Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Are Marico & GCPL wealth creators? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Apr 24, 2012

    Are Marico & GCPL wealth creators?

    In our previous article, we showcased how two mid-sized FMCG companies, Marico and GCPL have been growing at a robust pace clocking average sales growth of 22% and 38%, respectively during the past five years. They owe their growth to the acquisition overdrive, and what is remarkable is that they are still managing to stay afloat. Both of them have recently diluted equity to fund their inorganic growth.

    In this article, we test the efficacy of their brown-field "brand-wagon" expansion strategy for generating shareholder's return.

    Godrej Consumer Products Limited (GCPL) made its first acquisition of 'Keyline Brands' in 2005, whereas Marico acquired its first domestic brand 'Nihar' from HUL in 2006. So let us study the most recent five-year time-frame (FY06-FY11) to find out if, and how much shareholders have benefitted. The best way to test it is to determine the returns earned by shareholders on every additional rupee invested by them. In other words, these stocks should have earned at least a rupee for every one rupee invested 'One-rupee test' to qualify as an investment candidate as per Value Investment guru, Warren Buffet.

    The numbers testify that the brand acquisition strategy has enabled both Marico and GCPL in increasing shareholder's wealth. In fact, for every rupee of equity investment during the period FY06-FY11, Marico and GCPL have created market values of Rs 8.3 and Rs 4.7, respectively and have multiplied shareholder's wealth at least five fold.

    Interestingly however, the table below shows that this performance pales when compared to the magnitude of wealth created in the period prior to the acquisition spree (FY02-FY06). During this period, each rupee of shareholder's funds generated phenomenal returns of Rs 43 and Rs 146 for Marico and GCPL respectively.

    Marico and GCPL pass the 'One Rupee' test
      Increase in networth in Rs m (A) Increase in Market Cap in Rs m (B) Value created for every Re 1 invested (B/A)
    (Rs m) FY02-FY06 FY06-FY11 FY02-FY06 FY06-FY11 FY02-FY06 FY06-FY11
    Marico 640 6542 27449 53942 42.9 8.3
    Godrej Consumer 255 16465 37211 77261 145.9 4.7
    Source: Ace Equity

    A look at the trends clearly shows that shareholders reaped stellar returns on their investments during the initial organic growth phase. These spectacular returns fell considerably in the more recent inorganic growth phase, when the two companies acquired a large number of brands in the domestic and international markets.

    This relative underperformance, also, reflects shareholder's concerns about the future prospects of the acquired overseas brands in a global recession.

    Marico and GCPL have managed to finance their acquisitions without piling on excessive debt. However, they now need to focus on making their acquisitions successful, and on generating much higher returns on additional equity investments made by the shareholders.

    Going forward, it remains to be seen, if these two companies are able to derive greater mileage from the acquired brands, and regain their original status of being high wealth creators.

      Madhu Gupta (Research Analyst), Managing Editor, ResearchPro 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. Madhu contributes towards our small cap service Hidden Treasure.



    Equitymaster requests your view! Post a comment on "Are Marico & GCPL wealth creators?". Click here!

    1 Responses to "Are Marico & GCPL wealth creators?"


    Apr 24, 2012

    Marico has been a fantastic stock! Amazing chart and consistent growth. The valuations look definitely over the top, but there seems to be no let up in value creation also.

    Like (3)
    Equitymaster requests your view! Post a comment on "Are Marico & GCPL wealth creators?". Click here!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms