Despite the macro headwinds of slowing consumption demand and a back-ended monsoon, Godrej Consumer Products Ltd (GCPL) has not witnessed any demand weakness so far and remains confident of strong growth this financial year.
Given the robust prospects of its household insecticides and international businesses, analysts remain bullish on the company. Recently, a few have also upgraded the stock, which, after scaling a new high of Rs 701.90 on August 30 and consolidating thereafter, is again on an uptrend (up five per cent in the last fortnight).
“GCPL trades at 23.3 times FY14 estimated earnings, which is lower than the sector average. We believe as it continues to deliver strong performance in the international business, valuations will continue to move ahead in the near term,” says Manish Jain of Nomura Equity Research.
| ROBUST GROWTH | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Revenue | 4,866.2 | 6,342.7 | 7,889.8 |
| % change y-o-y | 33.6 | 30.3 | 24.4 |
| Ebitda margin (%) | 18.0 | 18.2 | 18.4 |
| Bps change y-o-y | -69.0 | 18.0 | 19.0 |
| Net profit | 726.7 | 908.4 | 1,145.7 |
| % change y-o-y | 41.2 | 25.0 | 26.1 |
| P/E (x) | 41.8 | 29.0 | 23.3 |
| ROE (%) | 31.9 | 25.0 | 26.0 |
| E: Estimates ROE is Return on Equity Source: Analyst reports | |||
GCPL’s five acquisitions over the last two years have hurt its balance sheet due to higher leverage and compressed return ratios. However, analysts expect these metrics to improve. While its debt/equity ratio has come down from one time in FY11 to 0.5 times in FY12, analysts expect GCPL to become net cash positive by FY15, driven by strong free cash-flow generation.
Except the Darling acquisition (where GCPL has to invest $100-125 million in the next couple of years), GCPL’s investments in all other acquisitions is largely done with and the acquired businesses are posting 15-25 per cent earnings growth. Consequently, analysts expect GCPL’s return on equity to improve to 24 per cent in FY15 from 18 per cent in FY12 and bottom line to grow by 25 per cent over the next two years.
On the flipside, any slowdown in the international markets and significant competition in the insecticides business remain key risks to GCPL’s growth.
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Home insecticides to drive growth
After the merger of the Godrej Sara Lee household insecticides business in FY10, GCPL’s revenues have more than doubled. The merger also enabled GCPL to diversify its business from the highly penetrated soap category (over 90 per cent). Soaps now form 36 per cent of GCPL’s domestic revenues versus 68 per cent in FY09. The household insecticides business contributes 45 per cent to its domestic revenues and its market share has expanded by 1,000 basis points to 40 per cent since FY10.
Notably, given the low penetration of the household insecticides business (35 per cent) in India, the scope for further expansion in its market share remains significant.
“GCPL’s portfolio mix is well positioned for further share gain, as its shares in the faster-growing premium segments such as aerosols and electrics are much higher than the slower growing coils. It has also had very successful innovations in the category, such as the low-smoke coil and electric dual switch. We expect further innovations such as paper-based insecticides to drive market share gains,” say Arnab Mitra and Akshay Saxena of Credit Suisse.
GCPL’s soap business, which has seen strong industry beating volume growth of over 20 per cent in the past six quarters (category growth of five per cent), is expected to have a healthy growth, driven largely by the re-launch of the Cinthol brand and of Godrej No 1 variants.
In contrast, its hair colour portfolio has struggled to grow despite re-launch of the Godrej Expert brand due to tough competition from brands such as L’Oreal. This segment is expected to be under pressure, going forward, believe analysts. However, the launch of crème sachets in India remains a key monitorable as that could boost growth in this segment.
Buoying international businesses
Following a string of acquisitions, GCPL’s international business (43 per cent of total revenues) is well poised to post robust growth. This is because it enjoys leadership in most markets it operates in and has presence in low-competitive categories. Further, GCPL has ample scope for cross-selling its products across regions. It has initiated this process by successfully launching paper insecticides in Indonesia, air care range in India and Caucasian hair colour in South Africa. Analysts believe, the full benefits of these initiatives will be realised over the next two to three years and will fuel growth.
GCPL’s Darling acquisition will be fully integrated over the next couple of years – post which all of its revenues will be reflected in GCPL’s financials. GCPL expects Darling’s hair extensions portfolio to post mid-teens growth in the medium term. Though GCPL is expected to do well in all its international markets, analysts believe Indonesia and Africa will lead growth in the medium term.