Godrej Consumer Products appears to be a good investment for investors with a three-year horizon. The company has delivered high growth even within the FMCG space, by acquiring new brands, entering new categories and building a robust market overseas.

It has managed 51 per cent compounded annual sales growth over the past three years and a net profit growth of 49 per cent on a consolidated basis. At Rs 565, the stock trades at 32 times the trailing twelve month earnings, just below its average earnings multiple in the past five years. It trades at 26 times estimated earnings for 2012-13.

Acquisitions to the fore

Besides domestic presence in soaps, household insecticides and hair colours, Godrej pursued growth through overseas acquisitions. It also smoothly and quickly integrated these acquisitions, which now contribute 40 per cent of revenues. The acquired companies are mostly in emerging economies of Asia, Africa and Latin America, and are market leaders in their respective geographies.

Further, all acquisitions operate in segments that are a good fit to Godrej's own domestic operations which can help cross-selling of its own products. Godrej is also set to derive cost benefits from integrating acquisitions in the African and Latin American regions.

Global revenues jumped 54 per cent in 2011-12, helped partly by the weakening rupee. Inflow from overseas markets will receive a further boost from additional stake acquisition in Africa's Darling group and Chile's Cosmetica Nacional.

Domestic markets hold

A strong rural and urban presence, and consumers continuing to buy smaller-value, frequent-use FMCGs helped overcome demand pressures. Household insecticides and soaps both grew well ahead of overall market growth.

Godrej achieved strong volume growth along with price rises in soaps. In hair-colours, while growth was below that of the overall market, new products could push sales going forward. Over the years, the product mix has also changed in favour of the higher-margin hair colour and insecticides. Consolidated operating margins improved to 21.6 per cent for 2011-12, against 19.7 per cent the year before. Helping margin improvement was the low-cost inventory in Africa and more judicious adspends.

However, higher input prices and limited room for more cuts in advertising could prevent significant margin improvement in the coming quarters. Godrej's debt-equity ratio stands improved to 0.4 times, the company having received an equity infusion of Rs 685 crore. Repayment of dollar-denominated debt, at $305 million (end-March 2012), is also staggered over the next several quarters, mitigating the effects of a volatile rupee. Consolidated operating profits cover interest payments by a comfortable 16 times.

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