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Godrej-Megasari deal: Our view - Views on News from Equitymaster

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Godrej-Megasari deal: Our view

Apr 13, 2010

Godrej Consumer Products Ltd. (GCPL) recently announced the acquisition of Pt. Megasari Makmur Group and its distributor Pt. Intrasari Raya. The latter is a leading FMCG company in Indonesia. It sells some leading brands in the insecticide, wet tissue and air freshener spaces. We attended a conference call with GCPL recently to understand the details of the deal. Given hereunder are the conference call extracts. Market profile: Megasari is based in Indonesia. The country has a population of 240 m and an expected GDP growth rate of 5.5% in 2010. The home care market is valued at US$ 980 m. The non-coil insecticide market is valued at US$ 150 m. Modern retail contributes to a larger portion of household care products sales (around 37%) in Indonesia than it does in India. Mom and pop stores contribute 16% of sales. The balance 47% comes from regional distributors.

Product profile: Megasariís brands include Hit (insecticide), Stella and Fogo (air care), Wetties and Mitu kids (wet tissue) and others. The main product of the company is Hit which operates in the non-coil insecticide space. The brand contributes about 50% of the companyís sales. It is the number two brand of insecticide in that country with a 34% share of the market. The insecticide market is growing rapidly in Indonesia. The last three yearsí average annual growth has stood at 24%. Stella and Mitu contribute about 22% of sales while the remaining 28% of sales is contributed by other categories comprising mainly of foods. Megasari is the market leader in the air care and wet tissues segment, with market shares of 45% and 80% respectively. The air care and wet tissue markets out there are growing at an average rate of 45% each.

Financials of the company: Megasari had sales of around US$ 120 m for FY09. Its operating (EBITDA) margins and PAT margins are at the same levels as GCPLís i.e., around 20% and 16% respectively. While sales grew by 20% YoY in FY09, these have grown at an average rate of 25% over the past three years.

What to expect?
The full details of the deal are not disclosed. But it has been announced that the acquisition will be financed using both internal cash and debt. GCPLís management expects to pay off the debt taken for acquisition within 5 years. It will be using Megasariís cash flows for the same. In fact GCPL expects Megasari to add to its earnings from the first year of operation itself.

We believe that this acquisition is positive for GCPL. The penetration of insecticide is about 30-40% in Indonesia. This gives ample space for Megasari to expand. Besides this, GCPL would be able to consolidate the R&D for insecticide as well as enjoy better economies of scale for this segment. Furthermore, it would be able to use Megasariís distribution chain to expand in a new geography. We will soon update our forward estimates for GCPL factoring in this acquisition.

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