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Marico vs. GCPL: Have acquisitions helped? - Views on News from Equitymaster
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  • Jan 13, 2012

    Marico vs. GCPL: Have acquisitions helped?

    In our previous article, we discussed the business models and some financial metrics of the two FMCG companies Marico & Godrej Consumer. In the first round, Godrej Consumer Products with its diversified presence and higher profitability has edged out ahead. We will now study whether the expansion sprees have really helped the companies in tiding over the inflationary environment.

    Sales of the two companies have been boosted by the blistering pace of acquisitions. But GCPL's debt has swelled up 1.3 times higher than its equity component. With around 90% of the outstanding loans of Rs 24.9 bn being foreign currency denominated, the weakening rupee is inflating the financial charges of GCPL. In comparison, Marico has a comfortable liquidity profile with debt forming 70% of equity.

    Rising input costs and higher interest outgo have severely dented the profitability of GCPL. Adjusting for brand amortization charges and excluding extra-ordinary income earned, its margin premium has virtually diminished. Even Marico's profitability has been under cloud due to hardening commodity prices. The company has decided to protect its turf by holding prices and so its margins are likely to be squeezed in the near term.

    Based on Trailing Twelve Months (TTM) earnings, Marico and GCPL are fetching around 30% returns on equity. At current valuations, both stocks are trading over 30 times TTM earnings and are overpriced. Nonetheless, both Marico aided by market leadership and robust growth in all segments & GCPL riding on diversified business and merger synergies hold good potential.

    Dimnished cost advantage of GCPL
    Consolidated financials 1HFY12
      Marico GCPL
    Sales growth (%) 29.4 30.3
    Operating margin (%) 12 13.7
    D/E (times) 0.7 1.3
    Interest/PBIT (%) 12.4 12
    Net margin (%) 8 7.6 ^
    ROE 29.8* 30*
    P/E 31* 34*
    * Based on Trailing Twelve Month earnings
    ^ Excluding the impact of exceptional items

    But GCPL's earning woes extend beyond the waning input cost pressures to higher debt servicing and brand amortization charges; which are not likely to restore its sagged profitability in the near future. Thus, we may not be surprised if the tables turn and GCPL starts lagging Marico in the times to come.



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