Godrej Consumer Products - Diwali Picks 2012 - IIFL

Favourable revenue mix change in the domestic business

Post the merger of the erstwhile Godrej Sara Lee (Household Insecticides - HI) business in FY10, GCPL's domestic revenues have more than doubled in the past two years. Prior to the merger, Soaps segment contributed ~68% to GCPL's revenues in FY09, which has come down to ~36% in FY12 while insecticides business now accounts for 45%. Soaps being the matured category in India with penetration levels of 90%+ and offering a low growth potential, the change in revenue mix augured well for GCPL. The management is looking at revenue synergies of ~Rs15-20bn and cost synergies of ~Rs2-2.5bn per year by FY15 from the merger. We expect the domestic business to witness revenues and earnings CAGR of ~21%/20% over FY12-14.

Insecticides business to be the key growth driver

The ~Rs30bn domestic HI market is an attractive high-growth market with low penetration levels of ~30%, rational competition and minimal (almost zero) possibility of any new entrants. GCPL's HI business, growing at ~16% revenue CAGR over the past three years consists of three key brands namely Good Knight and Jet - the mosquito repellant brands and HIT in the aerosol segment catering to all types of pest. The HI category is witnessing a major premiumisation, with the electric and aerosol segments outpacing the lowpriced coil segment. GCPL being the market leader in the non-coil segments is expected to be the biggest beneficiary. We expect this segment to witness revenue CAGR of 22.5% over FY12-14.

3x3 strategy working extremely well

GCPL's 3x3 strategy - presence in emerging markets in Asia, Africa and Latin America, through three core categories - personal wash, hair care and home care is working very well. In FY10, the international business mix was skewed towards developed markets, mainly the UK. With a series of acquisitions in FY11, GCPL's international business is now an emerging-market play on Indonesia, Africa and South America. GCPL is actively scouting for suitable acquisitions in the international market and has done ten acquisitions in last five years. The two key metrics, which GCPL follows are i) the acquisition has to be EPS accretive and ii) the time-frame to achieve breakeven. We expect GCPL's strategy of deriving synergies and cross-selling benefits out of the acquisitions made in the recent past to result in steady growth going ahead.

Strong earnings visibility, maintain BUY

With strong growth momentum in both domestic and international businesses and successful acquisitions, GCPL management is confident of achieving 26% revenue CAGR over the next 10 years. Around 10% growth is envisaged through the inorganic route which translates into a 10x jump in revenues by 2021. GCPL's successful acquisition integration in the past makes us confident of the management's ability to derive synergy benefits. We expect GCPL to witness revenue/earnings CAGR of ~27/35% respectively over FY12-14. At the current market price of Rs692, the stock is trading at 24.5x FY14E EPS of Rs28.3. GCPL has traded in the range of 18x to 28x over the past one year (avg 23.1x). Given the strong earnings growth prospects, we see headroom for further expansion of PE multiple. We maintain Buy with a 9-mth TP of Rs792.

Source : Equity Bulls

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