Stock Review: Godrej Consumer Products (GCPL)

 

Godrej Consumer's Merger Of Godrej Household With Itself Also Augurs Well For Co

 

THE stock of Godrej Consumer Products (GCPL) rose by 3% in a weak broader market on Thursday after news of the merger of its fully owned subsidiary Godrej Household Products (GHPL) with itself.

   GCPL has a strong position in north India and GHPL is strong in the southern region.

   The integration will help the company achieve economies of scale with higher cost synergies, better product portfolio and a stronger distribution network.

   Godrej Household Products was initially a joint venture between Godrej Consumer Products and the US-based Sara Lee and Body Care.

   Recently, GCPL bought the 51% stake of Sara Lee and formed GHPL.

   GHPL earns a major part of its revenue from home insecticides such as Good Knight and Hit. In FY10, GHPL had a total revenue of 950 crore and a profit after tax of 150 crore. Since GCPL earlier had only 49% stake in GHPL, it contributed a little less than 25% of the profits.

   Post merger, the home insecticide business would roughly have a 40% share. Hence, the merger will help GCPL to reduce its dependence on soap products and also tackle high raw material cost caused by inflation in the soap segment.

   The timing of the acquisition, which took place in May-end just before the monsoons, may improve the topline of GCPL in the September quarter.

   According to a Tata Securities report, there is a very high correlation between monsoons and the insecticide industry.

   Godrej Consumer's net sales have more than doubled due to a series of acquisitions in the past. The company mainly operates in the personal wash, hair products and insecticides segments and aspires to grow big in the emerging markets of Asia, Africa and Latin America.

The recent acquisitions of Indonesia-based Megasarai, Africa-based Tura, and Latin America-based Issue and Argencos confirm the company's ambition.
In the past 3 months, GCPL's stock price has increased by only 7.5% as against the 14.5% increase in the broader market Sensex.

At the current market price, the stock is trading at a consolidated price-earnings ratio of 33.2.