Investment focus : Godrej Consumer Products - Buy



Godrej Consumer Products has managed to treble its sales and profits in just three years through buyouts of profitable brands in India and abroad, quick integration of these brands into its fold and forays into new categories that have the potential to lift margins and growth rates.

The recent decline in stock price has pushed its valuations into a discount compared to peers, making this a good opportunity for investors to buy the stock. At Rs 392, the stock price discounts the company's estimated earnings for current year (2011-12) by 21 times. This is at the lower bounds of the valuation enjoyed by the stock over the last five years (21 to 38 times). The stock is also at an unjustified discount to FMCG peers such as Colgate Palmolive, Dabur India and GSK Consumer which trade at 25 times current year earnings.

Godrej Consumer owes its 48 per cent (compounded) growth in sales and profits since 2008 to a string of acquisitions, which have neatly come together to expand both its product portfolio and geographical reach.

The addition of Keyline Brands UK (owner of Cuticura), hair care brands Kinky and Rapidol in South Africa and cosmetic brand Tura in Nigeria, have helped build a presence in new geographies such as Europe, Latin America and Africa where Godrej can cross-sell its home-grown brands.

The company's Indian buyout of Godrej Sara Lee has brought in insecticide brands such as GoodKnight and Hit which are a good fit with the similar businesses of Megasari Makmur, an acquired Indonesian player.

These buyouts have had a twofold impact on the company. One, they have helped add a strong international leg to Godrej's operations, which today brings in about 35 per cent of the consolidated revenues and shields it from the bruising competition in the Indian FMCG space. The company has been able to marry its low cost manufacturing advantage with the acquired distribution reach abroad, to steadily improve the profit margins of its international business. Despite spiralling input costs, Godrej Consumer's consolidated operating profit margins stood at 19.6 per cent for 2010-11, the same as three years ago and comparable to its India focussed peers.

Two, the buyouts have helped the company transition from being a narrow two-product player (in soaps and hair colour) to a diversified player with over a dozen brands spread across four categories- soaps, toiletries, home care and hair care.

Home care has in fact emerged as Godrej Consumer's largest revenue contributor in 2010-11. This shift in the product mix augurs well for margins over the medium term, as categories such as home and hair care carry promise and greater pricing power than soaps and are less prone to competition.

Though the company's aggressive acquisition spree has added debt to the balance sheet, recent equity raising and refinancing of bridge loans has helped keep interest costs in check. The company's debt:equity ratio stands at 1:1, with the annual operating profits covering interest costs by a comfortable 13 times for the latest fiscal.

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