Godrej Consumer Products

 

 

Godrej Consumer Products remains an attractive buy for investors with a long-term horizon

   GODREJ Consumer Products, the midsized FMCG company, with products in personal and household care has seen its stock surging to a record high of Rs 335.85 on April 9, 2010. The company's stock price has witnessed a gradual re-rating since we recommended it in January 2008. The price has almost tripled since then.

   A member of the Godrej Group, the consumer products company has been growing rapidly — organically and inorganically — consolidating its presence in the fast-growing product categories, such as soaps, hair colour and household insecticides. Hence, despite the rally in the stock, the growth-oriented company remains a good buy for investors with a long-term horizon.

BUSINESS:

GCPL, which was a small-sized domestic player, is gradually shaping into a multi-national Indian FMCG company. The company has built strong brands in soaps, hair care, household insecticides, shaving cream, dish wash, wool fabric care and baby care in the domestic market.

   Now, it has turned its attention to emerging markets to juice up its growth. GCPL's policy has been to acquire profit-making FMCG businesses in developing and emerging markets that have strong brands in personal and household care — the two key areas identified by the company.

GROWTH OPPORTUNITIES:

The company currently has operations in Africa, Europe and West Asia. Among these, opportunities in the African region look the most promising. It has motivated the company to make three acquisitions such as Rapidol, Kinky and the latest being Tura, the maker of personal care products in Nigeria. It recently announced its entry into the Indonesian market with the acquisition of the household product maker Megasari Group. This latest acquisition will catapult GCPL to the number two position in household insecticides in Asia (ex-Japan). The company, meanwhile, continues to scout for acquisition in Asia, Africa and Latin America.

FINANCIALS:

Over the past five fiscals, the company has posted a compound annual growth rate (CAGR) of 26% in its consolidated revenues that stood at Rs 1,393 crore in FY09. Its consolidated earnings have grown at a CAGR of 13% during the same period to Rs 173 crore for FY09.

   The company has consistently paid dividends — maintaining an average dividend pay out of 70% since the past three years. At its current stock price, dividend yield works out to be 1.3%. Since the company is into growth phase, its dividends have grown at a CAGR of 9%, lower than the CAGR in profit.
   The company's debt burden is likely to rise following the purchase of the remaining 50% stake in the Godrej Sara Lee joint venture and the acquisitions of companies in Nigeria and Indonesia.

   The funding of these acquisitions may lead to company diluting its equity to raise funds. However, the company's balance sheet is still underleveraged and it has already sought approval to raise funds up to Rs 3,000 crore ahead of its planned acquisitions.

VALUATIONS:

GCPL is valued at nearly five times its annual consolidated revenues of Rs 1,900 crore. These are premium valuations for a mid-sized FMCG company. The stock is currently trading at a consolidated price to earnings multiple of 30. Once the recently acquired businesses get reflected in the consolidated financials of the company, it will bring down the P/E on account of higher earnings growth going forward.