Thursday, January 27, 2011

Indian Firms on the Scramble for Africa

Mumbai/Johannesburg - Indian consumer goods makers are scrambling to buy assets in Africa, applying their knowledge of challenging, lower-income markets to a continent where spending power is on the rise.

Tapping Africa opens up new growth avenues for cash rich Indian makers of personal care products such as soaps, shampoos and hair and skin care products, with rising costs and fierce competition squeezing profits at home.

"We are a homegrown multinational from a developing economy," said Jimmy Anklesaria, executive vice-president for international operations at Godrej Consumer. "Our ability to understand consumers in developing economies is sharp."

Godrej bought Nigerian personal care products maker Tura last year for about $33m, according to analysts. It has also bought haircare brands Rapidol and Kinky in South Africa over the past two years, and is on the hunt for more acquisitions.

Companies and countries looking to buy up its natural resources has long dominated foreign investment in Africa.

Two blockbuster deals last year - India's Bharti Airtel paid $9bn for the African cellular assets of Kuwait's Zain and Walmart's deal to buy South African retail chain Massmart Holdings [JSE:MSM] for $4bn - show the allure of the continent's rising spending power.

That potential market has intrigued Indian makers of consumer goods such as Godrej, Dabur India, Marico and Emami, which have been among those buying up assets.

"There will be many more acquisitions made by Indian companies in the consumer space in the coming months," said a senior banker with Indian investment bank, which recently advised an Indian firm on a M&A deal in Africa.

"We can expect some mid-sized acquisitions in early 2011."

Rising spending power

African consumer spending will nearly double to $1.4 trillion by 2020, while the number of households in Africa with discretionary income will rise by 50% to 128 million over the same period, a recent McKinsey report predicted.

Indian companies hope to use their experience developing and selling products in markets where affordability is crucial to compete with global players such as Anglo-Dutch giant Unilever, which recently struck a deal to buy Sara Lee Corp's operation in Kenya.

"Africa is currently witnessing growth rates that India witnessed about 10 to 15 years back," said Anand Raghuraman, partner and director at the Boston Consulting Group.

A sizeable population of Africans of Indian origin in eastern to southern Africa give Indian companies an advantage over global competitors, including China.

Whereas global players sometimes sell one-size-fits-all products, Indian manufacturers often adjust their offerings to suit local tastes and spending habits.

"The product portfolios of Indian companies are tweaked to suit local needs," said Debashish Mukherjee, principal with consultancy AT Kearney.

India was the most acquisitive company in sub-Saharan Africa in 2010, accounting for a third of the total value of deals done in the region, according to Thomson Reuters data. That was due mainly to Bharti Airtel's purchase of Zain's African assets.

Risks and growth

Risks to Indian firms making acquisitions in Africa include overpaying in the competition for scarce attractive targets. Both the Bharti and Walmart deals were widely seen to be expensive.

Africa also remains price sensitive, so a spike in commodity prices would squeeze margins.

"In low-income countries, consumers spend a high proportion of their income on food and if prices shoot up as they did in 2007/08, they will immediately stop buying anything that's not essential," said Boris Planer, research director at Planet Retail.

Still, Indian consumer goods firms active in Africa expect growth of between 25% to 30% from their operations there, and expect opportunities to move beyond personal care to household care and over-the-counter healthcare products in coming years.

"Among all the Indian companies who are moving into Africa, Godrej and Dabur are best positioned to benefit maximum from the Africa story," given the early-mover advantage, said Shirish Pardeshi, a senior sector analyst with brokerage Anand Rathi.

There is plenty of Indian competition for African assets.

Emami, which won board approval in October to invest $1bn to buy assets overseas and in India, is looking for more deals in markets including South Africa, Kenya and Nigeria, Group Director Harsh Agarwal told Reuters.

Marico, with cash of $480m, said it is looking to buy assets in North Africa and South Africa, while Godrej, with cash of $537m as of end September, continues to hunt for buys across Africa.

Dabur, one of the most active Indian players in Africa, is sitting on cash reserves of $873m and recently brought out US-based personal care products maker Namaste Labs and its two African units for $100m.

It is looking for assets in the $10m to $50m range in South Africa, Nigeria, Kenya, Ghana, Mozambique and Tanzania, said its CEO Sunil Duggal.

"Africa is a good hedge for what is happening in the Indian markets, and now asset valuations there are attractive compared to India," he said.