Economy to bounce back to 8% growth rate: Adi Godrej

Adi Godrej is Chairman of the 115-year-old Godrej Group, now a $3.3-billion conglomerate involved in fast-moving consumer goods, real estate, industrial engineering, security and much more.  He is also currently president of the Confederation of Indian Industry. In an exclusive interview with Govind Ethiraj on the show Bottomline, airing on Headlines Today, he speaks out on a range of subjects, from the state of the economy to his group's future. Edited excerpts:

Q: Hello and welcome to Bottomline. Our guest for today is Adi Godrej, Chairman of the Godrej Group. We are going to ask him some key questions. Are companies like his feeling optimistic or pessimistic about the way things are? What is it going to take to get us out of this and back on the growth path? Is there a mood of general optimism or general pessimism at this point?

A: Well, I think for the moment... because the GDP growth has come down… I think we will get out of it.

Q: But the last four years have also gone very well for Godrej. How was that?

A: First of all, our strategy has worked well. We are getting much more focused on our long-term strategy. For example, we have a ten by ten objective for the group; we want to be 10 times our present size in 10 years time, which is a compounded annual growth rate of about 26 per cent. Our strategy and our talent development have been working very well. So we feel we have good years ahead.  

Q: If things have been working right for Godrej and some other groups as well, why not for the Indian economy?

A: The Indian economy has been affected to a certain extent by the global macroeconomic situation. Also, those parts of the economy which have a lot of interaction with the government - say, infrastructure, mining, or various other areas like telecom - are not doing too well, because government decision making has become slow for various reasons. Partly, it is the anti-corruption movement, partly the CAG reports, internal problems of the government and the political dynamics of Parliament. So some sectors, which have to deal with the government, have been negatively impacted.

Q: Do you think if companies like Godrej can buck the trend, maybe we should stop worrying the performance at the macro level?

A: Well, we shouldn't worry. What we should do is see what we can do to improve the situation.

Q: Keeping in mind Godrej's portfolio of products and services, what are the best things your company has done in the last four to five years?

A: Our consumer products businesses have done very well. The Indian consumer demand, especially rural demand, has been growing rapidly. Around 500 million Indians use one or the other of our products each day, which gives us a very strong cache in the consumer market. In the last six to eight months our property development business has had some setbacks, although we have grown very well. Though the growth rate is over 100 per cent in this sector, general demand has taken a beating partly because of (the need for constant) interactions with the government. So, government permissions have become very slow and that affects the sector.

Q: Real estate is one of Godrej's biggest divisions, But, according to sources, you are facing some sort of resistance in this segment. Do you regret the time and effort you spent on it?

A: No, not at all. We still feel it will be our biggest single business over the next 10 years. We have grown very well, but the sector is facing difficulties and if the sector faces difficulties, our profitability gets affected.

Q: Some sectors of your group are growing faster than the others. Soaps, for instance, seem to be growing very fast, unlike hair care products. Why is that?

A: Our soap business has grown very well because our share is relatively low. Our share in the soap business is only about 12 per cent. In our hair colour business, the rate of growth is low because our new initiatives are yet to hit the market effectively. But we expect over the next two years we will do very well in this business also.

Q: So what does this tell us about Indian consumption patterns?

A: The consumer is doing well, especially the middle-class consumer. Incomes are rising. Rural consumers are consuming much more than before. In rural India, 10 years ago, most people barely kept body and soul together. Now, disposable income in rural India is rising very high. So actual discretionary spending may be rising 20 to 25 per cent a year in certain places. That is helping consumer products' companies grow quite well.

Q: Recent numbers show your international business has grown better than your domestic business. Is that a trend that is going to continue?

A: Our international businesses in Godrej consumer products are mainly in the developing countries. Growth is good in the countries we are in. For example Indonesia, the African countries, South America, growth has been good. Even organic growth in the last quarter - without taking inorganic growth into account - was about 31 per cent which is very good and if you add the inorganic growth, it was above 60 per cent. We will continue to grow very strongly in our international business, both organically and inorganically and we expect the growth in our international business will be higher than that of our Indian business, although our Indian business growth over the last few quarters has also been very high, in the mid 20 per cent range.

Q: What are the lessons you learnt from your overseas successes?

A: What you can take away is that in relatively low-income countries in the developing world, consumer demand is growing across the board. It is not just in India, it is not just in China, it is across the board and I think consumer demand will continue to grow as these countries develop. And in the years to come, I see more of the global growth coming from the developing countries.

Q: What can be learnt from your experience? We are in a phase where in India growth is moderating, maybe not in consumer products, but across the board. How do companies use this period to learn from their markets overseas then apply the lessons here?

A: I don't think India's growth is moderating. I think this is a short period. We had a similar year in 2008/09 when growth was low, and in 2009/10 and 2010/11, we bounced back to an 8.4 per cent growth. I think the growth rate will bounce back to more than eight per cent.

Q: Some would say you are an eternal optimist.

A: Yes, I am an optimist and I think my optimism has been vindicated by and large. Over the last 20 years since the reforms started, I think India has done very well. I don't think we should get overly disheartened. In the periods where that growth rate moderates a little bit, we should try and avoid such moderation. Last time when the global economy dipped because of the financial crisis, India did exceedingly well with fiscal stimuli, monetary stimuli and got out of it. We were the fastest and best, among the large economies of the world, to get out of it. Let's hope that we can do it again.

