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Godrej Consumer: The right moves

Jan 10, 2002

Godrej Consumer Products Limited (GCPL) has approved a plan to buyback equity shares at a price not exceeding Rs 100 for an aggregate amount not exceeding Rs 93 m. Currently, the stock trades at Rs 56 at a P/E of 8.4x annualised 1HFY02 earnings. GCPL is a major player in the Indian FMCG market with presence in the personal, hair, household and fabric care categories. It has leading brands such as Cinthol, Godrej Fairglow, Godrej No.1, and Shikakai range of soaps, Godrej Fairglow fairness cream, Godrej shaving cream & hair dyes, Colour Soft hair colour, Colour Gloss shampoo and Ezee liquid detergent. With a turnover of Rs 4.7 bn (for the Consumer Products Division of the former Godrej Soaps Limited), the company employs about 850 persons and has three manufacturing facilities at Malanpur (M.P.), Guwahati (Assam) and Silvassa (Dadra & Nagar Haveli.).

Market share
Aug'00 Aug'01
Toilet soaps 5.4% 5.7%
Hair colour 40.1% 43.9%
Liquid detergent 58.0% 68.1%
Shaving cream 11.4% 10.5%
Fairness cream 1.1% 3.4%
Talcum powder 2.1% 1.5%
Source: Godrej financial presentation, ORG Data

The maximum buyback price is at a 79% premium to the existing market price. As such the stock is likely to see a short-term upward movement. Let us suppose, that the company is able to buyback 1 m shares at an average price of Rs 93. This means that GCPL manages to reduce the number of outstanding equity by 1 m shares. Thus, the number of outstanding equity shares of the company would stand at 58.8 m. This will improve the companyís EPS (based on 1HFY02 performance) by 70 basis points to 6.7. Thus the improvement in EPS will not be significant for the valuations to improve. (Please note that this assumption is the most optimistic for shareholders and in all likelihood the Godrej management will be able to buy back more equity at a lesser price, thus further improving its EPS and valuations).

However, if you look from another angle, a buyback price at 79% premium to the existing market price does indicate the confidence of the management in the business. Infact, at Rs 100, the P/E ratio of the company at existing EPS stands at 15x annualised 1HFY02 earnings (almost double the current valuations).

Moreover, the Godrej group looks more focused on its FMCG business than in the past. The management has time and again reiterated that improving shareholder value is one of its primary objectives. Apart from the buyback, the company has already announced Rs 2 per share interim dividend (50% of face value). Not only has it demerged and formed a separate FMCG company (Godrej Consumer), it has also taken steps to improve its fundamentals and shareholder wealth. The company continued its debt restructuring in 2QFY02. It repaid Rs 98 m debt during the quarter. All in all, GCPL's debt has come down by Rs 442 m since April 2001. Its current outstanding debt stands at Rs 253 m. As a result, the company's interest burden has declined by 28% in 2QFY02, as compared to 1QFY02.

Its focus on FMCG has already started showing results. Godrej Colour Soft (liquid hair colour) has become the largest selling hair colour in the country. According to the company release, it has achieved a 31% market share to beat LíOrealís Excellence Hair Colour which has a 29% market share in terms of number of packs sold at all India level. The current hair colour market in India is valued at Rs 400 m and as per Godrej estimates is growing at a buoyant 77% annually.

If this momentum to improve business fundamentals coupled with enhancing shareholder value continues, Godrej Consumer could well be poised to improve its valuations going forward. However, being an FMCG company a rural demand pick up is crucial for providing the necessary impetus to its folio.


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