Are mid-sized FMCG companies growing too fast? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Are mid-sized FMCG companies growing too fast?

Apr 13, 2012

During the past five years, the FMCG sector has grown at an average rate of 11%.

Mid-sized companies, Godrej Consumer Products Ltd (GCPL) and Marico have grown at a robust pace clocking average sales growth of 38% and 22%, respectively in the same period. This rapid expansion has come in-organically via a strategy of overseas and domestic acquisitions. But this scorching pace of growth had stretched the balance sheets of the two companies. GCPL's debt swelled up 1.3 times its equity for the quarter ended September 2011. In response to this rising debt, in January 2012, the company sold 4.9% stake to private equity fund, Temasek, for Rs 6.8 bn. The funds will be utilized by GCPL for its latest acquisition of Chile-based Cosmetica Nacional and, importantly, to reduce its debt-to-equity ratio below one.

In February 2012, Marico acquired the personal care business of Paras Pharmaceuticals for an undisclosed sum. With a debt-to-equity ratio of 0.7, Marico is comfortably placed to fund its acquisition at the lower band of valuation. But at the upper band the company's debt equity ratio is likely to stretch above one. To keep its debt levels manageable, the company is in the process of offloading 4.6% stake to two private investors, Indivest and Baring India Private Equity Fund for a consideration of Rs 5 bn. The funds will be used by the company to finance its Paras acquisition.

So, after preferential allotment of shares, both Godrej Consumer Products Limited (GCPL) and Marico will revert to a comfortable debt profile, albeit with a diluted promoter holding.


Is equity dilution- an effective tool for companies to raise funds for their unbridled acquisition spree?

Well, this appears to be good strategy, as long as the promoters do not lose controlling stake in their business. In the case of allotment of preferential shares by GCPL, the institutional investor will not get any board rights. And, both companies will retain a majority share holding.

Moreover, the FMCG industry is growing at a phenomenal pace on the back of surging consumer demand for premium and value-added products. As companies scramble to launch innovative products to grab a greater share of the expanding consumer pie, those that acquire established brands are likely to be on a fast track.

Brownfield expansions have enabled both GCPL and Marico to diversify their revenue models. In fact, GCPL, which has made 10 acquisitions so far, now derives 40% of its revenues from overseas markets. Marico derives 22% revenues from international markets.

The funds raised by the companies through stake sale will ensure that they do not pile up huge debt. Thus as raw material inflation continues to remain high; margins of the companies will at least remain insulated from higher financing charges.

Now it remains to be seen how GCPL & Marico assimilate the acquired brands with their product basket, and if they are really in a position to derive greater mileage out of them.

In our next article, we shall analyse whether the inorganic expansion by GCPL and Marico has added to the shareholder's wealth or not.

Madhu Gupta

Madhu Gupta (Research Analyst), ValuePro has a post graduate degree in both physics and finance. Having worked with India's leading economic research agency, she has a natural flair for numbers and analytics. She brings with her a near-decade long rich experience in the field of finance. A firm believer of the principles of value investing, she looks for robust businesses with durable competitive advantages.

Equitymaster requests your view! Post a comment on "Are mid-sized FMCG companies growing too fast?". Click here!

  

More Views on News

The Top 6 Artificial Intelligence Plays in India (Views On News)

Dec 6, 2021

Investors looking to tap into AI theme need to keep an eye on tech firm leveraging the power of AI are making things possible.

6 Penny Stocks that Rallied 1,000%+ in One Year (Views On News)

Dec 6, 2021

These penny stocks shed their penny status by surging 1,000% or more in the last one year.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

How to Prepare for a Stockmarket Pandemic in 2022 podcast (Views On News)

Dec 6, 2021

The transition from a small correction to a market crash to a bear market may be without any warning.

SEBI Issues Operating Norms For Silver ETFs. Here is All You Should Know (Outside View)

Dec 6, 2021

SEBI has issued operating norms for Silver ETFs to ensure uniformity of the schemes.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Dec 6, 2021 03:36 PM

MARKET STATS