Godrej Consumer Products

MARKING its entry in the Latin American market, Godrej Consumer Products (GCPL) is set to acquire the Issue Group which has a leading presence in the fastgrowing hair colour markets of Argentina, Peru, Uruguay, Paraguay and Brazil.

   This latest takeover, after a series of acquisitions across the UK, South Africa, Nigeria and Indonesia, falls in line with GCPL's strategy to be present in Asia, Africa and Latin America.

   GCPL is buying a 100% stake in the group by paying around 8 times its EBITDA. Assuming the Issue Group, with annual revenues of $33 million (around Rs 152 crore) earns average EBITDA margin of 20%, the deal size can be estimated to be around Rs 250 crore. The acquisition is slated to be completed by June on close heels of company's two back-to-back acquisitions in March and April this year. GCPL has recently also bought out the stake of Sara Lee in Godrej Sara Lee joint venture for around Rs 1,055 crore. To meet the increased fund requirement on all these fronts, the company is considering raising equity either through private equity option or QIP route.

   The company's aggressive stance in achieving inorganic growth needs to be eyed with caution. Unlike the conservative business approach followed by FMCG players, GCPL has been more forceful than any other player in the sector. Frequent fund requirement is likely to bring the company's finances under pressure and increase its leverage. Despite the recent acquisitions being EPS-accretive, raising money through equity is likely to neutralise the effect of any rise in EPS.

   While the series of acquisitions across various geographies makes the company a leading multinational FMCG, it also exposes it to variety of risks pertaining to foreign exchange, region-specific economic conditions and execution.

   The Street's immediate reaction to the acquisition news was exuberant — pushing GCPL's stock to an all time intra-day high of Rs 365..

   Investors need to closely monitor GCPL's progress over the next 10 months as it consolidates all the newly-acquired businesses and attempts to achieve a profitable growth for FY11. This is because any sign of lapse in execution, co-ordination or risk management will cost the company dearly – especially during a phase when the company has been growing very rapidly.