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Godrej Consumers: Research meet extracts
Sep 12, 2005

We recently met up with the management of Godrej Consumer Products to obtain a first hand understanding of the overall soap and hair colour market in the country and what are the company’s plan going forward. Here are the key extracts of the meeting.

What is the company’s business?
Godrej Consumer Products Ltd. (GCPL) is one of the most well known FMCG companies in the country with presence in the personal care, hair care and fabric care categories and top-of-the-mind brands such as Cinthol, Fairglow, Godrej No.1 (soaps) and Ezee liquid detergent being a few amongst them. The company bought over the ‘Snuggies’ brand in the child nappy segment in 2003. Soaps and hair colours formed about 83% of the company's revenues in FY05. GCPL’s business is essentially divided into 2 segments – Soaps and Personal Care.

Soaps: Currently, GCPL commands an 8% market share, placing it third on the podium behind HLL (50% share) and Nirma (14%) in the overall soap industry. The soap industry can be divided into 3 categories – premium, popular and sub-popular. The company has a presence in the popular and sub-popular categories, with Cinthol and Fairglow falling in the popular slot while Godrej No.1 coming in the sub-popular category. All of Godrej’s soaps are of Grade–I quality with a TFM (Total Fatty Matter) of around 72%. However, since soaps are categorized on MRP basis, the company’s soaps do not qualify for the premium category.

As far as penetration levels are concerned, the mix for Cinthol would be 60:40, skewed towards urban areas, while the same stood at 70:30 around three years back, which indicates that the company’s reach has increased and it is now tapping ‘B’ and ‘C’ category towns and cities. GCPL’s aim is to improve its market share by about 1% each year. On the new launched side, around 50% of the company’s revenues come from products launched during the past 5 years, which include Fairglow and Godrej No.1. We believe that, those companies that are able to innovate and create space for themselves in this market as the technology to manufacture soap is more or less the same that was used 25 years ago and also it is not very capital intensive, will emerge winner in the future. A classic example of this is Fairglow soap from the company’s stable that has created a market for itself. It must be noted that HLL’s Fair and Lovely followed Fairglow.

Personal Care: in the personal care space, GCPL’s main product is hair colour, where it commands a 40% market share and is the leader. The company has products across all price points barring the high-end premium category, which is dominated by international players like L’Oreal. GCPL has hair dyes and colors in liquid, cream, oil and powder forms. This segment has huge potential to grow as currently penetration is extremely low and is extremely an urban focused item. We expect the hair colour segment to grow faster than soaps and hence, being the market leader, GCPL is slated to benefit from increased offtake.

As far as Ezee woolen wash liquid is concerned, it is mainly a seasonal product with sales mainly coming from Northern and Eastern markets. Currently, revenues from the brand are around Rs 450 m.

Snuggies, a child nappy brand that the company acquired in 2003, currently contributes only Rs 25 m to revenues as the nappy market in India is yet at the infant stage and its size is estimated at around Rs 1 bn.

Tax Structure
The company has its plants located in tax havens like Baddi in Himachal Pradesh and Assam, which offers it a 10 year excise exemption, 100% income tax holiday for the first 5 years and 30% for the next 5, resulting in the company paying taxes at MAT levels. VAT, which is at 12.5%, is lower than average sales tax and hence introduction of the same is a positive for the company. Also, brands will become relatively cheaper in times to come, as smaller players can no longer evade tax, hence narrowing the price differences between products from the larger and smaller players.

What to expect?
At the current price of Rs 440, the stock is trading at a price to multiple of 22.9 times its annualised 1QFY06 earnings and market cap to sales of 3.6 times.

GCPL is set for a sustainable growth in the future and the management expects the soaps segment to grow at a pace of about 5% per annum. However, the management did not mention about any new launch in the near future. As far as soap capacity is concerned, the company has a total installed capacity of 60,000 metric tonnes and is working on an optimum utilization on a 3-shift basis. Liquid detergents and hair colour are predominantly outsourced to third parties.

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