Gcpl

Godrej Consumer Products Ltd
BUY
Target Price `589 CMP `443 FY14 PE 15.1x

Index Details We initiate coverage on Godrej Consumer Products Ltd (GCPL) as a
Sensex 17,773 BUY with a Price Objective of `588.7 (target 20x FY14 EPS) over a period
Nifty 5,390 of 21-24 months representing a potential upside of ~32.9%. At CMP of
`443, the stock is trading at 18.1x and 15.1x its estimated earnings for
BSE 100 9,310
FY13 and FY14, respectively. Driven by global acquisitions of Darling
Industry
Group (Africa) & Cosmetica Nacional (Latin America) and strong growth
of the Indian household insecticides business, we expect GCPL’s
Scrip Details consolidated revenues to grow at 28.4% CAGR over the forecasted
Mkt Cap (` cr) 14,379 period FY12-FY14. In our opinion, our estimates are conservative and
BVPS (`) 56.5 we expect a substantial re-rating of the price earnings (PE) multiple.
Currently, the discount to peers is a mispricing which should narrow as
O/s Shares (Cr) 32.4
the acquisitions start delivering.
Avg Vol (Lac) 0.8
52 Wk H/L 463/339
 Segment leadership and strong growth prospects of
Div Yield (%) 1.0
geographies to boost revenue and profitability

STOCK POINTER
FVPS (`) 1
In Domestic market, GCPL not only has presence in high growth categories
(Household Insecticides~25% 2 year CAGR) but also enjoys leadership status in the
product categories of Hair Colors, Hair Extensions and Household Insecticides
Shareholding Pattern (barring for Soaps). In addition, GCPL’s dominant presence in the high growth
Shareholders % markets of Africa, Indonesia and LatAm further boosts the growth prospects. We
expect consolidated revenues to reach `7,711 crore (CAGR of 28.4%) on the back
Promoters 67.3
of organic growth and acquisitions.
DIIs 2.4
Domestic business to be the mainstay of operations
FIIs 19.9
With the acquisition of household insecticides business, GCPL has not only
Public 10.4 diversified its revenues but also scaled up its domestic business. We expect
Total 100 revenues of household insecticides and soaps to grow at ~25.2% CAGR and ~18%
CAGR respectively over the forecasted period FY12-14 on the back of disruptive
GCPL vs. Sensex
innovations, synergies arising from integration of both businesses and focused
marketing initiatives. Also, hair care business is expected to grow at ~16.2% CAGR
over the forecasted period. Overall the domestic business revenues are expected to
grow at ~17.6% CAGR to `3,820.9 crore in FY14 from `2,351.2 crore in FY11.
International business to drive growth
The hallmark of GCPL’s acquisitions is the fact that through these acquisitions it has
achieved market dominance in all categories. Having consolidated all the overseas
acquisitions, we expect GCPL, through its management expertise and cross
pollination of products, to significantly grow these businesses in the medium to long
term.
Key Financials (` in Cr)
Net EPS Growth RONW ROCE
Y/E Mar EBITDA PAT EPS P/E (X) EV/ EBITDA(X)
Revenue (%) (%) (%)
2011 3,646.1 643.8 514.7 15.1 35.0 29.8 19.1 29.2 26.3
2012E 4,846.1 931.4 826.9* 24.3 60.9 34.9 20.2 18.1 18.2
2013E 6,206.1 1,190.6 834.3 24.5 0.8 27.6 21.2 18.0 14.2
2014E 7,711.4 1,488.8 1,001.6 29.4 20.0 26.1 20.3 15.0 11.4
*Includes exceptional income of `200.2 crore (`175.2 crore on Kiwi sales and `25 crore on Brylcreem sales)

-1- Monday 13thFeb, 2012
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

Accordingly, we expect the international business revenues to grow at ~43.6% CAGR
to `3,890 crore by FY14.

 Immense Product/Technology synergies amongst geographies
backed by disruptive innovations to provide an edge against
peers
We expect cross-pollination of a large number of products across the different markets
in which the company has a presence (e.g. potential launch of HIT magic paper in
India). This is a major leverage that GCPL can draw on from its wide global offering. We
expect many potential product synergies to play out over the next 2-3 years and add
further scale to GCPL’s operations.

Valuation
We initiate coverage on Godrej Consumer Products Ltd (GCPL) as a BUY with a Price
Objective of `588.7 (target 20x FY14 EPS) over a period of 21-24 months representing
a potential upside of ~32.9%. At CMP of `443, the stock is trading at 18.1x and 15.1x
its estimated earnings for FY13 and FY14, respectively. We have valued the stock at
~31.5% discount to Hindustan Unilever Ltd’s valuation of 29.2x FY13 EPS (as per
Ventura estimates).