Q: What if we look at the flipside, what if we really don't grow at the pace we really want to?

A: I don't think we should look at it that way. If there are short periods when there are difficulties in implementation, we should find solutions. India has tremendous growth ahead for two or three reasons. One is the demography of our country which will be extremely positive, especially say five years from now onward, because, that's when Chinese demography will turn negative. We will overtake China in terms of growth rates from then on and that will allow us to grow very strongly. There will be other advantages over China because Chinese costs will keep rising. The new manufacturing policy, if well implemented, can help us get extremely competitive in increasing industry salience in our GDP. If we get our act right we will overtake the United States in terms of the size of our economy between 2030 and 2040. Whether we will be early or late in that decade will depend on how well we manage our macroeconomic fundamentals. We can overtake China between 2040 and 2050. We can also become the world's largest economy and a reasonably developed country by 2050.

Q: When you are running a large enterprise, you have to prepare for the worst as well. At Godrej, what is the other side looking like?

A: No, I don't think... We do scenario planning. We look at all aspects of the economy very clearly, and I don't think we can drop to a very low growth rate for any protracted period of time.

Q: In your scenario planning, what are your points of concern or red flags?

A: In our scenario planning, in the event India has low growth for say two to three years, we would put even more effort into the international business to make up for the Indian business.

Q: Are you already doing that in some ways?

A: In a little way. But our Indian business is going well. So our emphasis on faster growth in our international business is helping us accelerate the company's growth.

Q: What is the lesson here? We have talked about the consumer at the bottom of the pyramid and I think your retail business is looking at the consumer somewhere between the middle and the top of the pyramid or maybe at the top of the pyramid. Are there common threads?

A: As India grows, Indian consumers will tend to upgrade. More and more people will move from lower income level to middle income level and middle income level to upper income level. So consumption patterns will rise dramatically and as we get to a per capita income of around five thousand dollars annually, we will see tremendous growth in consumption across the board. If you look at almost any item today our per capita consumption is very low.

Q: You are confident about consumption stability at the top end?

A: Yes, I feel so.

Q: And at the bottom as well?

A: Very much so.

Q: So, it is the middle which is really the problem?

A: No. The middle is growing. Consumption is growing in the country. Parts of the economy which are not doing too well are the ones that depend on the government. Sectors like infrastructure, mining, and power. That is why GDP growth has slowed down. Consumption orientation is still doing well.

Q: If I look at, say randomly, your soaps portfolio, I feel you have not really introduced any new brands except for brand extensions for more than a decade. Is there any reason for that?

A: How many new brands have you seen in the last decade? New brands are very difficult to establish. It doesn't make sense. Brand extensions make a lot of sense. Very recently, we relaunched our entire Cinthol range, especially the Cinthol soaps and the deos and talcs, etc. That is a major re launch. We are repositioning, making what was always a premium product even more premium and we expect that will add a lot of value. We have introduced a lot of new variants. In fact, we are the fastest-growing soap manufacturing company.

Q: And No.1 is your largest product by sales?

A: No.1 is our largest soap brand.

Q: This seems to apply to your other brands as well. No real new brand has come into this space in the last 10 years.

A: If you look at the global consumer market, there are very few new brands coming in. It is much more important to ensure your well established brands becoming better established and that pattern works extremely well. For example, in the household business, we are the largest by far in India. I think our market share is more than double that of our next biggest competitor and our brands are extremely strong. They are growing very well. We have many innovative products that have helped our brands grow. Our market share has grown by about four percentage points over the last year, and is now 40 per cent.

Q: Is the rest of Indian industry not doing this?

A: No, Indian industry is doing this quite well. For example, Godrej Consumer Products has launched a new brand in a category we were in earlier, but that was a licensed product. We had to give it back to Sara Lee: air fresheners. We had a brand called Ambi Pur which we had to give to Procter and Gamble because Sara Lee sold it. Now, we have introduced Godrej Aer. It is doing exceedingly well, in fact we are in short supply right now and so that will be a new brand we will establish but that will be Godrej Aer.

Q: Is Indian industry continuing to understand the customer, as well as it was doing a few years ago?

A: Yes. I think, even better. Market research standards have improved. In addition to the traditional market research we used to do five to 10 years ago, there is a tremendous amount of research done in house. From time to time, I also visit homes and find out from consumers what they are looking for, what they want, how we can satisfy the need, etc.

Q: Can you tell us what happened during your last visit?

A: My last visit was to a rural belt. It was very interesting to see the kind of products even rural households were using. I was very surprised at the changes that had taken place, comparing it to a rural visit I had done three years before that.

Q: Keeping in mind the issues of mines and spectrum, will companies like yours be even more wary entering any resource-related industry?        

A: I think people will be wary because of what has happened. I like to look upon this as a short-term pain but long-term gain. I think what we need are strong policies. Any policy of the government to my mind is should be transparent and fair whether it is an auction or some other policy, it should be transparent, fair and open to everyone. If that is done, I think even these industries will prosper tremendously.

Q: When do you see things changing, if at all?

A: I think 2013/14 will be a year of good growth. I expect it will be at least eight per cent, could be nine per cent plus.

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