Godrej Consumer Products - Assuring Healthy Returns

In uncertain times, it is advisable to move to defensive stocks which are stable in nature and would be least impacted by the volatile business cycles. Stocks with stable earnings and regular dividend payouts are investor favourites for the clarity they offer in terms of
their future. One such company that has caught our attention is Godrej Consumer Products (GCPL). GCPL has constantly paid above 400 per cent dividend over the past four years (FV of Re 1), and its PAT has increased to Rs 514 crore in FY11 from Rs 159 crore in FY08. The company has carried over the same growth momentum in its current financial year as well. 

The net sales for 9MFY12 grew by 32 per cent (YoY) to Rs 3527.91 crore, and its net profit was up by 43 per cent to Rs 534.07 crore. GCPL, which is already one of the leading FMCG companies in India, is fast evolving as a major FMCG company in other emerging markets as well that have characteristics and consumer demographics similar to those of India. Recently, Baytree, which is an indirectly wholly-owned subsidiary of Temasek, invested an aggregate Rs 685 crore on a preferential basis in GCPL. This adds to the confidence and conviction that we have in the stock, the company’s fundamental strength and the management’s ability to grow.

GCPL is available at reasonably fair valuations as compared to its peers. It is currently available at a trailing P/E of 20x, while its peers like HUL, Dabur and Colgate Palmolive are trading at P/E multiples of 34x, 27x and 31x respectively. Backed by a strong consumption-based demand in the domestic as well as international markets, we feel that GCPL will continue its growth momentum. This is one
company where investors could park funds and reap good returns. 

Company Background

GCPL is a market leader in the hair and home care segments, with 29 per cent and 36 per cent share respectively. It stands second (with over 10 per cent share) in the personal wash category. Its portfolio comprises very strong brands such as Good Knight, Hit, Cinthol, Godrej No. 1, Godrej Expert Powder Hair Colour, etc. All this is because of the strong management, which advocates a 3x3 strategy (three categories, i.e. hair care, home care and personal wash; and three regions, i.e. Africa, Latin America and Asia). 
GCPL also has a stronghold in other emerging markets. It has not only been growing organically, but has also taken up strong inorganic growth through various acquisitions over the years. Keyline in UK, the Megasari Group in Indonesia, companies like Rapidol, Kinky and Tura in Africa, Issues and Argencos in Latin America, etc. are some examples of this.

The company has also recently announced plans to step into other geographies of Latin America by proposing to buy a majority stake in Cosmetica Nacional, a hair colour and cosmetics company, which enjoys a market leadership (30 per cent volume share) in Chile and Panama in the hair colourants category.

International Business

As of December 2011, the company’s international business contributes up to 38 per cent of its total revenue. It has a presence in various countries like Indonesia, Latin America, UK and Africa. Of the total export revenue, 45 per cent is contributed by the Indonesian business, Megasari, where it has a number one position in the air-freshener and wet tissues market, while it holds the second position in the insecticides business.

GCPL recently acquired a 51 per cent stake in the Darling Group of Africa. The complete acquisition of the group will be done in three phases, of which the first phase is already through. The Darling Group operates in 14 countries, and is a leader in the hair extensions segment (wigs). According to the management guidance which formed a part of its Q3 results announcement, it expects robust growth from this acquisition going forward, owing to the seasonal ramp-up in the hair extensions business in Africa between January-March.

Outlook
(Investment Rationale And Risk)

If we look at the past 18 months’ performance, a combination of both organic and inorganic growth has driven the financials of the company. On the organic front, it saw product innovations and re-launches which included Fair Glow, Godrej Expert Care, Good Knight Naturals, Godrej No. 1, etc. On the inorganic side, it acquired Issue and Argencos in Argentina, Megasari in Indonesia, Salon Selectives in UK and Tura and Darling group in Africa. Most recently, it has proposed to buy Cosmetica Nacional in Latin America. 

As of December 2011, the debt-to-equity ratio of the company stands at 0.97x, which looks higher when we compare it with other FMCG companies. But it should be noted that this is because of the number of acquisitions that the company has carried out over the recent past. The dependence on the soap segment that has low margins and huge competition is becoming lesser, and more weightage is now on insecticides and the hair care segments in which the company is a market leader and where the margins are higher. The distribution costs for the company are also in control.

In the past couple of quarters, the raw material prices for the company have cooled off but are still above the comfortable levels. It has always managed to pass on these costs to customers strategically. In CY2011, the company hiked its product prices approximately
in the range of eight to 10 per cent in the soaps and hair colour segments, while insecticide product prices were hiked by three per cent. 

The new products launched by the company have received mixed responses from consumers. Godrej Expert Powder Hair Colour and Fair Glow were appreciated by customers, while Good Knight Naturals mosquito repellent cream and Godrej No. 1 Saffron and Milk Cream soap weren’t as much in demand. 

One factor that needs close attention is that the integration of its overseas business remains a risk for the company as of now. Another issue that one should keep tabs on is about its forex risk. 

The company’s management expects a 15-20 per cent growth through the organic route and five per cent through the inorganic route for FY 2012, and the company expects to outperform the industry in the coming quarters. One should also note that in CY 2011, when
the Sensex yielded negative returns of 25 per cent, GCPL managed to keep its shareholders’ wealth stable. The net profit margin for FY 2011 was 14.13 per cent, which is one of the best among FMCG companies. GCPL reported an EPS of Rs 16.5 for 9MFY12. On a conservative basis, we expect the company to report an EPS of Rs 22 for FY 2012. Even at a price-earnings multiple of 23x, which is considered low for FMCG companies, the stock’s fair value works out to be around Rs 506. Keeping in mind the premium position of most of its brands in the markets, coupled with the strong consumption demand from the emerging markets, GCPL is poised to ride along the growth curve going forward. Our advice to investors is to park a portion of their portfolio in the scrip to garner better returns.