| Summary of Contents STOCK IDEAS Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs185
Current market price: Rs145
The soap opera Key points - Market share expansion in soaps to continue: Godrej Consumer Products Ltd (GCPL)’s product portfolio is dominated by mass-market brands of soaps and hair colorants. With rural demand remaining strong and the ongoing downturn keeping the demand for FMCG products buoyant at the bottom of the pyramid, GCPL’s soap portfolio, which contributes more than half of its annual revenues, will outperform the industry in terms of volume growth. The company will also gain from further downtrading, if any, in the soap category. GCPL, which currently enjoys a market share of 9.9% in the soap category, is targeting a 1% growth in the market share every year for the coming years, which, we believe, is achievable.
- Margin expansion to lead to hefty growth in earnings: In FY2009, GCPL’s OPM had contracted by 471 basis points due to a sharp increase in its raw material cost led mainly by spiraling palm oil prices. As a result of a sharp correction in palm oil prices in H2FY2009, GCPL’s margin is expected to expand substantially in FY2010. We, therefore, expect GCPL’s consolidated OPM to grow by 284 basis points yoy, thereby leading to a hefty growth of 35% yoy in its net profit in FY2010.
- Enough surplus cash to fund inorganic growth: Inorganic growth remains part of GCPL’s core growth strategy. In the past four years the company has acquired companies in the UK and South Africa to expand its overseas operations. As a result, the overseas business now contributes 22% of its total revenues. The strong cash flow generation and the healthy cash on books (~Rs400 crore in March 2009) leave much scope for more inorganic initiatives.
- Valuation and view: Even as the double-digit growth in its volume will drive its top line growth going forward, GCPL’s bottom line growth will far outperform its top line growth driven by the expected healthy expansion in its margins. We, therefore, expect the company’s revenues and profit to grow at a CAGR of 12.5% and of 23.6% respectively over FY2009-11E. Accordingly, we expect GCPL to outperform the industry by far in terms of profit growth. The stock is currently trading at 16x its FY2010E earnings. The valuation is attractive compared with that of its peers considering traction in its profit growth. We, therefore, re-initiate coverage on GCPL with a Buy recommendation and a one-year price target of Rs185 based on 20x its FY2010E earnings.
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