Godrej Foods' Joint Venture

According to the agreement, a company called Godrej Pillsbury is to be entrusted the entire marketing and distribution activities of Godrej Foods, making Godrej Foods a stand alone manufacturer.

The Dutch partner also has a majority 51 per cent stake in the alliance.

Furthermore, the Indian company is expected to receive $4.25 million from the tieup as part of a no-competing agreement and as consideration for the distribution network.

This confirms the fact that joint ventures have become the Indian corporate sector's preferred response to liberalisation. However, if viewed closely, there is a very unnerving trend developing for users of this route.

 

Multinationals initially require a toe-hold in a country. Riding piggyback on a joint venture enables the MNC to acquire this base and get some distribution clout within the country.

In due course, however, these MNCs get the hang of the business and then the time is ripe to either get in a 100 per cent subsidiary or buy out the Indian partner.

This is especially true in the consumer goods sector. A case in point is the host of joint ventures which either turned sour or resulted in takeovers, for instance, Godrej Soaps-P&G, Kelvinator-Whirlpool, HCL-HP, Maharaja-Electrolux.

Coming back to Godrej Foods, the company has received a part of the consideration for restructuring its business in the form of a payment of Rs 13.52 crore last fiscal.

Now, if one considers the financial performance sans this extraordinary revenue, Godrej Foods has actually posted a net loss of Rs 0.21 lakh. Higher interest costs and depreciation charges have eroded its profitability.

At the operational level, however, the company posted a 27.3 per cent increase in turnover which was at Rs 184.96 crore for the year ended March 1996.

A volume-led growth in edible oils, vanaspati and the fresh fruit beverage range of jumpin, has helped boost revenues.

But increased raw material costs and higher employee remunerations have squeezed margins even at the operational level.

In fact, operating margins without the one-off extraordinary income have actually dipped from 7.14 per cent to 4.53 per cent.

One school of thought is of the view that such alliances are not very lucrative for investors, the rationale being that once a part of the business is spun off, the parent company gets only that part of the profits which the joint venture chooses to declare as dividend.

But with the scrip moving from a low of Rs 17 to a high of Rs 32 all within a matter of a few weeks, investors in the company's stock seem to think otherwise. virtual="/incs/bottom.inc"-->