The inorganic growth strategy will see earnings grow, but there are concerns on equity dilution
The recent acquisition of Argentina-based Issue Group by Godrej Consumer Products Ltd (GCPL) is an extension of its ‘three by three’ strategy — a plan to mark its presence in three continents, Asia, Africa and Latin America, through its three core categories of home care, personal wash and hair care. This comes immediately after it acquired the remaining 51 per cent stake from its joint venture Godrej Sara Lee a fortnight ago. It has also purchased Tura in Africa and Megasari in Indonesia.
The Issue Group has a 22 per cent market share in Argentina by volume and 11.4 per cent share by value and its weighted distribution penetration is about 83 per cent. It will give GCPL the right traction to maintain 20 per cent growth in its international business, with the $200-million Argentina market growing at a 22 per cent rate. Moreover, the Issue Group also operates in neighbouring countries like Brazil and Uruguay. Synergies for the two companies lie in the fact that both target the lower value hair-colour segment. Godrej expects the acquisition to provide a market for its powder-based hair dyes. Its growing market share in the soaps segment is expected to stagnate, as competition intensifies and its base expands.
The deal is valued at about eight times earnings before interest, depreciation and amortisation and is expected to be earnings accretive in the first year of operations. However, the share price slipped 2.16 per cent on Monday to close at Rs 312. The quick concerns in the market place were that of a possible equity dilution. The company is expected to raise around Rs 700 crore through the equity route. It has Rs 300 crore as cash and will also be raising debt to fund these acquisitions. Analysts have valued the Issue acquisition to be around Rs 250 crore. This, along with other acquisitions, is expected to cost the company around Rs 2,800 crore.
Considering the company expects to maintain its equity-raising plans, the equity dilution is expected to be around seven per cent. This, along with increased debt, could have an impact on earnings. They could be a tad lower than the earlier strong earnings estimates, hence a small correction. More clarity on the funding pattern will set the share price back on track, as earnings from overseas integrates with the company and the growth trend remains intact.
