Godrej Consumer Products Ltd’s (GCPL) share price has fallen by about 6% since 1 October, much more than its peers, who have collectively shed a little over 1%. Take a longer time frame, and GCPL’s share has risen by 13%, while its peers have risen by 14% since 1 July. Investors must be missing the outperformance they had got accustomed to in previous years.
Last week, GCPL put out a strategy update, reiterating its plan to become a global player in emerging markets, and exploit synergies across geographies and portfolios. In the near term, a key concern is its debt burden. As of 30 September, GCPL had debt of Rs2,535 crore, against Rs37 crore as of end-fiscal 2010, and Rs278 crore in the year before. It had to take on debt to pay for overseas acquisitions such as Indonesia’s Megasari Group and Nigerian brand Tura, and to acquire the balance stake in Godrej Home Products Ltd.
In the first half of fiscal 2011, its interest outgo was Rs19.4 crore against Rs6.4 crore in the year-ago period. Though interest costs have tripled, the acquisitions have added to both revenue and profit, so interest is eating away only about 6% of GCPL’s profit before interest and tax. It intends to pay down this debt using its cash accruals.
GCPL’s domestic business has lost some of its earlier form, which is the next concern. Rising raw material prices, competition and the effect of inflation on demand has affected the consumer, home and personal care segment’s growth. This had affected the soaps business in the first half, but it expects the second half to be better. In the September quarter, GCPL’s sales fell by 3% over the year-ago period, while its net profit rose by 12%. Better growth rates in its soaps business will be viewed as a key positive.
Graphic: Yogesh Kumar / Mint
The stubborn uptrend in inflation could become a bigger worry, though. Demand in lower income segments in urban markets has been affected as a result, and this may continue. Rural markets have been more resilient, but the question is whether the resilience will continue.
Another concern is the effect of rising prices on its costs. Palm oil prices have been steadily rising and packaging costs may increase, too, due to rising prices of crude oil. An inflationary environment, rising interest rates, and high levels of competition will make investors nervous.
GCPL wowed investors with high growth rates, in the past, when market leaders were growing at a snail’s pace. Investors would like to see a repeat. Over a longer period, they would also want to see it successfully integrate its acquisitions, demonstrate scale benefits, attain superior growth by cross-selling products across markets, and become a more profitable firm. Till then, their sights will be trained on its forthcoming quarterly results, for the initial signs that its integration efforts are bearing fruit.