Shares of Raymond and Godrej Consumer Products (GCPL) were down up to 9% on the BSE in Friday’s intra-day trade after GCPL on Thursday announced the acquisition of the consumer products business of Raymond Consumer Care (RCCL), a subsidiary of Raymond. This would be an all-cash deal for Rs 2,825 crore.
Raymond shares closed trade down 7.37% versus the previous day’s close to Rs 1,590.80 apiece on the BSE on Friday. The stock had jumped nearly 7% the previous day (Thursday) to close at Rs 1,717.35 a piece.
GCPL, on the other hand, had closed trade down 2.35% on Thursday to Rs 953.20 a share. On Friday, the stock fell further, closing trade at Rs 906.25 a share, down nearly 5% versus the previous day’s close.
While Sudhir Sitapati, GCPL’s MD & CEO, said on Thursday that the company did not overpay for brands such as Park Avenue and KamaSutra, analysts say there will be challenges in scaling up the business in the future.
To put things in perspective, GCPL has been focusing on a three-by-three strategy over the last decade. This includes attention on hair care, personal care and household insecticides from a product portfolio perspective. And focus on markets such as India, Indonesia and Africa.
The transaction announced on Thursday will see GCPL get into sexual wellness, which is a new category for the company. And re-enter the deodorant market after unsuccessful attempts in the past with Brand Cinthol.
“We expect the acquisition to be earnings dilutive in the near term as GCPL will have to spend on improving the brand visibility and expanding its presence across India through its distribution. Also, more clarity on the acquired brands complementing GCPL’s existing portfolio will be a key monitorable,” Kaustubh Pawaskar, deputy vice-president, fundamental research at brokerage Sharekhan, said.
Under Raymond, the consumer business had a reach of 650,000 outlets, GCPL’s 6.5 million retail reach, which is 10 times the former, would be key in driving sales, some analysts said.
The deal, according to its contours announced on Thursday, was closed at 4.5 times the sales of Raymond’s consumer division, which is Rs 622 crore for FY23. On Thursday, Sitapati clarified that the acquisition would essentially cost GCPL around Rs 2,325 crore, since Raymond Consumer Care had Rs 100 crore cash on its books and there was a tax break of Rs 400 crore available to GCPL since the deal was a slump sale.
“The deal is not expensive. The net cost of acquisition works out to Rs 2,325 crore after factoring in a tax break and cash on the books of the company. This works out to around 3.75 times value to sales,” he said.
According to Nuvama Institutional Securities, the deodorant and sexual wellness markets in India are competitive with incumbents such as Hindustan Unilever, ITC, Vini and many more present in deodorants. While sexual wellness has strong players such as Reckitt Benckiser operating within the category.
“There is competitive intensity as both online and offline players want to participate in men’s grooming categories and that would be a key challenge for GCPL,” Abneesh Roy, executive director at Nuvama, said. Moreover, high promotional intensity would put pressure on margins especially in an inflationary scenario, Roy added.