In their book Focus, Al Ries and Jack Trout succinctly bring out the importance of a definite focus for an organization. They write, “The primary job of a corporate leader is not to manage the corporation but to find the future. Not just the future for the corporation but the specific future for the corporation under his or her care. A focus is the future in the sense that it makes a prediction about where the future lies and then makes specific steps to make that future happen. And the management at Dabur seems to have taken a cue.
The period 2000-02 hadn't been good for the company (Refer graph below for the performance of Dabur in the past five years). With a drop in the performance of the agriculture sector, there was an adverse impact on off take and consumption in rural areas. And the worst hit was the FMCG sector.

It was a bad patch for the economy in general. The industrial and manufacturing sectors grew by just 3.3 per cent and 2.7 per cent respectively in 2001-02. In a scenario of flat to falling demand, gross margins took a beating. To protect market shares, all FMCG companies, big and small, offered volume discounts and consumer promotion schemes, which had lowered sales realizations, and margins. Profit improvements were squeezed out from operational efficiencies alone.
In these trying times, Dabur, with the bulk of its turnover coming in from FMCG, needed direction more than anything else. A trace of cost cutting here and there wasn't going to be enough. There were several indicators from top management as well as the shareholders that the cash-intensive pharmaceuticals business was eating into the profits of the FMCG sector. Something had to be done - and soon.

DIVERSITY, A STUMBLING BLOCK
It was common knowledge in the bourses that the sheer diversity of Dabur's product portfolio made an evaluation of the company's prospects quite difficult. There were two major divisions, FMCG and pharma - and both were as different as chalk and cheese (Refer table 1.1 for a comparison). A closer analysis of the two revealed the following:

FMCG: Sober, but cash-rich
The growth from Dabur's established FMCG portfolio had been sedate, due to sluggish rural demand and intense competition from a host of regional brands and counterfeit products. Like other FMCG companies, over the past five years, Dabur had steadily improved its procurement and distribution systems to achieve a significant reduction in material costs. Dabur had inked a two-year tie-up with FreeMarkets Inc, for e-procurement. The objective: utilising cutting-edge technology for efficient procurement online. Dabur had an annual procurement bill in excess of Rs 500 crore with sourcing carried out from across the globe for raw and packaging material. As per the arrangement, Dabur would use FreeMarkets' FullSource services to accelerate savings and reduce supply risk. Also, the company would use FreeMarkets' QuickSource solution for automating, streamlining, and providing visibility into sourcing projects. But much of these savings had been ploughed back into brand-building efforts, which was evident in the steady rise in the adspend-to-sales ratio. This had kept Dabur's operating profit margins more or less constant over this period.

Pharma: High on potential
In contrast, Dabur's pharmaceutical business was in a relatively nascent stage, but had delivered high growth rates. Dabur's pharma revenues originated both from domestic sales and exports of formulations and generic products, with a focus on oncological products. It had set up manufacturing facilities to cater to the European and American markets as well.
Dabur's pharmaceutical portfolio had considerable potential for growth. Between 1999-2000 and 2001-02, pharmaceutical revenues expanded from Rs 96.4 crore to Rs 163 crore. These growth rates had been consistently higher than those in the FMCG business. In 2000-01, the pharma business grew 30 per cent against 12 per cent in the FMCG business. In 2001-02, growth in the pharma business slowed to 7.2 per cent, but it still did better than FMCG at 1.6 per cent. In the first nine months, the pharma business recovered to post robust growth of 16 per cent, relative to the 7.8 per cent achieved by FMCG. The profitability of the pharma operations was also higher than the FMCG business. However, given that Dabur's pharma business was research-driven, investments in the business were quite heavy. Over the past few years, Dabur had indeed used a significant portion of the cash generated from its core FMCG operations in funding its pharmaceutical businesses.

THE TRIGGERS FOR THE
SEPARATION
There were several considerations that prompted the management to think in terms of a de-merger.
*As Sunil Duggal, CEO Dabur India averred, “There were several obvious dissimilarities in the two businesses, and sooner or later we had to take cognizance of them. Our investor relations cell gathered feedback that they wanted to have the option of investing either in the high growth pharma or the stable FMCG business. This voice was getting stronger with the robust performance of pharma."
*Dabur had always worked on a 'herbal specialist' platform. It had built its chief brands like Chyawanprash, Hajmola, Vatika and Anmol on the same platform. Indeed, its FMCG brands were robust and there were several market leaders in its kitty. However, for the FMCG business to grow, it needed more than a good idea and a good brand name. There was a need to re-look at the strategic focus, restructuring the brand architecture, and the operational reorganization of the FMCG business. In the new brand architecture, far more resources would be deployed for the growth of five key brands - Dabur, Vatika, Anmol, Hajmola and Real - and these were to be backed up with much stronger advertising and larger marketing spends. Also, spends would be moved away from non-core to core brands. New and innovative product launches as well as a revamp of existing products was to be in store.

TABLE 1.1: AHEAD TO HEAD COMPARISON

*The de-merged company would have a lower asset base - and that would increase the company's return on capital employed even without any increase in profits before interest and taxes. It would also be a win-win strategy for the pharmaceutical business, which, while having access to the Dabur brand name, will have the freedom to pursue its own growth and R&D strategies.
*In order to create greater synergies and efficiencies, the company was also re-organizing its FMCG business operationally. Traditionally, the FMCG business of Dabur India was primarily structured along two strategic business units (SBUs) - the family products division, which looked after personal care products, and the healthcare products division. These two sets of products had considerable overlap and commonalities in marketing, distribution, retailing and sales. The company's management therefore decided to integrate these two SBUs into one.

