A diverse product range, value for money strategy and focus on new markets and categories will help Godrej Consumer sustain growth rates
In times of extreme market volatility, Godrej Consumer Products (GPCL) can not only add stability to your portfolio but also provide decent upside from current levels.
The company’s varied presence in soap, hair colour, toiletries, fabric care and hygiene categories with constant reinvention of its product range has been its forte for a long time now. The company’s product as well as the geographical diversification, with business interests in nearly 50 countries, will act as an anchor in these uncertain times.
Soaps - shoring volumes
The toilet soaps division, with brands like ‘No. 1’, Cinthol and FairGlow, contributes more than half of the company’s total revenues and is second only to Hindustan Unilever in terms of market share. GCPL’s ‘No.1’ brand is the largest selling grade one soap with TFM content of 76 per cent (higher TFM soap generates more lather, cleans better and lasts longer) and accounts for 60 per cent of company’s soap volumes.
The brand’s positioning as a “Value for money” product has helped the company to maintain its market share despite increasing competition from the likes of new entrant ITC (Superia brand). While the latter has shored up its market share, it hasn’t been able to make significant inroads into GCPL’s market share (last two quarters market share was stable at 9.1 per cent); ITC has eaten into the share of other players.
Going ahead, the recent correction of 50 per cent in the price of crude palm oil, which accounts for more than 60 per cent of raw material costs (for soaps), is a positive trigger. While how the company chooses to utilise the gains is not known, what’s known is that the benefits will get reflected from Q3 FY09 onwards.
Chances are that it may use the savings on a combination of price cuts and higher advertising and promotion expenditure (now at 12 per cent of sales) to facilitate higher volumes and new launches going forward. These moves will thus, improve margins, sales as well as brand visibility.
Hair - banking on the lead
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The total domestic hair colour market is estimated to be around Rs 600 crore; powder dye segment accounts for around 75 per cent in terms of volumes and 50 per cent of value. GCPL is the leader in the relatively lower-margin powder dye segment, which is considered to be the popular segment.
The company has been able to maintain its market share at 34-35 per cent (in the last four quarters) led by re-launches (launch of erstwhile Godrej Powder Hair Dye as Godrej Expert) and introduction of new product variants.
The premium segment of hair colorants is growing faster than the overall market on account of the changing lifestyle and higher disposable income and GCPL had been finding it difficult to crack the market, which is under a strong hold of multinationals like L’Oreal. This was one reason why the company’s market share (in value terms) had slipped in the past.
However, there could be positive surprises here, as GCPL has plans to move up the value-chain in the hair colour segment by offering expanded product range. The company is also trying to position itself in mid-priced category by launching a powder dye variant of its cream-based hair colour - “Godrej Renew”. The company has roped in Bollywood actress, Katrina Kaif, to consolidate its market share in this particular segment and
provide greater visibility to its premium segment.
Toiletries - growth levers
The toiletries segment is expected to get a boost, with Hrithik Roshan being roped in as the brand ambassador for Cinthol brand, to promote GCPL’s relaunched toiletries range - deo spray and talc.
Although its share in total revenues is low, toiletries could be considered a future growth driver for the company, with lower penetration levels in this segment. Toiletries revenues grew by a robust 28 per cent y-o-y in Q1 FY09, which gives some indication in this regard.
Spreading its wings
Apart from a good domestic presence, the company has been keen to enhance its global presence given the acquisitions it has made and plans going forward; acquisition of Kinky Group was completed in April 2008.
The international operations now account for more than 20 per cent of GCPL’s consolidated revenues and comprises of companies like Keyline Brands (UK), Kinky Group (SA) and Rapidol (SA), catering to hair and personal care segments. Its subsidiary, Godrej Global Mideast FZE (UAE), manages distribution of the company’s products in the GCC region.
Through these acquisitions, the company has gained access to newer markets for its own products along with the extended product range (anti-perspirants, oil-free shampoo, hair gels & sprays) gained from the overseas companies, which could also help boost its domestic sales. Notably, GCPL has recently raised Rs 400 crore via rights issue, of which, a major chunk will go towards funding acquisitions (in global markets in the hair-care segment).
Investment rationale
GCPL intends to substitute petroleum-based derivatives with non-edible vegetable oil derivatives to offset any increase in crude oil prices in future. This will materially improve the profitability of the soaps segment as the cost savings are pegged at 10 per cent of raw material costs. Nonetheless, the recent softening of commodity prices augurs well for the company.
| STEADY RISE | ||||
| Rs crore | FY07 | FY08 | FY09(E) | FY10(E) |
| Total Income | 954.0 | 1107.0 | 1357.0 | 1520.0 |
| PBDIT | 182.0 | 219.0 | 240.0 | 280.0 |
| PAT | 144.0 | 159.0 | 198.0 | 224.0 |
| NPM (%) | 15.1 | 14.4 | 14.6 | 14.7 |
| EPS (Rs) | 6.4 | 7.1 | 7.7 | 8.7 |
| PE (x) | - | |||
While high quality and affordable pricing has been the company’s plank across most of its businesses, GCPL’s move to rope in popular Bollywood actors as brand ambassadors will enhance brand visibility and should lead to higher growth in its soaps and hair colour businesses . (GCPL's hair colour offtake was well ahead at 19 per cent in Q1FY09 as compared to industry growth of 11.8 per cent as per AC Nielsen).
An under-penetrated domestic market (around 15 per cent) An under-penetrated domestic market (around 15 per cent) also augurs well for the hair colour business. One thing that needs to be watched, which is the performance of the premium Cinthol range; any major success here, can give a leg up to the company’s topline.
On the global front, the South Africa based-Kinky Group’s (earlier, a family-owned business of around 17-18 companies) had supply-chain issues during FY08. Following its integration, GCPL can reap higher margins (around 30-35 per cent) from Kinky, which will improve the overall margins of the international business. The company intends to expand in other parts of Africa and Kinky will be a plank to further these plans. Besides, GCPL’s plans to source material from its recent capacity expansion (in India) to its overseas subsidiaries (Rapidol and Kinky) should improve margins further.
Overall, the company’s prospects look healthy with consolidated revenues and profits expected to grow at an average 17-18 per cent in the next two years (FY09 and FY10). At Rs 112.50, the stock is trading at 14.6x FY09E earnings compared to over 20x enjoyed by its peers. While the stock may not be able deliver superlative returns, it could offer returns of 18-20 per cent in a year’s time.