Home / Markets / Mark To Market /  As Godrej family returns to CEO office at GCPL, investors frown

If shareholder returns are an indication, the Godrej family’s decision to relinquish the chief executive’s office at Godrej Consumer Products Ltd in April 2009 has paid rich dividends. Since then, the stock has risen 15 times, compared to the 5.8 times increase in the Nifty FMCG index.

Things are now coming back full circle. On Tuesday evening, the company said Vivek Gambhir has resigned as the managing director and CEO. His place will be taken by Nisaba Godrej, the company’s executive chairperson.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

Investors evidently didn’t like the move. Shares of Godrej Consumer Products Ltd (GCPL) fell 4% on Wednesday, making it the biggest loser in the Nifty FMCG index. “There is always a worry for investors when promoter-led companies also occupy the CEO’s office, as it leads to concentration of power," said an analyst with a domestic brokerage, requesting anonymity.

According to another analyst, the market is willing to give higher valuation multiples to companies that are run by outside professionals.

Nisaba is the daughter of Adi Godrej, chairman emeritus of GCPL. Of course, it’s important to note here that Ms. Godrej was already in an executive role at the firm, and has prior experience of leading it.

Still, studies show that separation of ownership and management helps companies in capital allocation and to attract better valuations.

Analysts point out that Gambhir did leave an impressive track record and at the moment one will have to watch how Godrej would perform. He was appointed as the managing director on 1 July 2013.

GCPL’s consolidated revenue has grown from 7,602.41 crore in FY14 to 9,910.8 crore in FY20. Profits though have grown faster. During the same period, net profit nearly doubled from 760 crore to 1,496 crore.

For investors, financial performance will be paramount. Unfortunately, the change in management comes at a tough time, given the covid-19 pandemic. For the March quarter, GCPL’s India business volume had declined as much as 15%. Even so, GCPL’s commentary on April growth was encouraging. Still, the road ahead will be rocky as one cannot be certain about demand recovery due to covid.

“Despite growth in April in India, we continue to build a slight decline in revenue in 1QFY21 as macro remains tough. GCPL may also face volatility in its overseas business, particularly in Africa," Jefferies India Pvt. Ltd analysts wrote in a note on 13 May.

Apart from some of the above factors, GCPL’s valuations have trailed some of its domestic FMCG peers, such as Dabur India Ltd, primarily owing to the nature of its product portfolio. Currently, the stock trades at 42 times FY20 earnings, while Dabur trades at nearly 50 times.

Investors would like to see some meaningful signs of growth recovery before supporting an expansion in valuation multiples.

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