*It was necessary to finalize the long-term growth strategy for the Pharmaceutical business. Dabur Pharma planned to be a major player in the global oncology generics business, supplementing its own strengths in this area by entering into key alliances with Pharma majors. The company would carry on original research focusing on developing New Chemical Entities (NCEs) and New Drug Delivery Systems (NDDS) in the oncology segment. This would make Dabur Pharma a completely integrated oncology player, enabling it to tap the large emerging opportunity in this area. The domestic branded generics business would also grow albeit with low investments.
*The FMCG business contributed 85 per cent to total sales and recorded sales of Rs. 1048.50 crore, and net profit of Rs 72 crore. The pharmaceuticals business, which contributed 15 per cent to total sales, posted sales of Rs. 184 crore and net profit of Rs 13 crore. While FMCG was more of a local business for Dabur, pharma was more global and the whole industry seemed to be headed that way. Again, while in the FMCG business, the product was conceived in the mind of the marketing man and then validated by R&D, in pharma, the R&D department conceived a product, which would then be marketed. The interdependencies were dramatically different.
*Then, there was the issue of timing. Pharma had been a protected child under the FMCG umbrella. It had now gained sufficient critical mass to stand on its own and fight it out in the competitive market place.
*Last but not the least was the element of risk. The pharma business would require regular infusions of cash going forward. Apart from the significant research and development costs, Dabur's aggressive foray into the export markets would require outlays on securing registrations and marketing approvals for its products. The payoffs from these investments may also be less certain than those from the established FMCG business.

THE JOYOUS SEPARATION
Dabur India Limited operationally separated its Pharmaceuticals business from the FMCG business in July 2002. This move was part of the restructuring exercise based on the recommendations and strategy plan proposed by Accenture. However, under this setup, the Pharmaceuticals business had continued to remain under the ambit of Dabur India Limited but was functioning as a separate business with independent business head, functional heads and books of accounts
The actual de-merger of the pharma business had positive implications for the shareholders of Dabur India.
*One, it would focus greater attention on the possibilities in the pharma portfolio, securing a greater valuation level for the business.
*Second, the FMCG portfolio may be freed of the burden of funding the emerging pharma business. If the bulk of the debt was vested with the de-merged company, this could put Dabur India in a better position to return surplus cash to its shareholders, through higher dividends or buybacks.
It was proposed that the new Pharmaceutical Company would be publicly listed in the stock exchanges. The share holding pattern of the new company would be the same as that of Dabur India, and it was decided that all shareholders of Dabur India would be issued one additional share of Dabur Pharma for every two shares held of Dabur India. The “Dabur" brand name, which was a property of Dabur India Limited, would be licensed to the Pharmaceutical Company and all patents, trademarks and brands pertaining to the Pharmaceutical business would be transferred to the new Pharmaceutical Company. Apart from specific liabilities, general liabilities in proportion to assets transferred would form a part of the new company's source of funds.
The company would transfer assets of Rs 214 crore pertaining to the Pharma business, out of the total asset base of Rs 521 crore, to Dabur Pharma Limited as part of the de-merger. The FMCG business, which would remain within Dabur India, would concentrate on its core competencies in personal care, healthcare, and ayurvedic specialties, while the new Pharmaceutical company, Dabur Pharma Limited, would focus on its expertise in Allopathic, Oncology formulations and Bulk drugs.
The issued share capital, post de-merger of Dabur India would remain at Rs. 28.58 crore while that of Dabur Pharma Limited, the proposed new name for the Pharma business, would be Rs 14.29 crore. The Board had to issue additional shares primarily because Dabur had a small base of equity share capital as compared to its net worth and reducing it further would affect its liquidity on the bourses.

THE AFTER EFFECTS
“We received encouraging views from Analysts on the de-merger. The de-merger would allow investors to benchmark performance of these two entities with their respective industry standards," revealed Mr. P D Narang, Group Director, Dabur India Limited.
According to Salomon Smith Barney Research, “The de-merger of the consumer and pharmaceuticals business was a value-enhancing move. We expect a re-rating and believe the sum of parts value will be higher than the current value of the stand alone entity."
The first quarter results after the de-merger were also encouraging. The FMCG business, comprising of Personal care, Health care and Ayurvedic Specialties products, recorded an impressive growth. The net profit of the business soared by a significant 54 per cent, up from Rs. 7 crore to Rs. 11 crore, during the period under review while the turnover increased by 12 per cent, up from Rs. 222 crore to Rs. 247.50 crore, during the same period.
The Pharmaceuticals business, recorded a growth of 19 per cent in turnover and a 6 per cent increase in its net profit during the first quarter. The turnover of this business increased to Rs. 53 crore from Rs. 44 crore while the net profit grew to Rs. 4.5 crore from Rs. 4 crore during the first three months. The business recorded this increase in net profit after charging Rs.4.78 crore on account of R&D this year as against Rs.2.25 crore that was charged in the previous year.
However, these are early times. Globally, the pharma industry is going through a rapid metamorphosis and only the best will survive. The FMCG business also boasts of giants whose turnover is tenfold that of Dabur. The company would have to tread cautiously and carve its own niche that no one else can occupy!

QUESTIONS

Reeta Gupta is a member of the GMR Research Team