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GODREJ CONSUMER PRODUCTS LTD (GCPL)
PRICE: RS.391 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.436 FY13E P/E: 19.7X
We initiate coverage on GCPL with an ACCUMULATE rating and price target
of Rs.436. Our positive stance on the stock is built on GCPL's strong
competitive position in domestic markets, visibility in growth thereof, and
possibilities of industry out-performance on the back of synergies generated
from GHPL. GCPL's earnings are largely (~90%) built on domestic operations
and Megasari. Given lack of visibility, and uncertain quarterly cues in the
company's international operations, we value the stock at a 10% discount to
FMCG peers. With a target multiple of 22x FY13E PER, we set a price target
of Rs.436.
q Domestic Growth Engines to aid legacy businesses: Legacy businesses of
GCPL, namely soaps and hair color, are well exposed to strong domestic consumption,
and fit well with the re-distribution led growth that the Indian FMCG
sector is witnessing. GCPL's legacy products have a strong value-for-money focus;
operations are strengthened by indirect reach of over 4 mn outlets - one of
the largest distribution networks among FMCG businesses in India. GCPL derives
70% of its profits from India.
q Low - Penetration products, strong competitive positions; domestic profits
have significant visibility: GCPL is the #1 hair color and household insecticides
(HI) company in India. Both hair color and HI have a low penetration in
India, which provides opportunities for industry-beating growth in the company's
Indian operations. In soaps, we believe price hikes undertaken by the company,
as well as weakening palm oil prices shall help margins. We therefore believe
that GCPL's profits from domestic operations are likely to be stable with high
visibility in growth.
q Qualitative Change in Earnings: Changes in revenue and profit mix of the
company, consequent to acquisition of Godrej-Sara Lee (GHPL), Megasari, have
brought about a qualitative change in earnings. Over 55% of the company's
EBITDA is now generated by HI business, where the company enjoys better
branding, and higher pricing power. Hair color (c.20% of co. EBITDA) and HI
now constitute over 75% of GCPL's profit - we believe this creates greater visibility
in earnings, on reduced exposure to volatile raw material prices. These products
enjoy better competitive positions and have higher margins on a relative basis.
q Synergies with GHPL to provide opportunities in filling gaps in product
lines: We believe that distribution synergies of GCPL/GHPL will lead to filling in
two important gaps in GCPL product lines - namely the crème segment in hair
color, and products for rural markets (India) in HI. The efforts could be complemented
with cross-pollination of technologies from other markets. We believe
that the opportunity size in both hair color and HI is almost as large as the
company's current revenues.
q New Markets and Cross Pollination of Technologies: GCPL has made a strategic
choice to seek growth in international emerging markets. Along with a less
combative (likely lower competitive intensity in international markets) growth
path for the company, we agree that GCPL's 3X3 strategy (three continents,
three product lines) strategy could provide significant cross - pollination opportunities.
q International Operations - Unstable quarterly reports, integration, high
debt are concern areas: While opportunities exist, GCPL international operations
have pockets of concerns. The company has had to raise significant (~$400
mn of which overseas debt of $350 mn) debt to finance the recent burst of acquisitions.
Over and above this, requirements on working capital have been
rather high in FY11. Margins in several international subsidiaries have been erratic
over recent quarters. Megasari, the Indonesian subsidiary of the company
has not, thus far, exhibited expected growth.
q Earnings Outlook stable, valuation reasonable: We forecast 16% revenue
growth, 15% EPS CAGR through FY11-FY13E. Excluding the Darling acquisition,
we forecast Rs 16.5/ Rs 19.8 in FY12/ FY13 EPS. Given unexciting growth prospects,
we believe the stock shall not re-rate significantly unless there is a meaningful
change in the visibility offered by international operations. We value the
company at Rs 436, based on 22x FY13E PER (10% discount to peers). We initiate
coverage on the stock with an ACCUMULATE rating. International operations
performance shall be the key monitorable.
