Godrej Consumer Products: Adding higher growth categories to the portfolio

2 May 2023 , 10:24 AM

Recommendation: Buy

Target Price: Rs 1,035

Raymond has strong positioning in the Deo market with high-teens market share and Park Avenue being the No. 2 brand. There are top-line synergies from distribution and increased brand communication, and margin synergies due to bloated overhead costs. Moreover, the category is nascent, with large headroom for growth and strong brands being acquired. The acquisition will be EPS-dilutive by ~5% for FY24, neutral for FY25.

Categories have headroom for growth

Market size for the category in India is nascent, and per-capita consumption even in emerging markets such as Vietnam and Indonesia is 2.5x/3x that of India. Category has low-teens headroom for growth, for next 20 years. Only 1 out of 5 urban males uses deodorants. Category is not any more competitive and the customer not any more disloyal than other HPC categories. Park Avenue is a strong No. 2 brand with NPS higher than the market leader. Condoms category is fast premiumizing with 21% CAGR growth 2017-22 and Kamasutra is an underleveraged brand.

Top-line, bottom-line synergies

Top-line synergies will come out of increased distribution (GCPL’s is 4x that of target), via increased marketing spends (which are currently quite low at ~5%), and reducing the gap between MRP and net sales (currently 50%) as it gets the scale benefits in the form of lower trade margins. Employee cost and other expenses for the target are nearly 40%, vs 18% for GCPL. There can be significant savings here, once the business is fully integrated (GCPL mentioned EBITDA margins could climb up to mid-20s from current high-single digits in due course; analysts at IIFL Securities agree).

Near-term EPS hit

FY24 sales are likely to remain flat for the acquired business as GCPL prunes tail SKUs and change of hands is happening during peak season. Moreover, margins will remain in single digits as some restructuring costs will need to be factored in. However, FY25 and onwards, double-digit growth with 20%+ margin likely. The acquisition will be funded via debt, which will result in ~5% EPS cut in FY24. However, the acquisition will be EPS-neutral in FY25.