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UBS Investment Research
Godrej Consumer Products
Upgrade post recent underperformance
Upgrade from Sell to Buy, raise price target to Rs425
Godrej Consumer Products (GCPL) has underperformed the benchmark c7% in the
past one week due to a continued overhang on weak sector results. GCPL does not
have significant exposure to the Middle East and North Africa (MENA) region,
which is another cause for concern. We believe the negatives such as—1) slowerthan-
expected international growth; 2) increasing domestic competition; and 3)
rising commodity prices—have been factored into the stock price.
Near-term positive catalysts
We believe the underlying business is solid while near-term positive catalysts
include: 1) the c3-5% price increase in soaps (January 2011); 2) a revival of
primary sales after drying up of pipeline inventory over Q1-Q3; 3) down-trading in
soaps and hair colours, which is expected to yield higher-than-industry volume
growth.
Rural exposure—key positive
GCPL has ~25% of revenues coming from rural areas, where demand will likely
remain strong in FY12 driven by: 1) strong growth in rural income (due to high
food inflation and strong agri growth); 2) continued stimulus to the rural economy
in the form of higher NREGA allocation; and 3) investment in rural infrastructure.
We believe these factors will continue to drive strong demand for low-end soaps
and hair colour, and insecticides.
Valuation: turn buyers with a price target of Rs425
We derive our price target from our sum-of-the-parts methodology. We value the
individual businesses on DCF, assuming a WACC of 11%.
Godrej Consumer Products
Godrej Consumer Products (GCPL) focuses on home care, hair care and
personal wash products in Asia, Africa and Latin America. In FY10, personal
wash was its largest revenue contributor at 41%, while hair care and home care
contributed 20% each. Following the GHPL and Megasari acquisitions,
homecare contributed 9% of total revenue in Q1 FY11, while personal wash and
hair care contributed 33% and 18%, respectively. GCPL's FY10 turnover was
US$443m, of which US$365m was from domestic operations (including GHPL)
and the remaining US$79m from international operations.
Statement of Risk
We think the key risks to GCPL’s earnings and valuation include intensifying
competition, increasing raw material costs and slowing economic growth. With
GCPL’s expansion in international markets, we believe, the company also has
exposure to multiple country and currency risk
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Godrej Consumer Products
Upgrade post recent underperformance
Upgrade from Sell to Buy, raise price target to Rs425
Godrej Consumer Products (GCPL) has underperformed the benchmark c7% in the
past one week due to a continued overhang on weak sector results. GCPL does not
have significant exposure to the Middle East and North Africa (MENA) region,
which is another cause for concern. We believe the negatives such as—1) slowerthan-
expected international growth; 2) increasing domestic competition; and 3)
rising commodity prices—have been factored into the stock price.
Near-term positive catalysts
We believe the underlying business is solid while near-term positive catalysts
include: 1) the c3-5% price increase in soaps (January 2011); 2) a revival of
primary sales after drying up of pipeline inventory over Q1-Q3; 3) down-trading in
soaps and hair colours, which is expected to yield higher-than-industry volume
growth.
Rural exposure—key positive
GCPL has ~25% of revenues coming from rural areas, where demand will likely
remain strong in FY12 driven by: 1) strong growth in rural income (due to high
food inflation and strong agri growth); 2) continued stimulus to the rural economy
in the form of higher NREGA allocation; and 3) investment in rural infrastructure.
We believe these factors will continue to drive strong demand for low-end soaps
and hair colour, and insecticides.
Valuation: turn buyers with a price target of Rs425
We derive our price target from our sum-of-the-parts methodology. We value the
individual businesses on DCF, assuming a WACC of 11%.
Godrej Consumer Products
Godrej Consumer Products (GCPL) focuses on home care, hair care and
personal wash products in Asia, Africa and Latin America. In FY10, personal
wash was its largest revenue contributor at 41%, while hair care and home care
contributed 20% each. Following the GHPL and Megasari acquisitions,
homecare contributed 9% of total revenue in Q1 FY11, while personal wash and
hair care contributed 33% and 18%, respectively. GCPL's FY10 turnover was
US$443m, of which US$365m was from domestic operations (including GHPL)
and the remaining US$79m from international operations.
Statement of Risk
We think the key risks to GCPL’s earnings and valuation include intensifying
competition, increasing raw material costs and slowing economic growth. With
GCPL’s expansion in international markets, we believe, the company also has
exposure to multiple country and currency risk
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