Adi Godrej?s done it again. The chairman of Godrej Consumer Products (GCPL) has snapped up Indonesian consumer firm Megasari Makmur in an all-cash deal barely a month after he bought out Tura, a Nigerian beauty products company. Of course, this time around, the deal is ten times bigger; while the Rs 1,397 crore FMCG firm paid about Rs 100?125 crore for Tura, Megasari will set it back by a reported Rs 1,100- 1,200 crore. The acquisition isn?t cheap coming as it does at an estimated two times sales, but Godrej claims it will be earnings accretive in the very first year.
Megasari, which has a presence across categories such as household insecticides, air care, wipes and breakfast cereals, posted revenues of around Rs 550 crore in 2009. That means it would add around 25% to the GCPL Group?s sales. What?s more, as HSBC Global Research points out, the Indonesian firm is slightly more profitable than the GCPL Group with EBITDA (earnings before interest, tax, depreciation and amortisation) margins of 20% compared with an expected18.5% or so for the GCPL Group in 2009-10. In the last three years, sales at Megasari have grown at a compounded 25% while operating profits have grown at a compounded 50% plus. Household insecticides account for a little less than 50% of the company?s top line.
The numbers apart, Megasari can open doors for GCPL in Indonesia, a new geography for the Indian company and, as HSBC observes, could serve as a launch pad for GCPL?s hair care portfolio. Megasari?s brands which include HIT, Mitu and Stella, reach 90,000 outlets in Indonesia, which translates into a market penetration of 75%. Modern retail constitutes 37% of sales, regional distributors about 47% and traditional retail about 16%.
Moreover, Megasari?s products complement those of GCPL and could yield synergies from the point of view of combined purchases as also category expertise. Also, with a wider array of products at its disposal, GCPL will be less dependent on the fiercely competitive and fairly mature soaps space in India. Of course, as Kotak Institutional Equities point out, post the consolidation of 49% of Sara Lee and 100% of the Megasari Group into GCPL, 35% of the consolidated entity?s sales are expected to come from household insecticides.
However, like all buyouts, this acquisition too comes with its share of concerns. Analysts wonder whether the foray into Indonesia will mean that the scaling up of GCPL?s African businesses will suffer. After all, both resources and management bandwidth are limited. If the cash outflow is indeed Rs 1,200 crore as is being estimated (the company has not made an announcement in this regard), it would not be a small amount, even if GCPL has close to Rs 400 crore on its books. Godrej says the Megasari buyout will be funded through ?offshore debt? which means that the company?s interest expenses will go up. The board recently approved a proposal to raise Rs 3,000 crore. Kotak Institutional Equities observes that the management has indicated that it would be conservative in maintaining the debt-equity ratio at 1:1 and may consider an equity dilution (through the QIP route) if need be.
GCPL?s revenues for the current year are expected to hit Rs 1,600 crore while revenues in 2010-11 are expected to grow by about 20% to Rs 1,950 crore. Operating profits are expected to increase to Rs 390 crore next year from around Rs 320 in the current year, an increase of 22%. As for the bottom line, GCPL?s net profit is estimated to grow to Rs 320 crore in 2010-11, translating into an earnings per share of around Rs 12.40, a growth of close to 15% over the previous year. At Rs 282, therefore, the stock trades at just over 22.6 times estimated 2010-11 earnings.