Godrej Consumer Products Fair Valued Raised

We're raising our fair value for Godrej as it begins to reap the benefits of its foreign expansion.
By Suruchi Jain |  10-12-12 | 
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About the Author
Suruchi Jain is an equity research analyst on Morningstar's India team, based in Mumbai. She covers consumer, banking and pharmaceutical stocks listed in India.

The following is a Stock Analyst Note, which is part of the Stock Analyst Report for Godrej Consumer Products. Registered Morningstar users can read the complete report here.

We are increasing our fair value estimate for Godrej Consumer Products Ltd. (GCPL) to INR 727, up from INR 535.

With 69% of revenues coming from home care and personal wash products that typically have low seasonality, we now believe the company has lower demand risk and hence requires a lower discount rate (our cost of capital is now 10.2% versus 13% previously), which drives much of the change in our fair value.

Furthermore, we are more confident about GCPL's plans for its Africa acquisition, as management guided that long-term steady-state EBITDA (earnings before interest, tax and depreciation) margins would be between 17% and 19%, making Africa the third-most profitable region behind Indonesia and India.

We forecast Africa will account for 21% of GCPL's consolidated sales in 2017 (up from just 7% in fiscal 2009), and this new information reaffirms our confidence in the margin expansion capability of GCPL, however, we continue to maintain our high uncertainty rating until acquisitions are fully integrated.

In addition, we don't expect a shift away from its acquisition-focused strategy following the recent announcement that managing director, Mr. A. Mahendran, will step down in June 2013 and Mr. Vivek Gambhir, currently chief strategy officer, is to assume that post.

We believe GCPL has begun reaping the benefits of its foreign expansion as it is leveraging acquired distribution networks to cross-introduce products from other country portfolios. In the second quarter of fiscal 2013, the company's revenues grew 35% year-over-year, supported by the acquisition of Chilean company, Cosmetica Nacional. GCPL witnessed 24% organic growth, with India growing at 19% and its international business growing at 32%.

For the second half of fiscal 2013, organic growth will primarily be driven by new product launches in foreign markets, rebranding of GCPL's personal wash brand 'Cinthol' and the launch of crème hair color products in India, while inorganic growth will be driven by the phase two acquisition of Darling Group in Africa.

The company recently launched its home insecticides products in the INR 5 billion African market, which has few well-entrenched players like S.C. Johnson, beyond which market share is largely fragmented.

While this may not move the needle on revenue growth immediately, we believe it is a large long-term opportunity and wait to hear more about how the market receives these new products. Its introduction of crème hair color in India, from its Argentinian business is another such example.

Overall, we continue to believe the company enjoys a narrow economic moat and will experience double-digit revenue growth over the next five years. Additional upside to our valuation could be warranted if GCPL's recent rebranding efforts to the premium end of the personal wash and hair care categories take hold, or if it gains a more sizeable presence in the home insecticide category.

At this time, we view the shares as fairly valued, and suggest that investors continue to wait for a reasonable margin of safety before building a position in this stock.

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