The acquisition strategy of Godrej Consumer Products Ltd (GCPL) may appear impulsive to some. During 2005- 08, it bought only three firms, one in the UK and two in South Africa. But in 2010, it bought four, not including the buyout of Sara Lee Corp.’s stake in Godrej Sara Lee Ltd, now renamed Godrej Household Products Ltd (GHPL).
Its recent acquisitions have seen it enter Indonesia, Nigeria and Argentina. While each acquisition may have its financial logic, investors may have some difficulty in getting the big picture, which is probably why GCPL made a presentation and did a conference call with analysts addressing its merger and acquisition strategy.
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GCPL’s domestic consumer business will be the main focus and contribute 60-70% of revenues in the long run, it said. That deals with concerns about why it is looking beyond the Indian market, one in which most multinational firms are trying to grow share.
In domestic markets, soaps, insecticides and hair colour will be its main categories, while it will nurture newer categories such as hand sanitizers and wet wipes. Its growth will be driven by category growth and expanding reach and taking initial positions in nascent categories.
GCPL’s international acquisition strategy has put it on course to become—in the next decade or so—a multinational haircare and household care company with a presence in emerging markets.
Initially, its focus has to drive growth and profitability. Looking ahead, the focus will be to do what all multinationals do well, use scale to benefit in areas such as marketing, procurement and operations. Its ability to cross-sell will be on test as it proposes to launch household insecticides in Africa and hair colours in Indonesia.
GCPL’s strategy on paper looks sound but the big challenge is to make it work, demonstrate sustained growth and better profitability, and show that its buys were a better way of using its surplus than returning cash to shareholders.
GCPL has taken on around $350 million (around Rs1,656 crore) worth of offshore debt for its international acquisitions. It has a qualified institutional placement issue lined up this month to pay off bridge finance taken for the GHPL acquisition.
So far, investors have been supportive of its acquisition strategy and it is important for it to remain that way, so that it can raise funds while ensuring minimal dilution of equity capital. On Monday, while the broad market was down by 2% and the BSE FMCG (fast-moving consumer goods) Index was down by 0.7%, the GCPL stock was up 1.4%.
Graphic by Yogesh Kumar/Mint
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