Week of the 25th January, 2013
Sometime last month, I was talking to a friend of mine who was convinced that FMCG companies are ‘ALWAYS’ a good buy (irrespective of the price). We spoke about Nestle, ITC and HUL amongst others, though I still doubt if ITC should belong to the same genre. At that time, HUL was trading at Price to earnings multiple of a little over 34. A month later and it’s about 29, down over 17%. Nestle tells a similar story. Neither Nestle nor HUL have found a place in any of our reports in the last 1 year. ITC however got chosen consistently and we are still positive on the cigarette giant.
The NSE 50-share Nifty topped the 6000-mark for the first time in two years on Jan 02, 2013. In FY 2012, defensive sectors like FMCG and pharma witnessed an increased investor interest. FMCG companies are considered as defensive bets as investors prefer them during uncertain economic / market conditions as these products and their usage does not reduce in recessionary or high inflationary environments. Investors continued to invest in the consumer goods space, which resulted in extremely high PE multiples in the FMCG sector.
Could investors still find stocks in the FMCG space which are available at a ‘reasonable’ price? Some of the bigger names in the FMCG apace like HUL, ITC, Nestle andGodrej Consumer are all trading at P/E multiples in the range of ~ 35-40. Given the high growth potential of the consumption space in a young country with rising disposable incomes, there is some merit in justifying such high valuations. Indian FMCG sector is the fourth largest sector in the economy growing with a CAGR of 11 % over the last decade led by strong domestic consumption. The sector has a strong MNC presence and is characterised by a well established distribution network, intense competition between the organised and unorganised segments and low operational cost. Availability of key raw materials, cheaper labour costs and presence across the entire value chain gives India a competitive advantage. According to FMCG Summit 2012, “Rising GDP growth over the next decade, will quadruple consumption in the country. This coupled with the demographic dividend (70% Indians will be of working age in 2025), the flexible younger generation becoming major consumers, increasing penetration and rising aspiration means for a great period ahead for the FMCG sector”.
This week we analysed Godrej Consumer Products Limited (“GCPL” or the “Company”) which manufactures a range of personal and household care products. The Company’s 3 X 3 strategy concentrates on three categories (personal wash, hair care and home care) in three emerging geographies (Asia, Africa and Latin America).
The sector has benefitted in the last few years from the rise in disposable income in rural areas, where 70% of the country resides and which accounts for 50 % of the total FMCG market. This represents the huge untapped market potential for the FMCG Companies. Growing Indian population, particularly the middle class and the rural segments, presents an enormous opportunity for large FMCG companies. In India, penetration level as well as per capita consumption in most product categories like skin care, toothpastes, hair wash, shower gels, deodorants etc, is amongst the lowest in the world, which provide ample scope for all the FMCG companies to tap the unsaturated market.
In line with the pattern of growing consumption, GCPL has expanded volumes across all its businesses. The Company has successfully integrated its global supply chain and is concentrating on building centres of excellence, leveraging strategic sourcing and driving cost efficiencies. In addition to this, it has also completed the integration of logistics leading to key synergy benefits and a far more streamlined organization. The Supply chain enhancements have resulted in additional capacity across coils, aerosols and toilet soaps. Further, debottlenecking initiatives combined with the strategic sourcing of raw material and packaging material is also resulting in much improved productivity. Cost competitive advantage due to availability of raw materials and cheap labour costs, supported with advance technology and cooperative manpower of the Company ensures the low cost operations in India which in turns ensures the consistent high margin for GCPL.
In home care segment, the Company enjoys market leadership positions across coils and aerosols. Higher growth is being driven by innovative product launches, continuous brand building and distribution gains resulting from the GCPL-GHPL merger. On the international front, GCPL is the market leader in Air Fresheners and Wet Tissues in Indonesia.
Personal Wash segment contributed 35 % of total business in Q2 FY 2013. The Company positioned itself as a second largest soap player in India with strong market positions in both urban and rural markets and is backed by excellent brand recognition.
In India, GCPL is a leader in the hair colour category and also the world’s largest manufacturer of powder hair color. This segment is currently growing at 14 % supported by the healthy growth in Godrej Expert Powder Hair Colour and Nupur Natural Mehendi.
For the September quarter of 2012, on a consolidated basis GCPL’s Net Sales increased by 35 % to Rs. 1,595 Cr. while Net Profit grew by 25 % to Rs. 168 Cr. The Indian sub-continent net sales grew by 19 % and the International business net sales grew 63 %. The Company also paid a second interim dividend of Rs. 1.00 per equity share for FY 2013. In FY2013, Keyline Brands, a UK-based subsidiary of Godrej Consumer Products Limited has acquired the Soft and Gentle deodorant brand from Colgate-Palmolive for an undisclosed amount. The acquisition is being funded by low-cost debt and the impact on GCPL’s consolidated debt equity ratio is 0.03. In line with its strategic intent to focus on home and personal care, GCPL today announced its intention to sell its Indonesian non-core food business to private equity firm Creador. On the valuation front, at the current market price of Rs. 724.90, the stock is available at a trailing PE multiple of 39.21x which is expensive even considering the Company’s strong growth prospects going forward. That said, GCPL Q3 2013 results are worth keeping an eye on.