Driven by global acquisitions of Darling Group in Africa and Cosmetica Nacional in Latin
America and strong growth of the Indian household insecticides business, we expect
GCPL’s consolidated revenues to grow at ~28.4% CAGR over the forecasted period
FY12-FY14. In our opinion, our estimates are conservative and we expect a substantial
re-rating of the price earnings (PE) multiple.

th
-2- Monday 13 Feb, 2012

 Company Background

Godrej Consumer Products Limited (GCPL),the flagship company of Godrej Group earlier
operated in two categories - soaps and hair colors till FY09. Post FY09, GCPL overhauled
its business as per a new “3 X 3” strategy that involves having a presence in three
categories across three continents. The household insecticides business (which was earlier
a joint venture between another Godrej group company and Sara Lee) was merged into
GCPL. GCPL manufactures and distributes personal wash, home care and hair care
rd
products in India and internationally (1/3 of revenues come from international operations).

The company also has a strong emerging presence in markets outside India. With the
acquisition of Keyline Brands in the United Kingdom, Rapidol, Kinky Group, Tura, Darling
Group in Africa and Issue Group, Argencos, Cosmetica Nacional in Latin America, GCPL is
best placed to benefit from presence across these emerging markets. As part of increasing
its global footprint, the company has also acquired Megasari Group, a leading household
care company in Indonesia.

GCPL’s Brand Portfolio

Godrej Consumer Products Ltd
(GCPL)

Domestic Operations International Operations
(Segments) (Regions)

Home Care Hair Care Personal Wash
Af rica Indonesia LatAm UK

BRANDS:
BRANDS: BRANDS:
- Godrej Acquisitions Acquisitions Acquisitions
- Good Knight Expert - Cinthol Acquisitions
- Rapidol (July 06) - Issue Group - Keyline
- HIT - Renew - Godrej Protekt - Megasari (May 10)
- Kinky Group (Apr Makmur Group Brands (Oct 05)
- Jet - Colour Sof t - Godrej No.1 - Argencos (June
08) (May 10)
- Ezee - Nupur - Godrej - Tura (Mar 10) 10)
- Godtej Dish Fairglow - Cosmetica
- Kesh Kala - Darling Group
Wash - Godrej Vigil (Jun 11) Nacional (Jan 12) BRANDS:
- Kali Mehandi
- Genteel - Shikakai - Cuticura
- Anoop Hair BRANDS:
Oil - Swatik - Nulon
- HIT
- Stella - Aapri
BRANDS: BRANDS
- Fogo - Erasmic
- Inecto - Consell
- Others - Denney
- Sof lene
- Others - Issue
- Roby
- Illicit
- U2
- Pamela Grant

Source: GCPL, Ventura Research Estimates

th
-3- Monday 13 Feb, 2012

 Key Investment Highlights

 Segment leadership and strong growth prospects across geographies to
boost revenues and profitability

Barring for soaps, in the product categories of Hair Colors, Hair Extensions and Household
Insecticides, GCPL enjoys leadership status. The reformulated 3x3 growth strategy has enabled
the company to consolidate its product portfolio and market dominance and more than double its
revenues from `1,396.6 crore in FY09 to `3,646.1 crore in FY11.We expect the company to
continue to maintain this pace of growth over FY14. Accordingly, revenues are expected to
reach `7,711 crore (CAGR of 28.4%) by FY14on the back of organic growth and acquisitions.

Revenue and Profitability trend GCPL’s current market share
9000 25% 42%
8000 20.1% 19.3%
19.2% 19.2% 36%
7000 17.7% 20%
30%
In Rs. Crore

6000 14.3%
17.7% 15%
5000 16.6% 24%
14.1% 14.5% 39.7%
4000 7,711 18%
10%
3000 6,206 28.7%
4,846 12%
2000 3,646 5%
1000 2,044 6% 10.1%
0 0% 0%
FY10 FY11 FY12E FY13E FY14E Home Care - Home Personal Wash - Hair care - Hair
Revenues EBITDA Margin PAT Margin Insecticides Soaps Colors

Source: GCPL, Ventura Research Estimates Source: GCPL, Ventura Research Estimates

Focused geographies to experience higher growth going forward

Increasing affluence and demographic trends of the markets in which GCPL operates are
experiencing significantly higher growth than global markets and GCPL with its market
dominance in these geographies is best placed to benefit from this.

World V/s Countries having GCPL’s presence GCPL’s current market share

15.0 Real GDP Growth (%) 42%
Estimated 36%
10.0
5.0
30%
24%
0.0
18% 35%
-5.0
28%
12%
-10.0
17%
6%
-15.0
2000 2002 2004 2006 2008 2010 2012 0%

World South Africa UK Africa Indonesia LatAM
India Indonesia Argentina Market Share - International

Source: IMF, Ventura Research Estimates Source: GCPL, Ventura Research Estimates

th
-4- Monday 13 Feb, 2012

India Business – to be the mainstay of operations

Post merger of the household insecticide (HI) business with GCPL, the domestic revenues of
GCPL have led to a significant transformation towards a stronger market position in the domestic
market. During FY09-11, GCPL has doubled its domestic revenue from `1,088.2 crore in FY09
to `2,395.16 crore. We believe that GCPL has depicted a strong fundamental shift in domestic
mix as well as expansion in its scale and expect domestic business revenues to grow at 17.6%
CAGR to `3,820.9 crore by FY14.

