know the depth of the well, one day you need to take out all the water and see what the depth is, and fill it thereafter,” says Kamath. The investments behind brands will start from October 1.

With four detergent brands — Chek, Ujala, Mr White, Henko — in its portfolio, Jyothy plans to keep stocks at all price points. So, each detergent brand will be priced at Rs30 difference from one another, so that there is flexibility and all consumer segments are tapped.

Last week, Jyothy bought an additional 3.29% stake in Henkel India from the open market, increasing its stake to 69%. “We are not in the business to run the loss-making company as a loss-making company forever,” says Kamath.

From April 1, 2012, there will be only one company — Jyothy Laboratories Ltd. Kamath says, now that he is dedicating most of his time with Henkel and its people, the staff at Jyothy feel ignored like an old daughter-in-law.

“Once the new daughter-in-law has settled down, then the old daughter-in-law also will get the work done from her.”Meanwhile, Jyothy’s investors are concerned whether the focus on Henkel would affect Jyothy’s performance.

“De-growth in key brands (Maxo, Exo and Ujala) and higher overheads relating to Henkel’s acquisition impacted earnings in the fourth quarter. Consolidated performance for fiscal 2011 was further impacted by extended losses in the laundry business,” wrote Hemant Patel and Yash Jhaveri of Enam Securities in a report on May 31, recommending a ‘buy’.

Patel and Jhaveri writes part of this underperformance may have been caused by shift in top management’s focus towards inorganic opportunities — in other words, the acquisition of Henkel India.

While Henkel gets over 60% of its sales from the urban markets, Jyothy gets over 80% sales from rural India. Combining Henkel’s 750 distributors with its own 3,500, Jyothy will have a good opportunity to grow volumes for Henkel products — Pril, Fa, Margo, Neem toothpaste, Henko, Mr White, and Chek.

Kamath says he wants to bring all Henkel global brands to India across categories of air care, body care, personal care, after March 2013.

“The combined entity will form a 50:50 optimum mix of urban/rural. Currently, Jyothy’s 70% revenues come from rural market, while Henkel’s 75% revenues come from urban market,” wrote Naveen Trivedi of PINC Research in a report on May 9.

Go hands-off when you are capable of hands-onKamath acknowledges the risks involved in the acquisition. “It is like putting a hook on to a shark and riding the boat along with the shark, you can say. I got a good fish, but if it drives you, you can go out of control,” he says.

From being present in only fabric care, mosquito repellent and dish wash bars, the company found itself in charge of brands across personal wash, deodorants, detergents and oral care. And for this very reason, a fresh set of legs were needed. Kamath therefore convinced Ramachandran to bring in a new team of category heads to be headed by a chief executive.

“Chairman and I are capable of running the business alone for another 10 years, but after that it will be difficult to hand over to somebody because our own hands will be shaking. The idea is to go hands-off when we are capable of returning to hands-on again, (if something goes wrong)” Kamath said.

More professionalismA new chief executive will be joining Jyothy in October from Unilever’s overseas unit. He will simultaneously bring along a few category heads from other companies.

Ramachandran says he wants to bring in a lot more professionalism in the company. “We will give a lot of freedom to the new chief executive, and the new team will help us grow.” The company has also brought on board two experts from the advertising industry to rejuvenate the brands. Collectively, their task will be to plug loopholes in Henkel’s business and advertising from October 2011 to March 2012.

“The challenge for us is to bring in the management team, how to do the hand-holding with them, allowing them to transform to the extend we require by integrating the business, and settle down for strong numbers for March 2013 balance sheet,” says Kamath.

Together, sales of Jyothy and Henkel should have a profit margin of 10%, he says.

Golden bridle must always remainRamachandran, who always wears white, including his footwear, is known to be passionate about his company and never taking a break. He wants to see Jyothy doing sales of Rs5,000 crore in next 4-5 years.

Where most of his peers in the industry are looking at acquisitions abroad, Ramachandran argues that the Indian land is so fertile that there is no reason for him to look beyond.

“When you do not have enough to eat, then you can look elsewhere. With two and half brands we have done so much, imagine what we can do now that we have additional brands.”

But where homegrown brands are being eyed by MNCs and when the competitive environment in the industry is so intense, where does he get this confidence from?

“All my staff is spread across India, more than 6,000, and they are my colleagues. And now, we jointly have 5,000 distributors. That is my strength and makes me feel no less than anybody else… All my boys, I take a lot of energy from them. When I look into their eyes, that energy multiplies.”

The company is believed to be in talks with private equity firms Actis, Caryle Group and Bain Capital for stake dilution to raise new capital, and is likely to seal a deal in 3-6 months. Ramachandran says with this his stake may come down 5-10% but he will never be less than 55% at any time.

With Henkel brands in its kitty and a new facility coming up in Bangladesh, Jyothy can commence sales to markets like Bangladesh and Sri Lanka. It is already distributing some of its products in Bangladesh.

Having given an option to Henkel AG to look at making a strategic investment in Jyothy Laboratories Ltd after five years, Ramachandran could not have been happier.

“Athithi devo bhava. If a company comes to India, fails and goes back, it spreads a bad message. We will give them an opportunity to come back here if they want to. That golden bridle must always remain.” The possibility remains, however, that once a private equity investor comes in and exits Jyothy, it could look at facilitating Henkel AG acquiring its shares from market.

Ramchandran has remained a firm believer in fate and has not devised exact plans to assure that the legacy of what he has set up over the years is maintained. Yet, he is sure of a bright future for Jyothy. “Whatever has to happen will happen.”