Adding colour and lather

POUND WISE

Godrej Consumer's overseas acquisitions and focus on niche segments like hair colour should drive growth.

Godrej Consumer Products (Godrej) is implementing a two-pronged strategy for growth, going forward. On the one hand, it is planning to expand its product portfolio and augment its market share in the domestic market.

On the other hand, it has set sail for overseas markets. With the acquisition of Keyline brands in the UK in October 2005, it has made a strong entry into the UK market and is trying for a couple of more acquisitions.

On the domestic turf, it is leveraging its leadership position in hair colourants and is diversifying its soap brands. Easing of competition pressure to some extent and a resurgence in FMCG sales will only aid the company post better numbers.

Godrej brands posted a 20 per cent growth in FY06. Analysts peg the sales growth in FY07 and FY08 at over 40 per cent and 25 per cent, respectively. With control over raw material costs through in-house production of fatty acids (highest in India), Godrej is expected to register better bottom line growth in the coming years.

Outward bound
Godrej is going in for international acquisitions with twin strategies "� diversifying risk and tapping new markets. It expects good synergies from the Keyline acquisition and a double-digit growth in these brands. It plans to introduce one brand in India in FY07. Moreover, Keyline outsources half its production, a major chunk of which could come to Godrej.

"We would use the existing distribution channel of Keyline brands to market Godrej products, with an eye on the Indian diaspora in Europe and the Caribbean," says Hoshedar Press, executive director and president.

Analysts believe that Godrej is in the advanced stage of making a couple of acquisitions this year.

The Keyline brands garnered a revenue of £5.2 million (about Rs 44.08 crore) during November 2005-March 2006, while PBT was £0.6 million (about Rs 5.09 crore). Major Keyline brands include Adorn (hair spray), Aapri (skin care), Cuticura (talcum powder), Erasmic (shaving products) and Nulon (hand creams).

Sunil Sapre, executive vice-president (finance & commercial), says, "Although exports account for a minuscule 3 per cent of the business, at present, we see a big opportunity in South East Asia and Africa." Analysts see exports growing to 20 per cent of the total business, including the Keyline brands.

Segment sense
The company is the leader in hair colourants with 40 per cent market share. It witnessed a 22 per cent growth in this business in FY06. It is setting up a new facility in Sikkim with a capex of Rs 10 crore.

An analyst at HDFC Securities expects the company to maintain its market share, even as modern day evils like pollution are likely to create more users. The fashion segment in hair colours would be another driver.

Sapre says, "Our focus would be on converting non-users into users, especially in the hair colour business."

The soaps business of Godrej, which accounts for 63 per cent of its revenues, posted a 17.5 per cent growth in FY06, compared with the industry growth of 3.2 per cent.

The company sees good growth potential in the business and stable vegetable oil prices (the chief raw material). With a 9 per cent market share in this segment, it stands second, though way behind the market leader "� Hindustan Lever (HLL) "� which has about 45 per cent share.

Godrej aims to increase its share by 1 per cent every year with focus on freebies, which, however, could lead to some margin loss. Analysts feel that the high total fatty matter (TFM) in Godrej's soaps at 76 per cent, vis-a-vis 60-70 per cent in most other soaps, is a positive.

In liquid detergents, the company is a market leader with its Ezee brand at over 80 per cent market share. But this segment may see limited growth, according to analysts. In the shaving cream category, the company is trying to grow with higher-end products and improved advertising, while its talcum powder business, where it banks on freebies, is likely to remain stagnant, according to them.

Competition
The company operates amid stiff competition. HLL is in a resurgent mode and ITC has plans to enter the soap business. There is competition from regional players as well. To fight competition, Godrej has been introducing new variants and brands. It recently launched its age control soap "� Evita.

Group Chairman Adi Godrej says, "We plan to enter one new category of personal care segment every year, provided we are able to differentiate our products." In hair colourants, the company has products at all price points, from the Rs 7 powdered hair colour to the higher-end Renew and Coloursoft.

Price wars in FMCG will remain and exert pressure on margins. But, Godrej hopes to maintain margins relying on certain internal economies. For example, it manufactures fatty acids, used in soaps, in-house and enjoys economies of scale in buying vegetable oils. Vegetable oil prices are likely to remain soft this year.

Tax benefits
The company will get 100 per cent excise exemption for 10 years in the north-east and Himachal and 100 per cent income tax exemption for five years and 30 per cent for another five years.

Sapre says the extent of actual benefit from tax exemption will depend on sales. Analysts add that some states also offer transport/ power subsidies. To expand existing facilities and set up new ones, Godrej has earmarked a capex of about Rs 105 crore this year.

Sector story
Of late, the FMCG sector has been moving faster. The sheer size of the market in India provides good opportunities, despite competition and possible cost pressures if international raw material prices fluctuate.

The sector is expected to grow to Rs 50,000 crore by 2010. Adi Godrej recently said, "Rising demand with higher disposable incomes, implementation of VAT in more states and tax-free zones would drive growth."

Valuation & financials
For FY06, the company posted 17 per cent growth in net sales to Rs 657.32 crore, while the operating profit rose 36.8 per cent.

The analyst at HDFC Securities says, "We expect the operating profit margin to grow to 21 per cent and 21.9 per cent, and net profit to rise 48 per cent and 34 per cent in FY07 and FY08 respectively." 
 

FINANCIALS
Rs crore	FY06	FY05	Change (%)
Net sales	657.32	562.67	16.82
Operating profit	137.44	100.46	36.81
OPM (%)	20.91	17.85	-
Net profit	121.20	89.59	35.28
EPS (Rs)	21.45	15.81	-
Trailing 12-month P/E			25.5x

On trailing 12-month earnings, the stock trades in line with its peers. While Godrej trades at 25.5x, the competitors trade at "� HLL: 28.62x, ITC: 24.7x, Colgate: 30.98x and Nestle: 29.30x.

According to Prabhudas Lilladher estimates, Godrej Consumer trades at 24.9x and 21x its FY07E and FY08E earnings. Analysts expect a 8-10 per cent rise in the share price after the upcoming stock split.