GODREJ CONSUMER Multiple growth drivers:: Edelweiss

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Following are key takeaways from our recent meeting with Mr Mahendran, MD, GCPL
􀂃 HI, hair color & international on track; soaps decline set to reverse
Godrej Consumer (GCPL) continues to grow robustly in household insecticide
(HI), hair color and most of the international markets. Its soaps division was on
the decline over the past few quarters owing to food inflation, high base effect
and intense competition from ITC and HUL. However, based on our channel
checks, we expect GCPL to report positive growth in soaps in Q3FY11.

􀂃 Margin concerns overplayed
Hair colour contributes ~30% to the top line and offers higher margins than
other businesses of the group. Since soaps contribute just ~30% to sales (two
years back ~60% of sales was from soaps) and ~20% to profits, we do not see
a major risk to the group’s profitability and margins from rising palm oil prices.
The company is, anyways, adequately covered for palm oil prices until Q4FY11
end. Further, all soap players have recently hiked their product prices.

􀂃 Multiple long-term drivers
Acquisition of Genteel has strengthened GCPL’s dominance in the liquid
detergent segment, enhancing its market share to 90% from 75%. The
company’s growth prospects are likely to be further bolstered by its strategies:
(1) Launching Stella, to replace Ambipur, in India; (2) obtaining licensing rights
for Kiwi in India, South Africa, Indonesia and the UK; (3) entering the premium
hair color segment in India through acquisitions in LatAm; (4) introducing HI in
Africa and LatAm; (5) selling Simba in Megasari as it is in foods (non core); (6)
entering Indonesia and Africa with the existing products; (7) expanding in
neighbouring countries of Indonesia and Argentina, to tap growing opportunities.

􀂃 Outlook and valuations: Attractive; maintain ‘BUY’
Valuations are attractive at these levels and GCPL is one of the cheapest stocks
in our FMCG coverage universe. Although, there would be near-term pressure on
soap margins, the company’s growth prospects are bright owing to strong
growth in hair colour and HI. Also, the company has established track record of
integrating its international acquisitions and derive maximum synergy out of
them, which strengthens our confidence on it. We maintain ‘BUY’ on GCPL and
rate it ‘Sector Performer’ on relative returns.