Domestic business revenue trajectory
Rs. in crore
4500
4000
3500
3000
2500
2000 3,821
1500 3,273
2,804
2,351
1000
500 1,239

0
FY10 FY11 FY12E FY13E FY14E

Household insecticides business acquisition provides a shot in the arm besides helping
diversify revenue mix

Acquisition of the high growth household insecticide (HI) business from Godrej - Sara Lee, has
not only significantly enhanced revenues but also helped diversify the revenue mix. Currently,
GCPL has a market share of ~39.2% and we expect GCPL to further boost its market share
through disruptive innovations (Magic paper to be introduced in India in the medium term), new
product offerings and leverage of its distribution network.

Diversification of revenues Increased scale of domestic business
3000
Acquired 100% of HI
Business
100% 2500 Acquired 51% of HI
20.4% 14.5% Business
80% 15.9% 2000
16.5%
60% 1500
34.2%
33.8%
40%
1000
20% 35.4%
29.3% 500
0%
0
FY11 FY14E
FY07 FY08 FY09 FY10 FY11
Home Care Personal Wash Hair care Others
Net Sales

th
-5- Monday 13 Feb, 2012

GCPL consistently gaining market share Household Insecticides - growth rates for GCPL
42%

FY11 39.2% 35% 39%
38%
28% 30%
28% 25%
FY10 35.5% 29%
21% 24% 25% 25%

FY09 33% 20%
14% 17%

FY08 32% 7%

0%
0% 20% 40% 60%

Home Insecticides


Revenues from this segment are expected to grow at a CAGR of 25.2% to `1,352 crore in FY14
from `688.2 crore in FY11.

Household Insecticides business revenue trajectory
Rs. in crore
1600

1400

1200

1000

800
1,352.1
600
1,079.8
400 862.1
688.2
200

0
FY11 FY12E FY13E FY14E


Household Insecticides (HI) Market to experience steady growth

The `2,500 crore HI market is characterized by low penetration, stiff entry barriers and highly
fragmented nature of competition. Also, not much competition from foreign majors is expected
as global majors SC Johnson and Reckitt Benckiser have their presence in this market since
decades. The HI market (20%+ CAGR) is characterized by high growth of the aerosols whereas
the traditional coils category has the highest market share.

th
-6- Monday 13 Feb, 2012

Household Insecticides market segmentation GCPL’s Home care business product portfolio
100%
7.2% 7.0% 7.3%

80%
32.7% 33.2% 33.0%

60%

40%
51.5% 50.2% 49.6%

20%

8.6% 9.6% 10.1%
0%
FY08 FY09 FY10
Aerosols Coils Electrics Others


Soap business witnessing growth on the back of increased focus and synergistic
benefits arising from the merger

GCPL’s soap business over the period FY07-11 have grown at CAGR of 12% to `796 crore in
FY11 despite a slack trend prevalent in the industry on the back of strong brand creations and
healthy mix of re-launches and marketing initiatives. The soap business of GCPL is expected to
maintain its growth rate aided by successful efforts of the management at introducing new high
value products through segmentation, leveraging benefits of the established distribution network
of HI business, growing market, prudent RM sourcing and price hikes. Going forward, we expect
the revenues to grow from `796 crore in FY11 to `1,306 crore in FY14 i.e. growth of ~18%
CAGR aided heavily by volume growth.

Soaps - growth rates for GCPL Soaps business revenue trajectory
32% Rs. in crore
34%
1400
27% 31%
27% 28% 1200
20% 24%
1000
13% 17% 16% 14%
12% 13% 800
6%
6% 1,306.1
-1% 600 1,141.7
988.5
-8% 400 828.4 795.9
-6%
-15% -10% -10%
200

0


th
-7- Monday 13 Feb, 2012

Top leaders in the segment GCPL’s Personal wash business product portfolio

9.1% 10.1%

8.1%

45.0%

GCPL HUL Source: GCPL, Ventura Research Estimates

Wipro Consumer Care Reckitt Benckiser


Hair Colors Business – Growth on the back of re-launches and innovation

GCPL is a dominant player in the hair colour segment with ~29% market share. Over the past 3
years, this business has grown at a CAGR of ~14% to `388 crore led by new product launches
and successful marketing initiative. Strong growth was led by several product re-launches under
the Expert brand. Nupur mehendi continues to gain strong market share and now appears along
with Godrej Expert in the Hair color category. Going forward, we believe that GCPL will continue
to maintain leadership position and we expect this business to grow at a CAGR of ~16.2% to
`608.3 crore by FY14 led by innovations, new product introductions and re-launches of existing
products.

