African units of consumer goods firms tweak production strategy to tide over currency headwinds

Marico MD and CEO Saugata Gupta. Photo: Abhijit Bhatlekar/Mint

Mumbai: African subsidiaries of Indian packaged consumer goods makers are facing the heat after major markets in the region devalued their currencies by 40-50% against the rupee, making Indian exports more expensive. For a way out, they are turning to local manufacturing and acquisitions.

Annual reports of Marico Ltd, Dabur India Ltd and Godrej Consumer Products Ltd show that profits of their units in Nigeria, Egypt, and South Africa, among others, have been dented in the last two financial years.

Marico Egypt for Industries SAE posted a Rs1.2 crore loss in FY16-17 after two profitable years as revenue fell 60% year-on-year. Marico South Africa Consumer Care (Pty) Ltd’s profits recovered year-on-year but were still 1.5% lower than FY14-15 at Rs3.26 crore.

“The severe macro-economic headwinds in the Middle East & North Africa (MENA) region have led to the muted growth (of 1%) in the overall International business this year,” Marico managing director and chief executive Saugata Gupta said in the company’s annual report for FY16-17.

The company declined to comment for this story.

“The near-term prognosis of MENA (Middle East and North Africa) business is largely neutral to negative,” Marico’s Gupta said in an earnings call on 2 August. “Having said that, it contributes only 3% of our turnover and is expected to deliver constant currency growth in the second half.”

Dabur’s subsidiary African Consumer Care Ltd reported a Rs556 crore loss for FY16-17, 23.9% narrower than the preceding fiscal year but 66% higher than in FY14-15.

Dabur Egypt Ltd managed 38% growth in margins but its revenue fell 8.87% from a year earlier to the level it was in FY14-15.

“Currency devaluation has been the major reason for this dip in value growth on translation,” a Dabur spokesperson said in response to an emailed questionnaire. “The business has registered growth in constant currency terms.”

“In Egypt too, sharp currency devaluation played spoilsport,” the spokesperson said. “The Egyptian pound has devalued by over 50% over the last one year, which has resulted in translation losses. In constant currency terms, however, the Egypt business has grown in strong double digits.”

Dabur shut its subsidiary Dabur Tunisie—selling to north African markets outside Egypt—on 9 August.

“Neighbouring countries subsequently either banned or imposed prohibitively high duties on imports from Tunisia, making it unviable,” the spokesperson said. “Also, the Tunisian market was not large enough to require a local manufacturing set-up and so we decided to liquidate this venture.”

The ‘Africa cluster’ of Godrej Consumer Products—including Ghana and Tanzania—has grown 24-26% every quarter since Jan-March 2015. But individual subsidiaries show signs of strain.

Godrej East Africa Holdings Ltd and Godrej West Africa Holdings Ltd both slipped into small losses in fiscal year 2016-17, as did Godrej Nigeria Ltd and Godrej Tanzania Holdings Ltd.

“Certainly, like other parts of the world, individual geographies in Africa do face geopolitical and currency volatility,” GCPL managing director Vivek Gambhir said in an emailed response. “We believe that we are well hedged by a diverse geographic portfolio and over time, a broader category presence.” These strains are also partly due to the complex holding structure that GCPL operates in Africa, Gambhir said.

All three firms called out currency volatility as a challenge to African expansion plans. Bloomberg data shows the Nigerian naira and the Egyptian pound fell 56.8% and 46.3% respectively against the Indian rupee since September 2015. The devaluation makes exports of Indian products to these countries more expensive.

Now they are localizing production to reduce their imports into these markets as they focus on merger and acquisition-led (M&A) led inorganic growth.

While Marico acquired hair care firm Isoplus for Rs36 crore in July to boost its product portfolio in South Africa, GCPL acquired US ethnic hair care maker Strength of Nature to sell its products in Africa. Dabur also acquired two cosmetics firms—D&A Cosmetics Atlanta and Body & Health Products—for Rs23.75 crore.

All three are working to set up local manufacturing units to hedge against currency devaluation.

“The sharp devaluation in currencies in these (African) markets had made imports of Namaste’s range of ethnic hair care products from the US prohibitively expensive,” Dabur’s spokesperson said of the firm’s US-based brand Namaste, whose products are also sold in Africa. “To counter this and mitigate the exchange impact, we have commenced local manufacturing of Namaste products in Africa, which have also started paying rich dividend.”

The company is also sourcing raw material and packaging products in Egypt to counter currency declines.

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