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"GST is a welcome move and will be good for India, keeping the rates low will be excellent for India"
Nadir Godrej, Managing Director, Godrej Industries Ltd Indian companies are capable of competing with the foreign companies, but there are few challenges that need to be addressed. This includes inability to setup PCPIRs properly, presence of some tension between large petrochemicals providers and the chemical industry, lack of long-term agreements etc. Nadir Godrej, Managing Director, Godrej Industries Ltd shares his view on these existing challenges in an exclusive interview with Mittravinda Ranjan.

How do you see the impact of the drastic drop in crude oil & natural gas prices on the chemical industry?
The overall energy sector is undergoing major transformations. Today, gas is USD 15-16 barrel oil equivalent, whereas oil is at USD 45-50 per barrel and I would expect that over the time that the oil price will be at par with the gas price. I don’t think the gas price is going to escalate any further. With the advent of new solar technologies and the declining cost of solar photovoltaics, we can anticipate the cost of solar energy to fall further. Storage of solar energy is one of the challenges which need to be addressed since this energy cannot be produced round the clock. In my view, over the next three to five years, the storage solutions will also become very economical thus making solar energy more economical than the coal based energy, which could also mean the end of the fossil fuel era.

For the chemical industry, I think, it is a very good time and not a big threat per se, since these developments would further drive the prices of fossil fuels very low, which will prove to be an opportunity. Moreover there is significant development in the field of bio-based materials which will further reduce the dependency on hydrocarbon feedstocks.

As a major producer as well as a consumer of specialty chemicals, how is the group realigning strategies in India and internationally?
Our specialty chemicals business contributes to 5 per cent of our total business and we have made good progress as some of our chemicals are already there in the market. Constant progression of FMCG industries and various other end-user industries will continue to accelerate the demand of specialty chemicals and we are ready to meet the demand.

For our specialty chemicals, Godrej Consumer Products is a regular customer, which is also the biggest Indian owned FMCG company, and globally, it is among the fastest growing consumer product companies in the world. Within our group, Godrej Agrovet is our big prospect for our specialty chemical products. We are working towards increasing the share of specialty business to 20-22 per cent in the near future and have also started producing conventional and novel surfactants, esters, ethoxylates and waxes; and raw materials for Godrej Agrovet.

We are already in talks with global FMCG companies like Unilever, Colgate & many others, to whom we would be selling our specialty chemicals. They are already customers for our oleochemicals and conventional surfactants. Presently, we are waiting for approvals from these organisations, which is a time consuming process.

In our business, one of the issues is in the palm oil supply chain which we are trying to streamline. India produces highly sustainable palm oil. But the Godrej group doesn’t refine palm oil in India and we only sell crude palm oil. Hence we don’t have the facility to refine and derive the by-products like palm stearin & palm fatty acid from the crude oil. In this scenario, it becomes difficult for us to maintain sustainability across the palm oil chain and we are working on addressing this challenge and on certifying Godrej Agrovet's own palm oil production, over time we will completely link the supply chain.

Coming to global business, we think Africa is a good market for the growth of consumer products where we see strong growth in the FMCG sector and our specialty chemicals. Indonesia is also a good market for consumer products and specialty chemicals. At present we are not looking to supplying in China since it is a difficult market to penetrate. We see low growth in OECD nations which are growing at less than 2 per cent and a slowdown in many commodity producing developing countries

How has the Godrej group continued to be competitive and cost effective along with maintaining strong connection across multiple segments of the society?
Premiumisation is going to be a big trend as India becomes a richer country. At the same time the number of people at the bottom of the pyramid is still growing remarkably which will lead to escalation in product demand. We produce different formulations to offer products to customers at the bottom of pyramid which are fit for purpose while not compromising on the quality. There is a significant increase in demand of sophisticated products which do come with a cost but we are seeing a healthy growth in our products in this segment as well.

For us, customer satisfaction is the single most critical aspect to run the business and we are ready to serve our customers. Innovation can always aid the producer to manufacture the product that satisfies the customers and we are confident in providing economical products of high quality for household consumption.

How can the Indian specialty chemical manufacturers become competitive at the global level?
Indian companies are capable of competing with the foreign companies, but there are few challenges that need to be addressed. The biggest challenge is that we haven’t been able to setup PCPIRs properly. There exists some tension between large petrochemicals providers and the chemical industry. Lack of long-term agreements makes petrochemical feedstock a problem for the industry. I don’t see a quick solution to the same. For the specialty chemical industry, feedstocks are not a big issue and thus there is a high potential for the growth of specialty chemicals industry in India and there is a room for multinational as well as Indian companies to grow holistically.

For the Indian specialty chemical manufacturers to be competitive at the global level, the Indian companies need to invest into continuous R&D to develop sophisticated specialty chemicals and also work on developing customer development programmes to work closely with their clients.

Please share insights on the investment of Rs. 300 crore by Godrej into the Godrej Agrovet business and current position of GAVL in the Indian and global markets?
Out of 300 crore investments that have been earmarked for our Godrej Agrovet business, we will invest half of this in our business for animal feed. We are investing around 100 crore in our palm oil business that I have already mentioned, and another 50 crore in Agrovet Agri inputs business.

Apart from this, Godrej Agrovet will invest 100 crores in its new acquisition of Creamline Dairy and 60 crores in Astec Life Science, which is a specialty chemicals company, where we are a majority shareholder. Astec Life Science specialises in triazole chemistry which supplies active ingredients to Godrej Agrovet and other companies in Indian and other international markets.

