Godrej Consumer Products - Integration and acquisition gains - Antique

Rural expansion to aid growth

Expansion of rural penetration will aid GCPL's performance during the next three years. We believe that the rising rural consumerism would benefit all its key product categories like soaps, hair colors and insect repellants. Particularly in case of hair colors, which has been a relatively underperformer, a higher rural penetration would lead to accelerated volume growth in the coming years.

Distribution integration with GHPL driving growth in soaps and insect repellant

Distribution integration with Godrej Household Product post the merger has led to rich dividends in terms of strong volume growth in key categories. GCPL's soaps business has benefited from insect repellants distribution strength in the southern markets while insect repellant business has benefited from the strength of soaps in the northern markets. The management expects these distribution gains to continue during the next two years.

International acquisitions in high growth geographies to drive medium to long term growth

We believe that in majority of the acquired businesses which are from emerging geographies like Indonesia, Africa and Latin America, GCPL would be able to generate a growth in revenues of about 15-20% per annum in the next few years. Further we believe that the increase in contribution from the high margin geographies like Indonesia (18% EBITDA margin) and Africa (19% EBITDA margin) would drive profitability in the coming years. We believe that Darling would record sales of about INR5.89bn in FY13e and INR8.77bn in FY14e (assuming 70% of Darling group business would be consolidated during 4QFY13.

Better management of working capital to aid valuations

The company has been able to control the increase in working capital requirement arising from the higher debtor days of the international operations (due to high dependence on modern trade) led by better terms with creditors. A consistency in the working capital management and a reduction in debt/equity levels would lead to a re-rating for the company going ahead.

Valuations factors in the strong growth in earnings

At the CMP of INR674, the stock is trading at a PE of 29.3x FY13e and 23.7x FY14e. The stock has traded at an average PE of 18.9x during the last five years(FY08-FY12). During FY10-FY12, the stock has witnessed a re-rating and has traded at an average of 21.5x. We believe that at the current levels, the stock is factoring in the high growth trajectory of the company. We therefore maintain our HOLD recommendation on the stock at the current levels with a target price of INR625, (implying a PE of 23.7x FY14e).

Source : Equity Bulls

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