>GODREJ CONSUMER PRODUCTS

Recommendation: Buy
Price target: Rs497
Current market price: Rs418

Price target revised to Rs497

Key points

• Q3FY2012 results-a blockbuster performance: For Q3FY2012 Godrej Consumer Products Ltd (GCPL) has reported a blockbuster performance with a sequential improvement of 214 basis points in the operating profit margins (OPMs) and a 50% growth in the bottom line for the quarter. The consolidated net sales grew by 36% year on year (YoY) to Rs1,344.1 crore (which was ahead of our estimate of Rs1,235.4 crore) during the quarter. This growth was driven by a 20.0% year-on-year (Y-o-Y) increase in the domestic business and a 68.2% Y-o-Y growth in the international business. Though the gross profit margin (GPM) remained almost flat but the OPM improved by 292 basis points YoY to 20.2%, largely on account of a 284-basis-point Y-o-Y decline in the advertisement and promotional spend during the quarter. The operating profit grew by 58.9% YoY to Rs272.1 crore and the adjusted profit after tax (PAT; before minority interest) grew by 54.3% YoY to Rs183.1 crore (which was ahead of our expectation of Rs143.2 crore). The foreign exchange (forex) loss due to the rupee's depreciation stood at Rs5.5 crore (in line with our expectation of Rs5 crore).
• Raising Rs685 crore through preferential allotment: GCPL is planning to raise Rs685 crore by issuing around 1.67 crore equity shares of Re1 each of the company to Baytree Investments (Mauritius) Pte Ltd (an arm of Singapore-based investment firm Temasek) at a premium of Rs409 per equity share. With this preferential allotment the share capital of the company will go up to 34.0 crore from 32.4 crore currently. The funds thus raised will be utilised largely to reduce the debt on books and to fund acquisitions. The management expects the debt/equity ratio to come down to 0.7x by FY2013 from 1.1x at present. 
• To acquire 60% stake in Latin American Cosmetica: GCPL has entered into an agreement to acquire a 60% stake in Cosmetica Nacional (Cosmetica), a leading player in Chile's hair colorant and cosmetic markets. The acquisition is in line with GCPL's 3x3 strategy of enhancing presence in the emerging markets. GCPL is likely to pay close to Rs195 crore for its 60% stake in Cosmetica. The acquisition is valued at 9x its enterprise value (EV)/EBIDTA and 1.8x its sales, which is in line with some of the acquisitions done by GCPL recently. The acquisition will be funded through the mix of low cost foreign currency debt and the money raised from the preferential allotment to Temasek. The management of GCPL expects the acquisition to be earnings accretive from the first year of its consolidation. GCPL is planning to buy the remaining 40% stake in the company over a period of the next three to five years.
• Revision in earnings estimates: We have factored in the higher than expected operating performance of Q3FY2012 in our estimates for FY2012 and FY2013 and this has resulted in an upward revision of 2.8% and 1.3% in the adjusted PAT estimates for the respective fiscals. However, the equity dilution to result from the preferential allotment to Temasek has caused us to reduce the earnings per share (EPS) estimates for FY2012 and FY2013 by 5% each. We have also not incorporated Cosmetica's numbers in our estimates due to the non-availability of the figures of the key balance sheet items. Nevertheless, a back-of-the-envelope calculation shows that the consolidation of Cosmetica would result in an increase of 5-6% in the FY2013 earnings estimate. However, we will wait for the balance sheet details of Cosmetica before revising our earning estimates.
• Outlook and valuation: The integration of the recent acquisitions and the cross pollination strategy would help GCPL to achieve a strong growth in long run. We believe the company is comfortably positioned to achieve a growth of around 20% YoY in the bottom line in the coming years. In addition, the company is focusing on reducing the debt on books to improve the balance sheet at the consolidated level. Hence, we like GCPL in the mid-cap space and maintain our Buy recommendation on the stock. In line with the reduction in the earnings estimates due to the impending equity dilution, our price target for GCPL now stands reduced to Rs497. At the current market price the stock trades at 24.6x its FY2012E EPS of Rs17.0 and 19.4x its FY2013E EPS of Rs21.6.

RISH TRADER