Presently, we are mostly selling formulations in the Indian market and growing steadily at 25 per cent per annum and expect to maintain the growth rate. Godrej Agrovet is a renowned pesticides manufacturer and with the acquisition of Astec Life Sciences Ltd which is into manufacturing of agrochemicals and pharmaceutical intermediates, we will be able to further expand our product basket to manufacture fungicides. Plant growth promoters are a very big part of our agri business and we are working on new plant growth promoters as well as old staples which include triacontanol and homobrassinolide; and very soon we expect to initiate exporting homobrassinolide to the USA.

Godrej Agrovet is also open to expansion through acquisitions.

What are your thoughts on the clearance of GST bill by the government?
GST is a welcome move and will be good for India, keeping the rates low will be excellent for India.

With the Make in India campaign, which aims to increase the share of manufacturing in GDP from current 16 per cent to 25 per cent, how much work needs to be done to realise this vision?
The government’s focus to get the manufacturing sector to contribute 25 per cent of GDP is appreciated as this will create lots of job opportunities. But while it is desirable to grow manufacturing the service sector is likely to grow even faster. And I believe agriculture has the potential to grow rapidly with better use of technology. So in the sectors like services, agriculture, and industries the complete economy can grow at 12 per cent p.a. Each sector needs to grow at a much faster pace. Although, there are multiple issues that need to be addressed. If all sectors grow rapidly it is not possible to significantly improve the salience of one sector such as manufacturing.

If you look at the feedstock for petrochemicals sector, the coordination between the users and the quality of raw materials are curbing the growth pace. Cost of gas is always low at the source of origin as compared to the total landing cost after transportation and since we are dependent on imports for feedstock, this can be a constraint for us while competing with countries like the USA and the Middle East where the cost of gas is much cheaper. However, the capital cost is high in the Middle East; it is not easy to operate the petrochemical plant there. So, the lower transportation cost in India and the higher capital cost in the Middle East will enable India to stay competitive. And as I have already said, with the solar energy becoming competitive, the raw materials like gas and oil will become even cheaper which will eventually be very good for India.

Industry is working on sourcing from renewable sources and there is research going on technologies like cellulose cracking that could lead to new chemicals thus creating different value chains. These may be competitive with petrochemicals, and not for all chemicals, but it has greater value for certain kind of products coming naturally from the chain. But we are not sure if the government would give any incentives or carbon tax on gas/oil use for the chemicals. Even we are looking at these as one of the future sustainable technologies for our business and are in talks with several technology providers. Several companies are escalating their budgets for integrating fresh innovations and deploying R&D in the same. We must continue weighted deductions on R&D expenditure, in order to accommodate constant innovations.

As far as infrastructure is concerned, high electricity rates continue to be a pain point for all the manufacturers. As solar energy is becoming cheaper and the distribution challenges are taken care of by the government, I think people will set up solar based captive units for consumption which would offset the energy cost to a great extent. However low cost storage will be required for captive units.

Water is not essentially a problem as we are capable of recycling our waste water. But, some industries that uses significant amount of water are at risk, where they need to cut down on their requirement of water. Industries consume a lot of water for cooling purpose, but if water is expensive, one can do water harvesting or generate enough water at one’s own land and undertaking water-shed program will act as a solution to cut down the cost of water. As a part of our corporate social responsibility program, we are executing water-shed program, which helps in collecting water at a very low cost, even in some of the driest parts of India.

Transportation through water routes in India is around one tenth of the cost of transporting via railways. Our Union Minister, Mr Nitin Gadkari’s announcement to invest in developing inland waterways infrastructure has brought a bright hope to address the water transport issues. In India, water transport is largely on natural rivers. Government should consider a north-west canal project which can be very useful for the chemical industry and I feel a study should be carried out in this direction.

Specialty chemicals cannot be sold on the basis of the specifications as these are produced with the aim to be the best fit for applications to impart desired product quality. This needs extensive research which is the key differentiator between the specialty and the basic chemicals. India produces huge herds of chemical engineers year after year. The cost of R&D is more economical in India than the global R&D cost. Typically the cost in India is one third. The specialty chemicals industry should be based on the R&D done in India. It would seem we are not doing much Research and Development in India but since the Indian cost is one third of the cost of developed nation R&D India effectively spends much more than it would seem. The weighted deduction in R&D has proved to be useful to the industry and the government should continue the weighted deduction and accelerate deduction for promoting the green R&D. Also, there is a need for developing synergies with the national agencies for bringing more local level innovations at low-cost.

We, at Godrej Industries have collaborated with National Chemical Laboratory successfully in the past and recently and are also collaborating with the Institute of Chemical Technology and IIT in addition to running our own in-house research programs.

What are the future plans of Godrej Industries?
Post the acquisition of Creamline Dairy and Astec Lifesciences, we expect Godrej Agrovet business to grow very fast organically as well as inorganically and are envisaging a good growth in our animal feed business and dairy industry products. We will continue looking out for more such opportunities in long and short term growth of our business.

The agricultural sector can grow at the phenomenal rate with onset of new agricultural techniques like bio-reactors, etc. and all of these can improve agricultural growth significantly. Organically, we expect our agri-business grow at 25 per cent which we can look at boosting to around 40 per cent through acquisitions.

Our chemicals business will provide Godrej Agrovet with newer game changing chemicals. We will develop new surfactants such as sophorolipids and focus on low cost green energy to lower our costs and give us a competitive advantage. We have struggled in the recent past but the future looks very bright.