Key takeaways from our recent meeting with senior management of GCPL:
• Mixed performance of domestic personal care business. While revenue
growth for soaps will be sluggish in Q2FY11 on account of inventory
correction (at wholesaler end), growth for hair colors will benefit from
c10% price hike undertaken in Q1FY11. While price increases have been
initiated in soaps category by market leader HUL (and GCPL is evaluating
potential price hikes currently), management noted that competitive intensity
still remains quite stiff in the mass end with brand spends being above
normative levels.
• Household Insecticide business on a strong footing. Higher incidence of
mosquito-borne diseases this monsoon has led to increased offtake of
insecticides. GHPL has been a key beneficiary of this trend and has
witnessed market share gains in the category. Recent launches like Good
Knight low smoke coils and Good Knight Naturals mosquito repellent cream
have seen encouraging consumer response as per management.
• Operational integration between GHPL and GCPL underway; cost
savings to reflect in FY12 earnings. Management expects very strong
synergistic advantages between leveraging GCPL and GHPL’s strengths for
faster top-line growth, which is expected to lead to higher margin growth.
While some of the savings on distribution and procurement front are
expected to accrue in Q4FY11, mgmt expects tremendous benefit in FY12
from this exercise.
• International business updates. Management expects Keyline to register
sluggish growth on account of weak economic enviornment in UK and lower
sales for hand sanitizers. South African operations of Kinky witnessed
subdued growth in Q2FY11 as there was short term sales disruption at retail
stores due to violence on account of municipal employee strike in the
country. Mgmt was more sanguine on growth prospects for Indonesian
(Megasari) and Latin American (Issue and Argencos) where they anticipate
15-20% sales growth with potential to scale up margins. ROCEs for
Megasari, Issue and Argencos range between 25-30% (lower compared to
domestic business primarily on account of +ve WC cycle).
• GCPL will explore various potential cross-border product sharing
synergies to leverage on its product portfolio across various markets. Key
opportunities that may be evaluated over next 6-9 months include: 1)
Introduce Stella air freshners from Megasari in India (as Ambipur brand is
handed over to P&G), 2) Introduce cream hair color sachet technology from
Argencos in India, and 3) Leverage on distribution network of Tura in
Nigeria to introduce HH Insecticides and hair colors.
• Maintain Neutral. Current valuations at 27x FY11E and 22x FY12E offer
limited room for upside. Performance of recent acquisitions will be critical,
particularly in light of limited disclosures on financials; risk emanates from
potential further commitments for inorganic growth, unfavorable F/X rate
movement (overseas debt is unhedged) and increase in interest costs.
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