Elder Pharmaceuticals entered into an agreement with Kose Corporation of Japan to form a joint venture (JV) company to manufacture and sell cosmetics in the Indian market. Alok Saxena, director of the company shares details with CNBC-TV18 regarding the JV.
Saxena expects the project to commence in three months and have no plans to set up a new plant in the near-term. He believes that the margins of the company will not be impacted by the JV.
Below is the verbatim transcript of Alok Saxena's interview on CNBC-TV18
Q: Could you give us details about the joint venture. How much funds will you need to infuse and when will revenue start accruing?
A: We are looking at getting this project on-stream in the next three months. The initial investments could run into couple of million dollars. We have not finalised the business plan as yet, but we are looking at giving them complete support of manufacturing and distribution in Indian market. Kose Corporation is one of the leading innovative cosmetic companies from Japan; in fact they are among the top three cosmetic companies. However, the plan is to bring their top-end unique products in the Indian market. They have been doing an analysis of the Indian market for sometime now and are quite confident that using our distribution and manufacturing support they will be able to do well in Indian market.
Q: Can you give us more detail on what kind of cosmetics are you speaking about? Is high end as well as food and drug administration (FDA) issue therefore will not come in; is there no question of any drug controls of any kind, quality or price?
A: There is no issue of FDA, but Japanese manufacturing requirements are very stringent. In fact they are asking us to follow absolute pharmaceutical norms for manufacturing. It is not just cosmetic norms. Therefore, we are planning to use one of our pharmaceutical factories for manufacturing because the quality issues are going to be as per international norms.
Q: Your mainline business is not cosmetics; do you need to put-up a new plant? Can you give us a ballpark idea of how much will be the money involved?
A: We are not putting up a new plant. We already have an existing plant, which is making pharmaceutical products. The same plant will be used for making cosmetic products because we will be following the same manufacturing norms as we do for pharmaceutical products. So, we are looking at top of the line products coming out.
Furthermore, the company is looking at both the mass segment and the prestige segments. All the products are intended to be made in India.
Q: What would they be, skin cosmetic, would they be creams?
A: Almost all the products initially in the first few years will be skin products in the form of creams, lotions and ointment. The total market in this segment is about Rs 18,000 crore. So, just a facial skincare segment is roughly a market of about Rs 5,500 crore. Therefore, their target is this market and almost all the products they are looking at are towards the skincare market.
Q: In FY14, how much would you be manufacturing from this JV and what would be the revenues as well as earnings that you are expecting based on your production expectations?
A: Based on our current estimates though we have not finalised the figures, from our current plant, which is in Paonta Sahib, we expect that 60-70 percent of our production from this plant will be used for this joint venture.
Q: What would that mean in terms of revenues in rupees?
A: Incremental revenues could run between Rs 30-40 crore in the first year.
Q: How much money will you put in or are you putting in any money at all?
A: We are putting in money because it is a joint venture where initially it will involve a lot of manufacturing. Apart from that, there will be a lot of marketing activities, a lot of promotional push and one knows how cosmetic companies operates in India. You will see a lot of publicity, marketing activities. So, at the moment we cannot disclose the figures because we have still not finalised some of the critical issues. It will involve a substantial investment from our side as well as from the side of Kose.
Q: Generally margins in cosmetics, which is a fast moving consumer goods (FMCG) product tend to be lower than margins in pharmaceuticals. Return on investments (ROIs) in FMCG could be lower than ROIs in pharmaceuticals. How would it work for you?
A: The biggest thing which we are looking at is that Elder Pharmaceutical will manufacture for the JV. We will get manufacturing revenues and export revenues because we will be selling in different markets. The largest market for us, initially be India but we are looking at markets around India where they intent to take products. We will also be distributing for them. There will be another revenue stream for us. So, there will be multiple revenue streams for the company, the parent company as well as the joint venture will do the actual marketing wherein again Elder will have benefit.
Q: Will your margins decrease or increase because of this JV?
A: The margins will not decrease because pharmaceutical products have different kinds of margins and cosmetic products have different kind of margins. The issue here is that we are looking at different segments. So, on the mass segment the revenues will be different and in the prestige segment the revenues are completely different.