Hair Colors – growth rates for GCPL Hair Colors business revenue trajectory
60% Rs. in crore
700
48%
50%
600
40%
500
30%
400
20% 20% 18% 19%
17% 15% 16% 16% 16%
20% 14% 300 608.3
9% 523.7
10% 4% 450.9
200 388.2
357.8
9%
0% 100

0


th
-8- Monday 13 Feb, 2012

GCPL’s Personal wash business product portfolio


International Business – Skewed towards Emerging Market
To fast track its global ambitions, GCPL has undertaken a series of judicious acquisitions
overseas in its existing lines of business which have not only provided it with market dominance
in the geographies of LatAm, Africa and Indonesia but has also inherited an impressive portfolio
which can be leveraged across these markets. Moreover, GCPL’s acquisitions in the overseas
markets have been funded by low cost overseas debt costing sub 4%, making these acquisitions
EPS accretive. Over the medium term we expect the international business to be the growth
driver and we expect revenues to grow at ~43.6% CAGR to `3,890 crore by FY14.

International business revenue trajectory
Rs. in crore Total
4500

4000

3500

3000

2500

2000 3,890.5
1500 2,933.0
1000 2,041.7
1,312.6
500

0


th
-9- Monday 13 Feb, 2012

Series of foreign acquisitions by GCPL in past 2 years
Amt
Brand Year Country Category
(Rs cr)
Insecticides, air-care,
Megasari 2010 Indonesia 1,200
cleaning, wipes, instant food
Sara Lee
2010 US NA 1,055
Stake
Tura 2010 Nigeria Medicated soaps, creams
Hair colors, shampoo, skin-
Issue Group 2010 Argentina 230**
care, mosquito repellant
Argencos 2010 Argentina Hair color, styling, shampoo -
Darling Group 2011 Senegal Hair extension products 900*
Cometica
2012 Chile Cosmetics 190
Nacional
*estimated
**GCPL paid `230 crore for both Issue Group and Argencos
Source: Industry Sources

Location wise revenue contribution

FY11 FY14E

UK UK
13% 7%
LatAm
16% Indonesia
LatAm
31%
16%
Indonesia
51%
Africa Africa
21% 46%

Indonesia Africa LatAm UK Indonesia Africa LatAm UK


Indonesia business – growth momentum to continue on the back of strong
market growth and new product launches

Megasari with a 25% market share continues to dominate the HI segment which has been
growing at20%+ over CY07-10. The successful launch of 'Hit magic paper' (an innovative paper
format repellent) coupled with the launch of HIT extra power electric mosquito repellant have
further boosted revenues. Penetration of the non-coil insecticides is below 30% in Indonesia,
which presents a large growth potential. Apart from HI, Megasari is also the market leader in air-
care and wipes business. We expect Megasari’s revenues to grow at 22% CAGR to `1,215
crore by FY14 driven by innovations and distribution network leverage.

th
- 10 - Monday 13 Feb, 2012

Megasari operates in a growth segment Indonesia business revenue trajectory
US$ mn Rs. in crore
1400
210
180 1200

150 1000

120 800

90 180 600 1,215.6
150
60 125 996.4
98 400 816.7
669.4
30
200
0
CY07 CY08 CY09 CY10 0
Indonesian home insecticide market

Megasari Product Portfolio


Darling Group acquisition game changer for GCPL’s African presence

Acquisition of the Darling group’s business has changed the landscape of operation in Africa for
GCPL. Not only will GCPL have access to a range of products in the hair care space besides a
pan African presence, but would be complementary to its existing Kinky range of products and
would further help lower costs significantly through benefits of backward integration.

GCPL’s Africa business is all set to witness the next level of synergies through expanding
distribution and introducing new categories in these markets. We expect revenues from the
African business to grow at ~20%+ over the forecasted period to `1,794 crore in FY14 on the
back of strong distribution network and cross selling products between African operations.

th
- 11 - Monday 13 Feb, 2012

Companies acquired in Africa
Company Name Acquired in Comments
Market leader in ethnic hair color market in South Africa
Rapidol Jul-06
Continues to grow strongly cementing its market leadership position
Product portfolio consists of hair braids, hair pieces, wigs and wefted
pieces and hair accessories
Kinky Apr-08
Launched Kinky's 'Store within a Store' concept and set up the hub
in Nairobi, Kenya
Household name in African market and leading personal care
company
Tura Mar-10
Product portfolio consists of soaps, moisturizing lotions and skin
toning creams
Market leader in hair extensions with presence in 14 countries
across Africa
Darling Group Jun-11
25-30% estimated market share in hair extensions across Africa
(incl. Kinky)

Darling Group’s Pan – African presence

Source: Ventura Research Estimates

th
- 12 - Monday 13 Feb, 2012

Darling group acquisition – a game changer for GCPLs African ambitions

We believe the strong share positions that the group brands enjoy will further accelerate GCPL’s trajectory of
sustainable profitable growth in the region. The acquisition is attractive given the group’s strong distribution network and
presence in an estimated market size of US$1 bn +. The lack of MNC presence and large organized players makes for
a relatively benign competitive environment. The group has seen 15% revenue CAGR over the past five years. The
company has posted revenue of ~ `1,000 crore in CY10 with no debt on books and is highly profitable having an
EBITDA margin of over 20%.
Darling Group Acquisition – Key Highlights
Key Highlights
Market leader in hair extensions in 14 countries across Africa
25-30% estimated market share in hair extensions across Africa (incl. Kinky)
Key Brands: Darling and Amigos
Product portfolio consists of braids, weave ons, wigs, human hair, curls and
other hair care products
Historical focus on retail chains
Reported $200 mn revenues in CY2010 with CAGR ~15% in last five years

