Why are investors so upbeat about Godrej Consumer’s new CEO?2 min read . Updated: 13 May 2021, 12:49 AM IST
- Godrej Consumer shares rose over 21% on Wednesday on announcement of new leadership
Napolean Bonaparte said, “A leader is a dealer in hope." Investors and traders dealing in the shares of Godrej Consumer Products Ltd have been infused with much hope, thanks to a change in leadership.
The company has appointed Sudhir Sitapati as managing director and chief executive officer for five years effective 18 October. Investors are thrilled about Sitapati’s rich experience of more than two decades at industry leader Hindustan Unilever Ltd, where his last role was as executive director overseeing the foods and refreshment business.
Godrej Consumer shares have risen over 21% since the announcement. This is in sharp contrast to a leadership change announced by the firm in June 2020, when Nisaba Godrej, part of the promoter group, took over as managing director. Godrej Consumer shares had fallen 8% in just three trading sessions at the time. When a promoter group also occupies the CEO’s office, investors worry about too much concentration of power.
Sitapati’s appointment, therefore, comes as a relief. What’s more, there have been a number of instances in the FMCG industry where management changes have reversed the fortunes of some firms. “While there are a lot of unknowns, the history of CEO changes at Britannia Industries, Jubilant Foodworks, Hindustan Unilever and Dabur India suggest that a new leader could bring about a paradigm shift, driving significant shareholder value. Godrej Consumer has underperformed most peers in the past few years, which may change as the new leader brings in a new strategy that may entail some hard decisions," analysts from Jefferies India Pvt. Ltd said in a report on 11 May.
According to data collated by the broker, the firm’s revenues grew at an annual average rate of merely 2% between fiscal 2017 and fiscal 2020, far lower than the 6-8% growth of other domestic consumer goods firms.
Analysts at Motilal Oswal Financial Services Ltd went so far as to upgrade the stock to a ‘buy’ rating, after having a ‘neutral’ rating for over a decade. “If Mr Sitapati is able to strongly grow the domestic business and usher in better capital allocation, the impact on Godrej Consumer’s prospects can be immense," analysts at Motilal Oswal said in a 12 May note to clients.
As pointed earlier, the new development marks a separation from the firm being a promoter-run company, to being led by a professional. Studies show that a separation of ownership and management helps firms in improving capital allocation and hence attract better valuations.
The company said that Nisaba Godrej, the company’s current chairperson and managing director, will continue to serve as executive chairperson. Nisaba is the daughter of Adi Godrej, chairman emeritus of Godrej Consumer. To be sure, Godrej Consumer has underperformed peers on revenue and profit growth for the past few years now, even before the promoter group stepped into the managing director’s chair last year.
Even as the Nifty FMCG index has risen by 20% in the past three years, Godrej Consumer’s stock had been flat in the same period, before the new CEO announcement.
Wednesday’s jump in the stock has naturally boosted valuations. Godrej Consumer now trades at roughly 47 times estimated FY22 earnings, based on data from Bloomberg, which is more or less in line with other domestic consumer goods stocks. Ahead of the announcement, the company’s valuations trailed those of Britannia, Marico and Dabur by a large margin.
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