"We needed to build the capabilities to grow continuously, and we did"

Ramu Ramanathan (RR): Essel Propack reported a 34.1% increase in its consolidated net profit in second quarters ended September 2014. Is there buoyancy in the market after the slowdown?
Ashok Goel (AG): Our growth can be attributed to several factors. First, there has been an increased use of tubes in beauty and cosmetics, pharma and health and food categories. The market potential for business in these categories, as we see it, is about 22 billion tubes. Second, our diversification into the non-oral care category has expanded our market three-fold. Third, our strength of innovation and introduction of new products in the markets, to cater to customer-specific requirements is the reason for our growth, and that is expected to continue. Finally, there is a gain through market share.
 

RR: What is the state of the lamitubes in India?
AG: The demand for tubes in India has been quite buoyant. The packing of tubes into cardboard folding cartons is predominantly in the oral care sector and is not a restricting factor for us. We hold 33% global market share in the oral care category, which is only 58% of our revenues. The rest of the 42% comes from beauty and cosmetics, pharma and health and food.

RR: What about non-oral care?
AG: Our diversification into the non-oral care category, viz., beauty and cosmetics, pharma and health and food have increased our market size three-fold . Our immediate target is to get 50% of revenues from this sector. We have put in place both the capacities and capabilities required to handle the non-oral care business across the globe.
 
RR: Is this the reason why you have been eyeing other verticals like pharma and cosmetics? Is it a decision based on margin and performance?
AG: We needed to build the capabilities to grow continuously for long term. This is the main reason, we said we need to build capabilities for beauty and cosmetics, pharma and health and food. So, this is what we did. And, yes, of course, it is a conscious and strategic decision, thereby increasing our market eco-system three times over across the globe.
 

RR: You did mention that overall growth has been quite healthy. There is a bit of a blip from what’s happening in Poland and Germany. Has that remedied itself, or has corrective action been taken?
AG: Yes. Poland, this year, will be PAT positive and therefore, the overall Europe region should be PAT positive. As Europe turns positive and growth continues to come, we aim that Polish and German capacities achieve desired economies of scale, thereby leveraging on pre-existing fixed cost. Hence, we can expect improved margins in Europe in the next couple of years.   

RR: You have been setting up plants across the globe. What are the production best practices over there as opposed to over here?
AG: There is nothing ‘as opposed to’. We have best practices implemented in India first and then only we were able to succeed overseas. It can never work the other way round. Unless you are following the best practices on your home turf, chances are you will not succeed anywhere else. Our basis of going international was that we had the best practices at home, which we exported overseas. In fact this allowed and helped us to win business overseas. We follow the best in category GMP/HMP standards across the globe.
 

RR: What are the challenges to export out of India?
AG: Export has been a bit challenging, not from market perspective though. There are many factors that adversely affect exports; from transporters' strikes to octroi process to port strikes to available berths for the ships. So, this infrastructure capacity building and the attitude change required is of huge importance. To maintain the timelines for exports has been a huge challenge and that has been one of the hindering factors for exports out of India, thereby adding to supply chain uncertainties. We have been exporting, for example, into SAARC nations, Africa, Middle East, etc. Supply chain has been a challenge from Indian perspective as opposed to China from where we export as well. In China, the supply chain is practically ensured as the timelines factored for each step of supply chain is more or less met. Therefore, one is certain that the goods will be on the ship.  
 
RR: What is the usual go-to-customer time?
AG: Our go-to-customer approach is what we call ‘Minus 5’ steps. Essentially, this means that we would undertake the study of formulation of the product in our labs, understand the active ingredients of that particular formulation and design the tube structure to provide required shelf life. Typically this takes two years. This is one step of ‘Minus 5’. Then we look at the decoration and suggest ways to enhance it. Some other steps include dispensing of the product, including its caps and closures. So, we gain complete understanding of the product and find ways to enhance it. This takes six months to a year.

RR: What is the process for offering a product?
AG: We do not offer our products just like that. We have to test the product first in our laboratories for us to be sure that what we are offering to the customer will suit the product. Once we are sure, only then we go ahead and offer our product. The customer also conducts similar trials. Once trials are done, we go for commercial supplies.    

