Godrej Consumer Products Ltd’s acquisition of the remaining 51% stake in Godrej Sara Lee Ltd (GSLL) could not have been better timed. As cracks appear in some pockets of the domestic home and personal care market, getting control of a large and fast expanding business will help maintain its growth momentum. All of GSLL’s sales and profits will now be reflected in Godrej Consumer’s accounts, compared with only 49% earlier. The company sells household insecticides and owns popular brands such as Hit and Good Knight.
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Godrej Consumer had acquired a 49% stake in GSLL from a group company in June 2009. Subsequently, its financials reflected its share of sales and profits in fiscal 2010. In the March 2010 quarter, Godrej Consumer’s consolidated sales rose by 48%, but excluding GSLL’s share (which was not present in the year-ago March quarter), growth was lower at 6%. The base effect would have ended after the current quarter. But with the acquisition of the remaining 51% stake, Godrej Consumer’s sales and profit will get a leg-up for another four quarters. Of course, stripped of the benefit of the acquisition, growth would look less impressive, just as in the March quarter.
The acquisition, which will cost Godrej Consumer €185 million (Rs1,054.5 crore), will considerably improve its earnings profile. A large part of the parent company’s revenue comes from the mass segment of toilet soaps, where competitive pressure has increased lately. In this backdrop, getting a larger share of revenue from the household insecticides segment will be a boost.
Graphic: Yogesh Kumar/Mint
The company has valued GSLL at about Rs2,100 crore, or twice sales and 15 times net profit. That is very reasonable considering the company’s fiscal 2010 sales and profit growth of 20% and 30%, respectively. Funding shouldn’t be an issue since Godrej Consumer already has shareholder approval to use up to Rs300 crore from its rights issue proceeds and to borrow up to Rs850 crore to fund the acquisition.
Godrej Consumer has also acquired the Nigerian cosmetic brand Tura and the Megasari business in Indonesia in recent months. All three acquisitions will lift its sales growth in fiscal 2011. Its share price rose by 14% to Rs339 on news of the Sara Lee acquisition.
That is surprising to some extent because the acquisition has been anticipated for a long time. The removal of uncertainty on the deal completion could be one reason for the optimism and so could be the acquisition price.
Godrej Consumer’s stock price had also been falling from Rs315 levels since 6 May, which could be another explanation for the rebound.
Assuming GSLL’s sales grow by 15% in fiscal 2011, the acquisition will add about 20% more to Godrej Consumer’s sales (assuming the contribution is for three quarters).
The Megasari acquisition will add another 25%. The accretion to its earnings per share depends on equity dilution, the debt-to-equity mix for funding its acquisitions and the cost of debt.
In a year of uncertainty on the growth front for the domestic home and personal care markets, Godrej Consumer’s relatively faster growth trajectory has evidently got investors excited.
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