A carefully articulated strategy (both for chasing organic and inorganic growth) with the right product mix is an imperative to success in emerging markets, and GCPL seems to have got the ‘multi local operating model’ right. A deep dive in the regional businesses reinforces our view that the growth potential of categories is high while a margins expansion possibility exists. Reiterate Buy.
Potential high across regions
There’s enough headroom for growth, be it for core categories in India or in International businesses. Penetration levels are still low, market share gain is a possibility and new products (new products launched in the past 5 years account for c.20% of global growth and c.35% of India growth) can deliver high sustainable growth. FY19e net debt/Ebitda of 0.3x opens room for further acquisitions, though we don’t expect any big ticket deals.
Margins expansion feasible
GCPL has a clear strategy of focusing on new products that offer higher gross margins by 15 ppt than the category average of the previous three years. This, in turn, would ensure enough fire power to invest in A&P of the new and existing products. Global sourcing capabilities and cost savings programmes have been yielding dividends and provide further support for margins improvement. Specifically, in Latin America we believe cost saving initiatives, favourable mix, and stable currencies would aid margins, while in Africa, scale advantage and synergies from various bolt-on acquisitions would help margins. Margins in Indonesia are closer to peak, and we believe an improvement is possible only if the underlying demand momentum improves. Margins in India would be led by new product launches and favourable mix.
Low RoEs but high earnings growth
While the RoE profile of GCPL isn’t best in class, we note that the company was able to generate c.4x earnings since 2010, which is the best in the sector. As acquisition integration concludes, an opportunity to improve the RoEs also exist.
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We value GCPL using a DCF-based methodology, with a WACC of 10.2%, earnings CAGR of 17.9% from FY16-19E and 12.5% from FY21-29E. A perpetual growth rate of 6% is assumed thereafter. We adjust for 1:1 bonus issue and our PT is Rs 1,117.57. Risks: Demand weakness and an increase in competitive intensity. In addition, GCPL faces high political risk in a few regions. Complex nature of business leading to challenges in accuracy of estimates.