Accumulate Godrej Consumer Products - Reliance Securities

Adds Chile to its portfolio and raises cash in Mauritius

Key highlights of the result

- GCPL acquires Cosmetica Nacional, a hair care company in Chile, Argentina: Godrej consumer Products (GCPL) announced, along with its 3QFY2012 results, the acquisition of a controlling 60% stake in the Chile based hair care company, Cosmetica Nacional (CN). The acquisition is expected to be completed by April, 2012. While our preliminary analysis indicates that the acquisition will be EPS accretive by ~4-5% in FY2013E itself (the first year of consolidation), we will wait for at least a quarter more before factoring the same in our numbers.

- Issues preferential shares to Baytree Investments (Mauritius), an indirect wholly owned subsidiary of Temasek: GCPL has accepted a binding offer from Baytree to issue 1.67cr preferential equity shares of Re1 at a premium of Rs409/equity share, for an aggregate issue size of Rs684-Rs685cr. The deal is awaiting shareholder's approval and is expected to come through by the end of FY2012. Our preliminary analysis indicates that the deal is expected to dilute the EPS by ~4-5% for FY2013E. Hence, the net EPS, post the two deals, is expected to remain broadly unchanged.

- Consolidated revenue growth of 36% yoy, with 20% yoy growth in Domestic sales and 30% organic growth in international business: GCPL reported a topline growth of 36% yoy driven by consolidation of the recent acquisitions. However, on a comparable basis, the domestic business registered a strong growth of 20% yoy to Rs779cr, driven by yoy growth of 30%, 31% and 9% in home care, personal wash and hair care categories respectively. The international business registered a strong growth of 20% yoy on a comparable basis with strong sales across all geographies.

- Recurring earnings growth strong at 54% yoy despite high interest and depreciation expenses, aided by increase in other income: GCPL registered strong earnings growth despite incurring interest and depreciation cost pressures and forex loss of ~Rs6cr. Interest expense was higher by 116% yoy on account of large offshore debt, while, the depreciation expense was higher by 41.4% yoy, aided by a trickle-down effect of margin expansion and higher other income (up 176.5% yoy). The OPM expanded a whopping 298bp yoy, primarily aided by substantial savings in advertisement expense of 284bp yoy.

Outlook and Valuation

We maintain our EPS estimates post the results; however, we have increased our revenue estimates to factor in strong revenue traction in both domestic and international geographies. Management has indicated that the Darling acquisition is on track and GCPL has acquired so far 51% stake in Darling. GCPL currently has a debt-to-equity ratio of ~1:1 and post the two deals (mentioned above); the management expects the debt-to-equity ratio to come down to 0.7:1. We maintain our Accumulate view on the stock with a target price of Rs451 indicating a potential upside of ~8% from the current levels.

Risks to the view

- International business revenues are subject to exchange rate fluctuation and political turmoil
- Higher than anticipated cost of debt will impact our earnings estimates.

Source : Equity Bulls

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