Latin-American colour

Godrej Consumer Products (GCPL), the home-grown toilet soaps and hair colour major, is pursuing its global ambitions very seriously.

On Sunday it made its fifth acquisition in three years, agreeing to buy Argentina’s hair colour company Issue Group, for an undisclosed amount. Issue is the number one hair colour company in Argentina, with 20% of the $200 million hair colour market. It is also big in other markets like Peru, Uruguay and Paraguay and is building up its business in Brazil.

GCPL did not reveal the financial details citing confidentiality agreements. However it did say that the valuation of the acquisition is around 8 times the Ebidta (earnings before interest depreciation and taxes or operating profit) of Issue Group.

Issue Group had sales of $33 million in the last financial year.

Analysts estimate that the Ebidta of the group would be around 20%, or $6.5million. And since the deal was at 8 times Ebidta, the deal size is likely to be in the range of $50-55million or Rs 235-260 crore.

The deal is likely to come through in early-June. Analysts say the deal would be earnings accretive in this financial year. “Assuming 20% sales growth and 100 basis points margin gain driven by synergies, the deal would be earnings per share (EPS) accretive by 2-3% over FY11-12E,” wrote Anuj Bansal, research analyst of DSP Merrill Lynch (India), in a note to clients on Monday.

Even though an increase in EPS of 2-3% is not earth shattering, what makes analysts positive is the fact that it will give GCPL an entry into the growing hair colour market in Latin America. The company can also look at catering to the mass-segment by launching its successful low-cost powder hair dye.

Adi Godrej, chairman, Godrej group, has said the acquisition would give GCPL access to distribution in Latin America, which it could leverage to introduce other products from its portfolio. The company could look to introduce other products in categories like soaps, household insecticide and skin care.

Analyst estimates suggest that the hair colour market in Argentina is estimated to be around $200 million, growing at a rate of more than 22% over the last two years. Of this, Issue has a market share of over 20% and market leadership in Peru, Uruguay and Paraguay.

International businesses currently contribute 25% to the Godrej group’s revenues and analysts see that reaching 35% in the near future. Analysts remain positive on the stock. Gaurang Kakkad and Bandish Mehta at Religare Securities maintain buy on the stock with a price target of Rs 380.

The stock closed on Rs 312.20 on Monday. Analysts expect the equity dilution in the company to the extent of Rs 600-700 crore to be the next big trigger for the price of the stock.