The Phases of Darling Group acquisition (Transaction Overview)
Phase Period Description
GCPL will take 51% stake in Darling Holdings which
2-3
I currently owns companies accounting for 45% of the total
mths
turnover of Darling group.
12 Darling Holdings will acquire 70% of turnover of the Darling
II
mths group
24 Darling Holdings will acquire 100% of turnover of the Darling
III
mths group while still continuing to hold 51% stake
GCPL has option to buy remaining 49% stake in Darling
IV 3-5 yrs
Holdings at a pre-determined P/E multiple

We believe that recently acquired stake of 51% in Darling group is an important linchpin and GCPL will look to build
Darling brand into one of the largest personal care brands across Africa. In addition, significant value add is expected on
account of integration of the Kinky brands and Darling group pan African reach.

Strong Synergies to follow on the back of backward integration
Darling Kinky
Focused on retail chains 70% of revenue through own stores
Leader in the mass and mass premium More focus on the higher value
segments segments
Fully backward integrated right to the
Not backward integrated
backend into the raw material research
Operational synergy leading to improved profitability in Kinky

th
- 13 - Monday 13 Feb, 2012

This acquisition will help not only to provide backward integration benefits for its Kinky product
portfolio (leading to expansion in margins from Q4FY12 onwards) but also provide a ready
market to its earlier acquisitions of Rapidol and Tura. We expect African business revenues to
grow by ~20%+ over the forecasted period to `1,794 crore in FY14 on the back of strong
distribution network and cross selling of products across the African operations.

Africa business revenue trajectory Brand portfolio of African companies
Rs. in crore
2000
1800
1600
1400
1200
1000
1,794.2
800
600 1,195.2
400 776.5
200
269.1
0


Latin America Business – to grow on the back of new launches and leveraged
distribution network

Having entered the Latin American market in FY11, GCPL holds ~17% market share on the
back of the acquisition of two businesses: Issue and Argencos. The hair colorant market in
Argentina is estimated to be around USD 200 million growing at CAGR of 22% over the last two-
three years. Thus, the merger is expected to realize significant purchase and distribution
synergies. Besides this, acquisition of Cosmetica Nacional (a Chilean company) in January 2012
will facilitate GCPL to exploit synergies of scale between its Argentina business and Cosmetica
(Chilean market).

We expect LatAm business to grow by ~22%+ over the forecasted period to `621 crore by FY14
primarily driven by exploring wide distribution synergies and cross selling of products. Moreover,
we expect the margins to improve on account of favorable revenue mix (acquisition of
Cosmetica Nacional having ~20% EBITDA margins).

LatAm business revenue trajectory Brand portfolio of companies
Rs. in crore
700 14.0%
11.4%
600 12.0%
10.0%
500 9.0% 11.3% 10.0%

400 8.0%

300 621.2 6.0%
515.7
200 4.0%
252.3
100 203.5 2.0%

0 0.0%


th
- 14 - Monday 13 Feb, 2012

LatAm business - acquisition of 60% stake in Cosmetica Nacional

Founded in 1979 by Fernando Garcia, Cosmetica Nacional is a Chilean hair color and cosmetics
company, enjoying market leadership positions in Chile and Panama in the hair colourant
category with strong heritage brand such as Ilicit and U2 (volume share ~33% and value share
~28%). The company also has a strong presence in the color cosmetics segment - Pamela
Grant (second largest brand in the colour cosmetics market with value and volume share of
~16%).

Key Transaction Highlights

The Cosmetica Nacional business had revenues of $36 mn in CY11 and an EBITDA of $7.3 mn.
GCPL plans to purchase a 60% stake in Cosmetica Nacional for an equity value of $38 mn with
option to acquire 100% ownership through a combination of call and put options in a 3-5 year
period.

 Significant product / technological synergies amongst geographies
backed by disruptive innovations to facilitate growth opportunities

The global brand portfolio of GCPL is a significant intangible which would help foster future
growth of the company once all the operations across geographies are integrated and stream
lined. Cross-pollination of its brands across markets would, in our opinion, be the future growth
driver for GCPL.

Acquisition of the Darling business can be viewed as a critical building block in achieving
GCPL’s Africa aspirations. This is especially true for the household insecticides segment that
has similar products across markets and needs minimal change in formulation or packaging.

Probable synergies / cross country launches
Country Possible synergies that would realize if -
Megasari, Indonesia innovated by launching paper format repellant- 'HIT
Magic Paper' in Household Insecticide category. It burns for 3 minutes and
India
has residual efficacy upto 8 hours. The product, which is a low cost
solution mass product, could be a game changer in the category.
Indonesi
GCPL will introduce powder hair colors and insecticide coils
a
Argentin
GCPL will introduce powder hair colors and insecticides
a
GCPL will introduce ethnic hair colors, hair extensions and household
Africa
insecticides across all geographies of Africa

th
- 15 - Monday 13 Feb, 2012

 Key Concerns

Vulnerability to price spikes in raw material costs

GCPL has witnessed a sharp increase in raw material prices in recent months which also remain
a concern going ahead. However, efficient working capital management, sound sourcing policy,
cost reduction measures and calibrated price hikes have helped GCPL to mitigate inflationary
risks and should help GCPL sustain its operating margins over the medium term.

