Godrej Consumer gets ‘Buy’ rating; here’s why

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Published: July 11, 2016 6:04:32 AM

GCPL has been ahead of competition in innovation, helping it gain market share

Godrej Consumer Products Ltd’s (gcpl) presence in Asia, Latin America and Africa across hair care, home care and personal care provides sufficient headroom for high growth to sustain over a long period. With an addressable market of 2.5 bn consumers in low income, fast growing emerging economies, GCPL’s is a highly scalable business model that combines robust organic growth with value accretive acquisitions. We forecast 19% EPS Cagr FY16-19 spurred by innovation, cross-pollination of products, and synergies of integration.

Attractive opportunity

GCPL’s presence across Asia, Latin America and Africa provides exposure to a population of 2.5 billion with an average per capita GDP of $5400 and a nominal GDP growth forecast of 12%. We believe there is significant penetration-led growth opportunity (e.g., per capita consumption in hair colours in India/Indonesia is 3-4x lower than Thailand). Moreover, there is enough headroom to grow in the current market.

Solid innovation track record

GCPL has been ahead of competition in  innovation, which has helped it to gain market share. Products such as “Hit Magic Paper”, “Expert Crème Hair colour” in sachet and “Good knight low smoke coil” have made the respective categories more accessible or attractive to consumers while being margin accretive for the company. GCPL will continue to have this edge due to its design-led thinking, R&D capabilities, and multi-country presence.

Successful acquisition strategy

GCPL acquires companies in focused geographies and categories at reasonable valuations. The acquired companies are given significant autonomy to maintain their distinct culture while ensuring that the best practices of the group are followed. Exchange of learnings across geographies accelerates growth and mitigates risk. Moreover, GCPL uses its technological and marketing expertise in one region to grow organically in another. HI (Household Insecticides) in Africa and the upcoming hair care launch in Indonesia are examples of this growth via cross pollination.

There’s large opportunity size

While international exposure comes with risks such as geopolitical scenario, currency fluctuations, and management bandwidth, in addition to lower visibility from the investors’ point of view, we believe that it also comes with a significant positive—that of a larger opportunity.

This opportunity is better captured if the company has a focused approach in terms of geographies and categories in which it wants to operate. GCPL has a 3×3 matrix and over 90% of its turnover conforms to this strategy. The strategy dictates that GCPL will operate in three geographies (Asia, Africa, and Latin America) and in three product categories (home care, hair care, and personal care). Moreover, GCPL occupies either a number one or number two position in most of the segments in which it operates.

Here is what we mean when we say that the size of the opportunity is large: Ethnic hair care is a Rs 300 bn opportunity globally and we estimate GCPL’s turnover in FY17 (at retail price) at Rs 25 bn, i.e. the category size is 12 times GCPL’s sales. Household insecticides in Africa is a R40 bn market and GCPL’s turnover there is very small at less than R100m. Market size of categories that GCPL is present in Latin America is R25 bn, while currently GCPL’s turnover (at retail price) is R9 bn. GCPL is present mainly in Argentina and Chile and can expand into markets such as Brazil.

We believe that GCPL can gradually over a number of years exploit more of the opportunity by increasing its presence in geographies where it is weak, increasing product portfolio in geographies where it is present and acquiring companies where required, to enhance product capabilities.

Successful model for inorganic growth

In the past five years, GCPL has completed several acquisitions. Most of GCPL’s acquisitions have been successful and have been EPS/EVA accretive. GCPL follows a structure to identify the acquisition targets: The 3×3 matrix – three geographies (Asia, Africa, and LatAm) and three categories (personal care, hair care, and household insecticides). This ensures that there is a focused approach to acquisitions. Although SON, which was acquired recently, has a substantial US presence, it focuses on hair care for ethnic African women residing in the US.

Valuation multiples are not aggressive – most of the acquisitions have been at low double-digit EV/Ebitda multiples. It should be something that GCPL is able to add value. Value addition may be from perspective of either category or geography or business process. GCPL lets the acquired company maintain operational autonomy and keep the entrepreneurial spirit intact. GCPL does not send too many people from India. A few key positions such as finance, HR, etc. are occupied by people sent from India to mitigate risk and ensure streamlining of certain processes. In many cases, part of the purchase consideration is paid after 2-3 years and the old management is asked to continue until such time. This strategy was implemented in the recent acquisition of SON and also the acquisition of Megasari in Indonesia. In the African acquisition of Darling, the acquisition was done in a phased manner that entailed gradual entry into new geographies and increasing of stakes in existing geographies. The previous owners continue to be involved in the business in this case too. However, at the same time, GCPL tries to incentivise the acquired companies to leverage best practices and benefits from the innovation and R&D platform.


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