Strong brands, value for money strategy and focus on new markets and products will help Godrej Consumer sustain high growth rates.
A sum of Rs 3,000 crore is what Godrej Consumer Products (GCPL) intends to raise to fund its acquisition plans in the near future. It wants to get complete control of Godrej Sara Lee, besides US-based Sara Lee Corp’s global insecticide business that is up for grabs. Apart from scouting for probable targets outside India, the company is chalking plans to expand into the hinterland.
In terms of operations, the company is looking towards household and personal care segments for future growth in addition to the bigger soaps and hair colours segments that are doing well now. These initiatives should help the company sustain healthy growth rates in future as well.
Soaps: At new highs
The soaps business, which accounts for about two-thirds of revenue, is not only growing at a fast clip but has been able to improve its market share to 10.9 per cent, its highest ever till date. Superior quality positioning and value proposition for its brands like Godrej No.1 coupled with relatively lower price hikes (led by rising input costs) in the soaps categories have helped GCPL consolidate its market share in the recent quarters. Overall, the soaps segment grew at an average 27 per cent (volume growth was 16 per cent) in the first half of 2009-10 on the back of robust performance of Godrej No.1 and Cinthol.
Godrej No.1, which became a Rs 500 crore brand in August 2009, observed good traction, both in the North and the West, in the September 2009 quarter. During the quarter, the company launched another low priced (Rs 6) pack in the Cinthol range. This will help the Cinthol Regular range to deliver better volumes, going ahead.
The management is confident of maintaining its 11 per cent market share even as bigger players like HUL are eager to regain their lost market share.
| GROWING LATHER | |||
| in Rs crore | FY09 | FY10E | FY11E |
| Net sales | 1,393 | 2,000 | 2,376 |
| EBITDA | 203 | 383 | 452 |
| Net profit | 173 | 328 | 386 |
| EPS (Rs) | 5.6 | 10.6 | 12.5 |
| P/E (x) | 46.8 | 24.7 | 21.0 |
| E: Estimates Consolidated financials | |||
Hair colours: Volume focus
In the hair care segment, GCPL lost market share in three out of the last four fiscals. Increasing popularity of premium segment hair colour over the black hair dye segment is the reason for this slippage. However, in the last four quarters, the company has able to regain some lost ground (see chart Market share gains\. The recent gains in the market share come about on higher volumes derived from Godrej Nupur Mehendi and Godrej Expert. In the September quarter, hair colour segment grew at 47 per cent, far outpacing the industry growth of 19 per cent.
Going by history, it would be difficult for GCPL to make a major break-through into the premium-end market that is dominated by multi-nationals like L’Oreal. However, greater volumes from the mass hair colour segment should help it outperform peers in the future. The recent initiatives like tying up with barbers (target of adding 50,000 across the country over the next six months) are tools being used by the company to penetrate smaller towns and rural areas.
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Big acquisition plans
In order to expand its product portfolio and sustain high growth rates, the company plans to acquire companies – both international and local. The group is actively scouting for acquisitions in the household care and hair colour segments.
The company is planning to buy the remaining 51 per cent stake in Godrej Sara Lee (a domestic home insecticides producer). In May 2009, GCPL had bought 49 per cent stake in the company for around Rs 850 crore from two group companies in exchange for shares. At that run-rate, the remaining 51 per cent could cost GCPL about Rs 850-900 crore more. Further if GCPL succeeds in acquiring Sara Lee’s global insecticide business, it will have to shell out $400-450 million. These could be some of the initial targets. However, the company is in active pursuit in regions like Europe and Africa for potential targets.
With probable targets in sight, GCPL is seeking shareholder’s approval to raise funds up to Rs 3,000 crore. GCPL’s current debt-equity stands at 0.5 and it has cash of Rs 300 crore. The management has indicated that the initial Rs 1,000 crore would be in debt, which is most likely be towards acquiring complete control of Godrej Sara Lee. Thereafter or if it chooses to go in for a bigger acquisition, GCPL would require to consider raising equity.
Conclusion
Palm oil constitutes around 50 per cent of its raw material costs and accounts for 25 per cent of sales. While palm oil prices have started rising again in the past one and half months, the solace is that the company has hedged its requirements up to March 2010. Thus, EBITDA margins which have hovered around 22 per cent in the first half, should stay around 19-20 per cent in 2009-10, an increase of about 500 basis points higher as compared to 2008-09.
The company intends to double its network in small towns and triple its reach in villages in the next three years. Consequently, the share of rural markets in GCPL’s overall sales is expected to increase from 38 per cent now to about half over this period. At Rs 261.40, the stock is trading at 21 times its estimated 2010-11 earnings; investor can consider the stock on dips.