Raw Material price trends
Caustic Soda price trend Palm Oil price trend
1800 60000
1600
50000
1400

1200 40000
In INR/MT

INR/MT
1000
30000
800

600 20000

400
10000
200

0 0
Jun-08 Feb-09 Oct-09 Jun-10 Feb-11 Oct-11 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11


Raw Material Outlook
Name Status Outlook
Demand has been high throughout last year
We see the prices marginally increasing this
while supply has faced crunches on account of
Caustic year primarily on account of increasing demand
lower salt supply from Gujarat. Excess monsoon
Soda and sharp increases in the prices of industrial
last year did have considerable affect on the salt
salt, a key input for manufacturing caustic soda.
production last year.
Raw material for LAB - kerosene and benzene
Linear
prices have been rising following high crude
Alkyl Basic LAB prices in the domestic market are
prices. Benzene and Kerosene is expected to
Benzene ruling at around `110-115 a kg.
follow crude’s footprints which is the feedstock
(LAB)
for benzene and kerosene.
Indian demand of polymers touched 10-12
million tons in 2010. The industry demand was at
Prices to remain stable with marginal uptrend as
12.4 million tons in 2010-11, making Indiathe
HDPE increasing supply/capacities in Middle East are
third largest consumer after US and China.
likely to curb price increases.
Prices have been more or less stable despite
fluctuations in crude prices.
Palm oil prices are expected to rise in
Poor crop leading to supply shortage for past 2
international market in coming months on
years alongwith link to crude oil movement led to
account of likely tightening of the demand-
Palm Oil substantial increase in palm oil price. However,
supply situation and domestic prices are
production has rebounded this year and prices
expected to mimic this trend as almost half of
dropped.
the demand is met through imports.
Source: CMIE, Ventura Research Estimates

th
- 16 - Monday 13 Feb, 2012

Changing consumer preferences and intense competition can impact business
growth and profitability

In addition to the constantly evolving consumer preferences and cut throat competition from
global majors, GCPL has to be fleet footed to cater to the rapidly changing demands of the
market besides competing with the global majors on pricing, innovation, and availability. In our
view GCPL is well embedded within the consumer products space and is equal to, if not better
than competition in its understanding of the changing preferences and should be able to
withstand competition.

Infrastructural Bottlenecks

Power costs in India are very high and they contribute substantially to cost of goods sold and
they are 3-4 times of optimal costs. To compound this problem is the poor transportation and
roadways infrastructure. Many of the villages have poor infrastructural connectivity, so the
amount of time it takes for the harvest to be transported to the FMCG manufacturers is
unpredictable, and results in substantial spoilage of the goods. Sharp rise in the cost of
development of infrastructure coupled with bureaucratic wrangles with respect to land
acquisition further delay development of road and rail infrastructure, thereby increasing the
associated costs.

th
- 17 - Monday 13 Feb, 2012

 Financial Performance(Consolidated)

Domestic sales rose 19.9% YoY driven by 31%, 9% and 30% respective sales growth for soaps,
hair colors and household insecticide (HI) during Q3FY12. Volume growth stood at ~20%, ~4-
5% and ~25% respectively for soaps, hair colors and HI.

Overseas revenues registered organic growth of 30% yoy to `567 crore. Indonesia (Megasari)
posting a healthy performance with 35% sales growth (~20% adjusted for currency, +17-18%
volume growth) and EBITDA margins of 20.6% (+190 bps YoY, +120bp QoQ) led by favorable
product mix and good performance of new launches. Latin American operations posted 29%
sales growth (~20% adjusted for currency) and EBITDA margins of 9%. Africa region posted
revenues of `186 crore with inclusion of Darling. EBITDA margins came in quite strong at 31%
driven by good festive season sales, favorable mix on hair extensions, and low ad expenses.
Europe (Keyline) registered 43% YoY sales growth (~25% adjusted for currency) and 6%
EBITDA margin.

Quarterly Financial Performance (Rs in crore)

Particulars Q3FY12 Q3FY11 FY11 FY10
Net Sales 1,344.1 988.8 3,646.1 2,043.7
Growth % 35.9 78.4
Total Expenditure 1,095.8 835.2 3,002.3 1,633.9
EBDITA 255.0 159.2 643.8 409.8
EBDITA Margin % 19.0 16.1 17.7 20.1
Depreciation 17.1 12.1 49.9 23.6
EBIT (EX OI) 237.9 147.1 593.9 386.2
Other Income 6.8 5.6 69.8 44.8
EBIT 267.5 160.6 663.7 431.0
Margin % 19.9 16.2 18.2 21.0
Interest 28.7 13.3 51.9 11.1
Exceptional items 0.0 2.0 0.0 0.0
PBT 238.8 147.3 611.8 419.9
Margin % 17.8 14.9 16.8 20.5
Provision for Tax 55.5 28.5 130.2 80.3
PAT 183.3 118.8 481.6 339.6
PAT Margin (%) 13.6 12.0 13.2 16.6

Recent Developments
GCPL acquired 60% stake in Cosmetica Nacional (Chilean company) for $38 mn. With sales
of $36mn and EBITDA margin of ~20%, Cosmetica Nacional has grown over ~15% in recent
past. Acquisition is to be funded by low cost overseas debt.

