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Godrej Consumer: Conference call extracts

Jun 22, 2010

Recently we attended a conference call with Godrej Consumer Products Limited (GCPL). In this conference, the company discussed its recent acquisitions and the rationale behind them as well as its strategy going forward.

First the score card. Godrej since March this year has acquired five companies, Tura (in Nigeria), Megasari (Indonesia), Issue Group and Argencos (both Argentina). The company also acquired the 51% stake of Sara Lee Corporation in Godrej Sara Lee Limited, making it its100% owned subsidiary. GCPL has rechristened this company as Godrej Household Products Limited (GHPL).As we have discussed Megasari and Godrej Sara Lee previously, we will discuss the remaining acquisitions here:

Tura: Tura, a leading personal product company in Nigeria was established in 1986. The company is on a fast growth track with the sales growing by 62% over FY07 to FY09. In FY09, the company has sales of N 1.6 bn (about Rs 484 m). Its main product category is medicated soap. This contributed 81% of the company’s top line in FY09. The medicated soap is a market leader and has a market share of 12% in medicated soaps. The company has only one manufacturing facility. This is located in Aba in Nigeria. Details of the deal have not been disclosed.

Issue Group: The company, based in Argentina is a market leader in volumes terms in hair colour market. Issue is also the market leader in Peru, Uruguay and Paraguay. It also has a presence in Brazil. In CY09, the company’s revenue was US$ 33 m. However the operating (EBITDA) margins are lower than that of Godrej. While Godrej saw operating margin at 20% in FY10, Issue turned in operating margins of only 14% in CY09. The company derives a substantial portion of its top line from exports. Issue exports to 30 countries and this contributes ¼ of the company’s top line. Other products in the company’s portfolio include shampoo, conditioner, skin care products and mosquito repellents.

Argencos: This company is a midsized company in the hair care business. The biggest brand of the company is Roby which is the market leader in hair spray in Argentina. The company had sales of about Rs 500 m in CY09 and had operating margins of about 14%. Argencos derives 14% of its sales from exports. Other products in the company’s portfolio are shampoos and conditioners.

What we expect:
While it seems that Godrej has been foolhardy in acquiring companies, the company assured us that this was not the case. Godrej had been studying and conducting due diligence on these companies for up to 2 years before it decided to acquire them. A concern for everyone has been how Godrej would be able to integrate these new companies in its fold. For this, Godrej revealed that it has been training managers since the past two years for this very purpose. Godrej wants to retain the current team in all the acquired companies. It will only supplement the operations and the finance divisions with its people from India. This would help integrate all the companies under one umbrella. Furthermore, all companies acquired by Godrej are in the same space as the company. This has give Godrej the opportunity for cross selling across geographies as well as to plug the gaps in its own portfolio. While these acquisitions are believed to be EPS accretive from the first year itself, we believe that there is a large potential for them to grow.

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