Godrej Consumer has a rural edge

BSE Code: 532424
NSE Code: GODREJCP

The fast moving consumer goods (FMCG) segment, the fourth largest sector in the Indian economy, is expected to witness a steady growth of around 15% over the next few years.

The FMCG sector, which was not majorily impacted by slowdown last year, would see increased demand from urban areas as the economy gains strength.

Rural demand continues to be robust with rising income levels and shift in lifestyles. Godrej Consumer Products Ltd (GCPL) would benefit from growing consumer demand due to its differentiated product offerings, conservative pricing strategies and a strong presence in rural markets.

Business:  GCPL, one of the top FMCG players in the country, has a wide presence in the personal and household care products. Founded in 1897, the Godrej Group has several subsidiaries in India and internationally.

GCPL manufactures and markets personal care products such as soaps, hair colours, liquid detergents and other toiletries. It offers household insecticides, sanitary napkins, baby diapers and hair product accessories.

The company has several manufacturing units in India and has acquired companies internationally in UK, South Africa and Middle East. These acquisitions have given GCPL access to strong brands, wider portfolio and markets in Europe, Australia, Canada and Africa.

GCPL is the second largest player in the toilet-soap category with a market share of around 10%. Its well-known brands include Cinthol, Fair Glow and Godrej No. 1. GCPL is a market leader in hair colour segment with a market share of 35%.  

Soaps contributed around 40% to its consolidated Q2 FY10 revenues, hair colour 15%, toiletries around 20% while insecticides and other household products formed 25%.

Investment rationale: GCPL continues to grow at a much healthier pace in both soap and hair colour segments than the overall market growth. Its soaps business witnessed a growth of 28% against the industry average of 12%, while hair colour segment grew at 47.5% as against 19.6% industry average growth.

GCPL has been focusing on increasing penetration in smaller towns and rural areas. It has increased its distribution channel significantly by 10-18% over the last two quarters and plans to expand into newer areas.

GCPL’s increased rural thrust along with rising income levels in rural areas and shift in lifestyles there would benefit GCPL. Though poor monsoon may be a dampener in the short term, GCPL would not see significant drop in volumes due to its “value for money” pricing. GCPL has been focusing on cost efficiency and productivity across the manufacturing processes in order to contain its expenses. It is covered for raw material price increase for 2-3 months and has pricing advantage to pass on slight price hike to consumers.

The company has made several changes in its product composition and has come out with innovative products at different price points, which would ensure interest among the consumers. GCPL’s international business grew by 22% in Q2 FY10. GCPL is aggressively looking at acquisitions to expand its footprint globally as well as to widen its product portfolio. GCPL may be looking at businesses in Asia, Latin America and Africa to reduce its exposure to domestic market alone.

GCPL has a strong balance sheet with sufficient cash and a comfortable debt/equity ratio.

Its management had recently passed resolution to raise around Rs 3,000 crore for acquisitions.

Concerns: There is stiff competition in the FMCG space on account of low entry barriers of technology and capital requirements.

The presence of several multinationals as well as regional players in the FMCG space may lead to a price war thereby impacting the revenue share and profits.

Rise in costs of raw materials like palm oil may hurt profits in coming months. Rising food inflation would mean less spending on non-food items and consumers shifting their buying pattern or brands, thereby affecting revenues.

Valuations: GCPL’s revenues in the coming years would be driven by increasing thrust on rural areas, enhanced product portfolio and likely acquisitions in emerging markets going forward.

GCPL’s revenues are expected to grow at compound annual growth rate of 27% over FY09-FY11E and net profit at CAGR of 42% over the same period.
At current market price of Rs 263.90, GCPL trades at a P/E of 22.61x & 19.31x of its FY10E & FY11E earnings, respectively.

Considering the company’s inorganic growth plans, its strong rural focus, leadership position in its key products and strong fundamentals, GCPL can be looked at current levels from a medium- to long-term perspective.

Disclaimer: The writer does not hold any share in the company