RR: What are the different delivery models?
AG: The delivery can take place from a plant which is servicing multiple customers. It can take place from a plant which is set up close to a particular customer. It can also be done through a model where the factory is inside the customer’s factory. That depends on the volumes and the duration of the contract that we have. Then each of the models gets adopted. The new COCO (Customer-Owned-Company-Operated) model is one whereby all the investments are made by the customer and we manage the rest of it. This model is typically located at the customer’s premises.
 

RR: With your capacities, what is your customer base? What is the basis of measurement?
AG: In our case, we need to have plants of a minimum economic size. It doesn’t matter whether it is servicing 10 or 200 customers. Of course, the configuration of the plant depends on how many customers and therefore how many SKUs need to be serviced. The capacity and the capabilities of any plant is designed and determined based on the end market (category) that we are going to service from a particular plant.
So, in the beginning, we depend on an anchor customer that helps us build the base. Then we prospect for more business, based on pre-conducted market research.

RR: Explain the hub-and-spoke model on which Essel Propack has been successful?
AG: Typically in the tube industry, the model has been that people would have their own decoration and tube-making set-up and they would procure laminates from vendors. When we set up shop in India, we decided to have facilities which were vertically integrated. Having done that  once, we mastered it. Therefore, we started to do product innovation in laminates and we can credit ourselves for being the first in the world almost everytime in terms of new innovations.
 As producing laminates means a huge capacity, we have only two laminate manufacturing facilities, in India and China. We cater to the rest of the world from these two facilities.
 
RR: When you say innovations, what do you actually do in a laminate?
AG: You create barrier properties. The active ingredients that are filled inside would want to escape and the first layer which comes in contact with the ingredient would want to react with that. Then there are atmospheric elements which will try to penetrate in. These are the basic fundamentals of barrier properties.

We create oxygen, moisture, UV, all kinds of barriers. Also, there are so many different types of active ingredients. Therefore, we have to custom-make every product. That defines the efficacy of the product. This is just one example. Then we go for look and feel properties of the tube. There is this ‘first moment of truth’, how attractive is the pack. Then, there is dispensing. Can a jam come out in a star shape? Can a tube be transparent and yet protect the product from UV? Can we give a total metallic feel without using metal? These are some examples of innovation.

 Every new innovation has to go through a rigorous stage-gate process. In that, the product is designed for at least two years of shelf life, coupled with transport, temperature and storage conditions. So, those are part of our test protocol. We have a best in class laboratory which simulates a lot of conditions for testing.
 

RR: You have a pipeline of new products. You have more than 23-24 global IPRs and you keep rolling out innovations globally. Please share two of your innovations.
AG: I will share two breakthrough products: EGNITE is one structure where it has high metallic gloss but there is no metal. The second innovation is the  recently launched Green Maple Leaf, where the polymers are used in combination in such a way that they are from the same family and can be recycled easily.
 
RR: Does all the research and development happen in India?
AG: For laminates and dispensing systems, the R&D happens in India. For decoration and caps and closures, we do product innovation in the US. For plastic tubes, a lot of innovation happens in Poland. This is because, strategically, we want to decentralise a lot of functions.

RR: Are there different policies in terms of pricing and servicing, when you deal with small players and big players?
AG: Whether a customer is small or big, for us, he is a customer. The service and pricing varies, depending on value additions and volumes. Our effort has always been to have more and more customers, whether small or big. What we certainly look for is the stability of the forecast. If the customer is able to give us a forecast of their uptake, it helps us to plan our capacities better. In addition, our stated objective is that we want to sell more and more tubes to non-oral care category. Therefore, even a small non-oral care customer obviously gets more importance.
 
RR: Are you seeing a steady growth in this segment for middle of the pyramid players?
AG: Yes, of course. In almost every geography, we have multinational customers as well as local customers, and we cater to all of them.

RR: What is the toughest thing today? Is it the costing, pricing, that is the biggest deterrent?
AG: It depends on the product category that you are talking about. If it is oral care, it is always going to be price sensitive. For non-oral care category, the price sensitivity usually gets reduced. In the end, what wins is the ability to deliver on time in full quantity and quality (OTIFQ).
 
RR: Why is oral care price sensitive?
AG: For oral care products, packaging, which consists of the outer carton and the tube is 25-30% of their BOM, whereas in other categories, it would vary from 2 to 5%. That is the basic fundamental. But in oral care you get volume.n