>GODREJ CONSUMER PRODUCTS: Shopping for growth

We initiate coverage on Godrej Consumer Products (GCPL) with a „BUY‟ rating and a target price of Rs420, an upside of 20%. GCPL has rapidly transformed itself, with inorganic expansion as its single largest driving force. Having consummated five accretive acquisitions in the space of two months, we believe GCPL is on its way to achieve our expected 28% earnings CAGR for FY10-12E. Synergies from the acquired companies, coupled with reduced dependence on the Soaps portfolio and enhanced presence in „high growth-low penetration‟ categories like Household Insecticide, will drive GCPL‟s performance, in our view.

■ Accretive inorganic expansion to drive earnings growth: In the near term, integration of Godrej Household Products (GHPL, erstwhile Godrej Sara Lee) with GCPL can result in savings in distribution as well as overhead costs. Crosspollination of various products across different geographies (e.g. Hair colours in Indonesia, Western Africa) will provide the revenue trigger in the near-tomedium term. According to the management, recent acquisitions are expected to add Rs600m to PAT in FY11e.

■ Dependence on Soaps to come down, Personal care and Household care hold the key: Post the recent acquisitions, including the buy-out of Sara Lee‟s 51% stake in JV, we believe GCPL‟s dependence on Soaps which is a highly competitive and heavily penetrated category, to come down from 51% in FY09 to 25% in FY12e. Consequently, the overall margin profile is likely to improve as we expect GCPL to drive penetration and distribution-led growth in Hair Colours and Household Insecticides.

■ Robust earnings growth to help sustain re-rating: GCPL has undergone significant re-rating in the last twelve months, driven by various accretive acquisitions, beginning with transfer of 49% stake of GSL JV to GCPL in June 2009. We expect GCPL to sustain these valuations on the back of robust 28% expected earnings CAGR for FY10-12E. Any additional accretive acquisition and realisation of higher-than-guided earnings accretion of the concluded acquisitions (guidance of Rs600m for FY11E) can provide upside trigger, in our view. Integration of recent acquisitions remains a key monitorable.

To read the full report: GODREJ CONSUMER PRODUCTS