q Risks to our investment outlook include: 1/ Lack of clarity in international
operations including risks of higher leverage, working capital requirements 2/
Forex risks on account of high exposure of the company to non-domestic sources,
3/ Forex risks relating with international debt, 5/ Macroeconomic Risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GODREJ CONSUMER PRODUCTS LTD (GCPL)
PRICE: RS.391 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.436 FY13E P/E: 19.7X
We initiate coverage on GCPL with an ACCUMULATE rating and price target
of Rs.436. Our positive stance on the stock is built on GCPL's strong
competitive position in domestic markets, visibility in growth thereof, and
possibilities of industry out-performance on the back of synergies generated
from GHPL. GCPL's earnings are largely (~90%) built on domestic operations
and Megasari. Given lack of visibility, and uncertain quarterly cues in the
company's international operations, we value the stock at a 10% discount to
FMCG peers. With a target multiple of 22x FY13E PER, we set a price target
of Rs.436.
q Domestic Growth Engines to aid legacy businesses: Legacy businesses of
GCPL, namely soaps and hair color, are well exposed to strong domestic consumption,
and fit well with the re-distribution led growth that the Indian FMCG
sector is witnessing. GCPL's legacy products have a strong value-for-money focus;
operations are strengthened by indirect reach of over 4 mn outlets - one of
the largest distribution networks among FMCG businesses in India. GCPL derives
70% of its profits from India.
q Low - Penetration products, strong competitive positions; domestic profits
have significant visibility: GCPL is the #1 hair color and household insecticides
(HI) company in India. Both hair color and HI have a low penetration in
India, which provides opportunities for industry-beating growth in the company's
Indian operations. In soaps, we believe price hikes undertaken by the company,
as well as weakening palm oil prices shall help margins. We therefore believe
that GCPL's profits from domestic operations are likely to be stable with high
visibility in growth.
q Qualitative Change in Earnings: Changes in revenue and profit mix of the
company, consequent to acquisition of Godrej-Sara Lee (GHPL), Megasari, have
brought about a qualitative change in earnings. Over 55% of the company's
EBITDA is now generated by HI business, where the company enjoys better
branding, and higher pricing power. Hair color (c.20% of co. EBITDA) and HI
now constitute over 75% of GCPL's profit - we believe this creates greater visibility
in earnings, on reduced exposure to volatile raw material prices. These products
enjoy better competitive positions and have higher margins on a relative basis.
q Synergies with GHPL to provide opportunities in filling gaps in product
lines: We believe that distribution synergies of GCPL/GHPL will lead to filling in
two important gaps in GCPL product lines - namely the crème segment in hair
color, and products for rural markets (India) in HI. The efforts could be complemented
with cross-pollination of technologies from other markets. We believe
that the opportunity size in both hair color and HI is almost as large as the
company's current revenues.
q New Markets and Cross Pollination of Technologies: GCPL has made a strategic
choice to seek growth in international emerging markets. Along with a less
combative (likely lower competitive intensity in international markets) growth
path for the company, we agree that GCPL's 3X3 strategy (three continents,
three product lines) strategy could provide significant cross - pollination opportunities.
q International Operations - Unstable quarterly reports, integration, high
debt are concern areas: While opportunities exist, GCPL international operations
have pockets of concerns. The company has had to raise significant (~$400
mn of which overseas debt of $350 mn) debt to finance the recent burst of acquisitions.
Over and above this, requirements on working capital have been
rather high in FY11. Margins in several international subsidiaries have been erratic
over recent quarters. Megasari, the Indonesian subsidiary of the company
has not, thus far, exhibited expected growth.
q Earnings Outlook stable, valuation reasonable: We forecast 16% revenue
growth, 15% EPS CAGR through FY11-FY13E. Excluding the Darling acquisition,
we forecast Rs 16.5/ Rs 19.8 in FY12/ FY13 EPS. Given unexciting growth prospects,
we believe the stock shall not re-rate significantly unless there is a meaningful
change in the visibility offered by international operations. We value the
company at Rs 436, based on 22x FY13E PER (10% discount to peers). We initiate
coverage on the stock with an ACCUMULATE rating. International operations
performance shall be the key monitorable.
q Risks to our investment outlook include: 1/ Lack of clarity in international
operations including risks of higher leverage, working capital requirements 2/
Forex risks on account of high exposure of the company to non-domestic sources,
3/ Forex risks relating with international debt, 5/ Macroeconomic Risks.
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