Godrej Consumer fmcg shares personnal care products

Godrej Consumer Ltd (updated 21 Mar 2010)

While the acquisition of Parkway Holdings will significantly expand Fortis’ healthcare business, valuations are on the higher side

Fortis Healthcare’s acquisition of a 24-per cent stake in the Singaporebased healthcare services provider Parkway Holdings for $685.3 million (Rs 3,118 crore) from the Texas Pacific Group (TPG) gives it a spring board for international expansion. This is the company’s third major deal in the last five years after Escorts Heart Institute and Wockhardt Hospitals.

Funding for the deal shouldn’t be a concern considering that Fortis has shareholder’s approval to raise about Rs 1,200 crore, some cash balances and warrants pending conversion.

With Parkway’s 3,400 beds, Fortis’ bed count will reach 10,000, making it the largest healthcare provider in India and in some South East Asian markets. Notably, Fortis will gain control (TPG was the single largest shareholder) over aprofitable operation.

In CY09, Parkway had profits of $84 million (Rs 382 crore) on sales of $700 million, with operating profit margins of 24 per cent. The Fortis management believes that the Indian operations will benefit from Parkway’s skill sets and technology, in addition to the opportunity of the healthcare tourism market in the region.

While the deal may bear fruit in the long run, it isn’t expected to add meaningfully to Fortis’ bottomline in the near term, given the interest expenses the company will incur on the debt it takes for the acquisition.

Analysts believe that the price paid (14 per cent higher than Parkway’s closing price on March 11) was on the higher side. A Citi report says that the deal, which values Parkway at $2.8 billion, works out to an expensive 23 times and 21 times CY10 and CY11 EV/Ebitda estimates, respectively. Though the two markets are different, Fortis is paying about Rs 3.7 crore a bed (EV/bed), while those of its Indian operations are under Rs 1crore, and a bed in a greenfield facility would have cost about Rs 75-80 lakh a bed.

While analysts say that Fortis could be a good longterm bet, it is currently expensive (at Rs 181) and trades at a much higher premium than its nearest competitor, Apollo Healthcare.
Source - Business Standard

Godrej Consumer Ltd (updated - 07 April 2010)
Godrej Consumer Products (GCPL) has acquired Indonesiabased PT Megasari Makmur Group for an undisclosed amount. However, according to reports, the acquisition cost is pegged between Rs 1,000 crore and 1,200 crore.

Megasari manufactures and distributes household products in Indonesia with a strong presence in insecticides, air freshener, wet tissues and baby wipes segments with revenues of $120 million in 2009. Its earnings before interest tax depreciation and amortisation (Ebitda) has grown 53 per cent CAGR (compounded annual growth rate) over the last three years and operating margins are about 20 per cent, comparable to GCPL, according to the management.

The acquisition is in line with GCPL’s strategy to expand to other emerging markets in Asia, Africa and Latin America. The focus is on three core segments — haircare, home care (including insecticides) and personal wash. The deal provides an entry point to other South East Asian countries like Malaysia.

The Indonesian household products market is estimated at $980 million with insecticides (projected by GCPL as a key segment) acccounting for about 33 per cent of the market and is the fourth-largest emerging market globally. Megasari is the second-largest player in the insecticide market with a market share of about 35 per cent.

Godrej plans to fund the acquisition through a combination of low-cost offshore debt and cash. It would be able to pay off debt using Megasari’s own cash flows. The management projects the deal to be earnings per share accretive from the first year itself. Consolidated debtequity ratio was a comfortable 0.3x as of March 2009 and the board has already approved raising up to Rs 3,000 crore to fund acquisitions. The management indicated that it continued to consider other acquisitions and will raise equity funding through the QIP route should the debt to equity cross 1:1.The stock settled 1.3 per cent higher over its previous day’s close at Rs 281 and trades at a P/E of 22.4x to consensus analyst FY11 EPS estimates.
Source - Business Standard

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Godrej Consumer Ltd (updated - 25 May 2010)
The recent acquisition of Argentina-based Issue Group by Godrej Consumer Products Ltd (GCPL) is an extension of its ‘three by three’ strategy — a plan to mark its presence in three continents, Asia, Africa and Latin America, through its three core categories of home care, personal wash and hair care. This comes immediately after it acquired the remaining 51 per cent stake from its joint venture Godrej Sara Lee a fortnight ago. It has also purchased Tura in Africa and Megasari in Indonesia.

The Issue Group has a 22 per cent market share in Argentina by volume and 11.4 per cent share by value and its weighted distribution penetration is about 83 per cent. It will give GCPL the right traction to maintain 20 per cent growth in its international business, with the $200-million Argentina market growing at a 22 per cent rate. Moreover, the Issue Group also operates in neighbouring countries like Brazil and Uruguay.
Synergies for the two companies lie in the fact that both target the lower value haircolour segment. Godrej expects the acquisition to provide a market for its powderbased hair dyes. Its growing market share in the soaps segment is expected to stagnate, as competition intensifies and its base expands.

The deal is valued at about eight times earnings before interest, depreciation and amortisation and is expected to be earnings accretive in the first year of operations. However, the share price slipped 2.16 per cent on Monday to close at Rs 312. The quick concerns in the market place were that of a possible equity dilution. The company is expected to raise around Rs 700 crore through the equity route. It has Rs 300 crore as cash and will also be raising debt to fund these acquisitions. Analysts have valued the Issue acquisition to be around Rs 250 crore. This, along with other acquisitions, is expected to cost the company around Rs 2,800 crore.

Considering the company expects to maintain its equity-raising plans, the equity dilution is expected to be around seven per cent. This, along with increased debt, could have an impact on earnings. They could be a tad lower than the earlier strong earnings estimates, hence a small correction. More clarity on the funding pattern will set the share price back on track, as earnings from overseas integrates with the company and the growth trend remains intact.
source - business standard

Godrej Consumer Products Ltd (GCPL) (updated - 25 Dec 2010)
Though declining sales in soaps business was a major contributor for the disappointing standalone performance in the September quarter, analysts expect a bounce back in the second half of 2010-2011 due to price rise (about 3 per cent), last year’s lower base and lower food inflation going forward. However, the impact of higher palm oil prices, a key raw material in soaps, on profitability is to be monitored.

More, analysts believe investors should not worry too much about the relatively muted growth expected in soaps as the industry is more mature with high penetration levels. Its contribution in Godrej Consumer Products (GCPL’s) consolidated revenues is expected to decline over the next few years from the current 22 per cent.

Meanwhile, the company is doing well in relatively less competitive hair colours (13 per cent of overall sales) and home insecticides (30 per cent); thanks to its market leadership. Revenues of both the businesses grew by 21 per cent and 38 per cent, respectively in the second quarter with stable operating profit margins.

The company derives over 40 per cent of its domestic revenues from rural markets, which can grow faster as penetration increases. The fear about competition from global players in hair colours is overdone as they are mostly in the premium category, is just 10 per cent of the overall market.

Analysts feel the change in GCPL’s business model from being a predominantly soaps to a multi-product company with presence in several geographies will yield results over the long term. However, there are concerns of integration, currency fluctuations and relatively high debt compared with other FMCG players.

While GCPL is doing well in Indonesia, the growth of its businesses in Africa, South America and the UK (accounting for 16 per cent of consolidated revenues) has not been encouraging. With a positive outlook in most business segments, the GCPL stock trades at a reasonable valuation of 22 times 2010-2011 average estimated earnings. On Friday, the stock jumped about 5 per cent.

The outlook is positive for all its business segments
source - Business Standard