Godrej Consumer Products - Developing a Taste for acquisitions - HDFC Securities

We are enthused by the company's constant focus on innovations ('HIT' magic paper), new launches ('AER' freshner') and cross pollination (Crème based hair color launched in India) to stimulate growth across all it business segments. The company's '3x3' strategy is yielding rich dividend. Recommend BUY with target price of INR. 840/sh.

Indian business is a 'HIT'

- Household Insecticide (HI) biz, market leader across formats, continues to grow faster than the category (since past 8 quarters). Also, gradual transition from coil to electric will bring in more profitability. This has also led to reduced dependence on low margin soap business (from 41% in FY10 to 22% in 2QFY13).

- Soaps business is constantly delivering resilient growth (4QFY12: 30%, 1QFY13: 42%, 2QFY13: 24%). Re-launch of Cinthol soaps would aid to the growth.

- Hair color, the only category, which has disappointed has witnessed entry into crème based hair color (technology from its business in Argentina) at highly disruptive price (40% lower than competitor). We believe this would help the company gain share from local players. However MNC brands, perceived to be premium, won't be much impacted in near term.

International business provides natural hedge

- GCPL's international business is likely to contribute 50% of total revenue post complete acquisition of DGH (viz. FY14E). Also, in most geography, GCPL business enjoys market leadership position with immense growth opportunities. Integration of DGH and stabilization of LatAm businesses holds key for long term sustained profitability of the company.

Cross pollination the way ahead

- The company plans to derive synergistic benefits by taking its existing products to other geographies: Hair color to Indonesia, HI to South Africa and Argentina, and plans to launch HIT Magic Paper in India. Further, the company plans to expand in neighboring countries of Indonesia and Argentina.

Recent attempts of cross pollination include: 1) Launching HI in Nigeria, 2) Bringing AER, HIT magic paper to India, 3) Launch of hair color products from LatAm business in India.

International business integration to hold key

- We like GCPL's aggression in developing categories via new launches and cross pollination of products across geographies. Also, softening in RM may benefit the gross margins in near term. At CMP, the stock is trading at 28.2x and 21.7x on FY14E and FY15E EPS, respectively. Recommend 'BUY' with TP of INR 840/sh (25x FY15E).

Source : Equity Bulls

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