GCPL shall raise `685 crore from Temasek at `410 per share diluting 5.2% of equity. The
management attributes an equity raise to tone down leverage as it looks at a maximum debt
equity mix of 1:1.

th
- 18 - Monday 13 Feb, 2012

 Financial Outlook

On the back of recent acquisitions, successful innovations & product launches and geographical
diversification, we expect revenues to grow at a CAGR of 28.4% to `7,711.4 crore over the
forecast period of FY12-14. Moreover, we expect significant cost and revenue synergies in the
domestic and international business over the next 2 to 4 years. Consequently, we expect
EBITDA margin (excl OI) to be maintained ~19% over the forecasted period amidst volatile raw
material prices.

GCPL’s Outlook
Rs in Crore
9000 20.1% 20.5%
8000 20.0%
19.2% 19.2% 19.3%
7000 19.5%
6000 19.0%
5000 18.5%
4000 17.7% 7,711.4 18.0%
3000 6,206.1 17.5%
4,846.1
2000 3,646.1 17.0%
1000 2,043.7 16.5%
0 16.0%

Net Revenue (LHS) EBIDTA Margin (RHS)


 Valuation

We initiate coverage on Godrej Consumer Products Ltd (GCPL) as a BUY with a Price Objective
of `588.7 (target 20x FY14 EPS) over a period of 21-24 months representing a potential upside
of ~32.9%. At CMP of`443, the stock is trading at 18.1x and 15.1x its estimated earnings for
FY13and FY14, respectively. We have valued the stock at ~31.5% discount to Hindustan
Unilever Ltd’s valuation of 29.2x FY13 EPS (as per Ventura estimates).

Driven by global acquisitions of Darling Group in Africa and Cosmetica Nacional in Latin America
and strong growth of the Indian household insecticides business, we expect GCPL’s
consolidated revenues to grow at ~28.4% CAGR over the forecasted period FY12-FY14. In our
opinion, our estimates are conservative and we expect a substantial re-rating of the price
earnings (PE) multiple. Currently, the discount to peers is a mispricing which should narrow as
the acquisitions start delivering.

th
- 19 - Monday 13 Feb, 2012

Peer Comparison

Earnings
P/E P/B ROE
Company Name Growth (%)
FY12E FY13E FY12E FY13E FY12E FY13E FY11-13E
GCPL* 20.9 16.1 5.4 4.3 33.5 26.7 27.8
Marico* 26.5 21.7 7.4 5.7 28.1 26.3 19.4
Dabur 26.5 22.1 10.1 8.1 42.1 40.1 18.3
Emami 21.3 17.7 6.8 5.5 34.8 35.0 19.3
HUL* 36.2 31.7 25.4 19.0 70.0 59.9 15.1
Zydus Wellness 20.5 16.7 7.8 6.1 42.9 39.7 21.3
ITC 25.9 22.0 8.5 7.6 34.4 36.3 19.2
P&G 31.2 22.2 8.2 6.9 24.3 29.2 28.2
Bajaj Corp* 12.7 10.2 3.2 2.7 25.7 26.8 30.6
Britannia Ind 30.6 24.3 12.2 9.6 41.4 48.0 34.3
GSK Consumers 25.9 21.9 8.2 6.8 34.7 34.3 30.3
Colgate Palmolive 31.7 27.4 30.9 26.3 105.5 103.9 9.3
Nestle 43.8 36.0 31.8 23.5 93.7 84.2 35.9

Source: *Ventura Research Estimates, Bloomberg Estimates

One year forward PE relative to HUL One year forward PE discount relative to HUL
40%
50.0
45.0
20%
40.0
35.0
0%
30.0
PE (x)

Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
25.0
20.0 -20%

15.0
10.0 -40%

5.0
0.0 -60%

GCPL HUL -80%

Source: Ventura Research Estimates Source: Ventura Research Estimates

th
- 20 - Monday 13 Feb, 2012

One year forward PE

40.0

35.0

30.0

25.0
PE (x)

20.0

15.0

10.0

5.0

0.0
GCPL Avg P/E


th
- 21 - Monday 13 Feb, 2012

P/E bands
1000
900
800
700
600
500
400
300
200
100
0
Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

