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Godrej Consumer
Products Limited
Large International Exposure
Caps Upside - EW
What's Changed
Price Target Rs360.00 to Rs430.00
EPS: F12, F13 +8%, +12%
After nearly one full year of operation, we estimate
that recent acquisitions have been earnings
accretive but with return ratios lower than
previously envisaged – this is likely to limit stock
performance, we believe.
Conclusion: GCPL has outperformed markets by 20%
over the past 6 months, reflecting successful
management transformation that resulted in 6 earningsaccretive
acquisitions over the past 15 months. However,
we are less sanguine on stock performance versus
markets and believe that low return ratios in the
international business will likely cap stock performance.
What's new: We expect GCPL’s international business
to contribute half of F15e revenues. Our calculations
reveal that RoCE at ~8% (for F11) is significantly lower
than we had previously envisaged. This is unlikely to
change meaningfully, near term, we believe. Our
earnings model incorporates the recent acquisition of
Darling Group in Africa which we estimate will increase
operating profits by 4%-9% for F12-F13. We roll forward
our RI model to July 2011 for a price target of Rs430 – at
which GCPL will trade at 23x F12e, ~10% above its
historical average, although return ratios have halved.
Where we differ: Markets appear focused on earnings
accretion from recent acquisitions. However, with
relatively low return ratios we are wary of potential
compression in earnings multiples in the event of
increased business volatility. While bulls argue that
these acquisitions are funded at ~4% cost of capital and
hence are value accretive, we note that debt repayment
will eventually be from India business profits – which
entails cost of capital of ~12%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Godrej Consumer
Products Limited
Large International Exposure
Caps Upside - EW
What's Changed
Price Target Rs360.00 to Rs430.00
EPS: F12, F13 +8%, +12%
After nearly one full year of operation, we estimate
that recent acquisitions have been earnings
accretive but with return ratios lower than
previously envisaged – this is likely to limit stock
performance, we believe.
Conclusion: GCPL has outperformed markets by 20%
over the past 6 months, reflecting successful
management transformation that resulted in 6 earningsaccretive
acquisitions over the past 15 months. However,
we are less sanguine on stock performance versus
markets and believe that low return ratios in the
international business will likely cap stock performance.
What's new: We expect GCPL’s international business
to contribute half of F15e revenues. Our calculations
reveal that RoCE at ~8% (for F11) is significantly lower
than we had previously envisaged. This is unlikely to
change meaningfully, near term, we believe. Our
earnings model incorporates the recent acquisition of
Darling Group in Africa which we estimate will increase
operating profits by 4%-9% for F12-F13. We roll forward
our RI model to July 2011 for a price target of Rs430 – at
which GCPL will trade at 23x F12e, ~10% above its
historical average, although return ratios have halved.
Where we differ: Markets appear focused on earnings
accretion from recent acquisitions. However, with
relatively low return ratios we are wary of potential
compression in earnings multiples in the event of
increased business volatility. While bulls argue that
these acquisitions are funded at ~4% cost of capital and
hence are value accretive, we note that debt repayment
will eventually be from India business profits – which
entails cost of capital of ~12%.
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