CMP 13X 19X 25X 31X 37X


P/B bands
1400

1200

1000

800

600

400

200

0
Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

CMP 5X 6.5X 8X 9.5X 11X


EV/EBIDTA bands
35000
30000
25000
20000
15000
10000
5000
0
Apr-06 Apr-08 Apr-10 Apr-12
EV 12X 15X 18X 21X 24X


th
- 22 - Monday 13 Feb, 2012

Financials and Projections

Y/E March, Fig in Rs. Cr FY 2011 FY 2012e FY 2013e FY 2014e Y/E March, Fig in Rs. Cr FY 2011 FY 2012e FY 2013e FY 2014e
Profit & Loss Statement Per Share Data (Rs)
Net Sales 3646.1 4846.1 6206.1 7711.4 EPS 15.1 24.3 24.5 29.4
% Chg. 178.4 32.9 28.1 24.3 Cash EPS 16.6 25.5 26.4 31.6
Total Expenditure 3002.3 3914.7 5015.5 6222.6 DPS 4.5 4.5 4.5 4.5
% Chg. 183.8 30.4 28.1 24.1 Book Value 50.7 69.6 88.7 112.7
EBDITA 643.8 931.4 1190.6 1488.8 Capital, Liquidity, Returns Ratio
EBDITA Margin % 17.7 19.2 19.2 19.3 Debt / Equity (x) 1.2 1.1 1.0 1.0
Other Income 69.8 92.8 118.8 115.7 Current Ratio (x) 1.7 2.1 2.5 2.9
PBDIT 713.6 1024.2 1309.4 1604.5 ROE (%) 29.8 34.9 27.6 26.1
Depreciation 49.9 41.0 62.8 72.2 ROCE (%) 19.1 20.2 21.2 20.3
Interest 51.9 70.6 81.6 103.5 Dividend Yield (%) 1.0 1.0 1.0 1.0
Exceptional items 33.1 200.2 0.0 0.0 Valuation Ratio (x)
PBT 644.9 1112.7 1165.0 1428.8 P/E 29.3 18.2 18.1 15.1
Tax Provisions 130.2 255.9 268.0 328.6 P/BV 8.7 6.4 5.0 3.9
Minority Interest 0.0 29.9 62.8 98.5 EV/Sales 4.7 3.5 2.7 2.2
Reported PAT 514.7 826.9 834.3 1001.6 EV/EBIDTA 26.4 18.3 14.3 11.4
PAT Margin (%) 14.1 17.1 13.4 13.0 Efficiency Ratio (x)
Raw Materials / Sales (%) 49.2 50.0 50.0 50.0 Inventory (days) 44.0 47.0 48.0 49.0
Manpower cost / Sales (%) 7.5 7.0 7.0 7.0 Debtors (days) 38.4 42.0 42.0 42.0
Tax Rate (%) 20.2 23.0 23.0 23.0 Creditors (days) 84.6 82.0 81.0 81.0

Balance Sheet Cash Flow statement
Share Capital 32.4 34.0 34.0 34.0 Profit After Tax 514.7 856.8 897.1 1100.1
Reserves & Surplus 1692.8 2334.4 2983.4 3799.8 Depreciation 49.9 41.0 62.8 72.2
Minority Interest 0.0 85.7 148.5 247.0 Working Capital Changes (373.2) (95.5) (20.9) (41.7)
Total Loans 2005.4 2605.3 3017.4 3833.8 Others (116.8) (185.3) (186.3) (225.1)
Deferred Tax Liability 0.0 0.0 0.0 0.0 Operating Cash Flow 206.1 873.0 1020.6 1234.2
Total Liabilities 3730.6 5059.4 6183.4 7914.6 Capital Expenditure (2,415.1) (656.1) (503.9) (562.8)
Gross Block 3455.2 4111.3 4425.1 4988.0 Change in Investment 0.0 (74.5) 0.0 0.0
Less: Acc. Depreciation 377.5 418.5 481.2 553.4 Cash Flow from Investing -2364.3 -730.6 -503.9 -562.8
Net Block 3077.7 3692.8 3943.9 4434.5 Proceeds from equity issue 522.8 0.0 685.0 0.0
Capital Work in Progress 15.4 0.0 0.0 0.0 Increase/(Decrease) in Loans 1760.5 599.8 -82.8 816.3
Investments 0.0 74.5 74.5 74.5 Dividend and DDT -163.1 -153.1 -153.1 -153.1
Net Current Assets 638.9 1296.3 2169.2 3409.8 Cash Flow from Financing 2237.5 343.9 335.3 527.5
Deferred Tax Assets (1.4) (4.1) (4.1) (4.1) Net Change in Cash 79.3 486.3 852.0 1198.9
Misc Expenses 0.0 0.0 0.0 0.0 Opening Cash Balance 51.0 16.8 81.3 149.5
Total Assets 3730.6 5059.6 6183.5 7914.7 Closing Cash Balance 226.9 713.2 1565.2 2764.1

Ventura Securities Limited

Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai – 400079

This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no
responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their
articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or
in part without written permission is prohibited. This report is for private circulation.

th
- 23 - Monday 13 Feb, 2012

Gcpl

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Gcpl

Similar to Gcpl (20)

More from Vinit Bolinjkar LION bolinjkar.vinit@gmail.com

More from Vinit Bolinjkar LION bolinjkar.vinit@gmail.com (20)

Recently uploaded

Recently uploaded (20)

Gcpl