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Friday, April 9, 2010

Godrej eyes pole position in emerging markets

Investors were unsure how to react to Godrej Consumer Products Ltd’s (GCPL) Indonesian acquisition. One reason could be the lack of adequate information on the deal size and the target’s profitability. Another could be a concern about GCPL’s plans to grow in emerging markets. The stock was up by around 8% in intraday trading but ended the day up just 1.4%.

The company is acquiring the Megasari group’s $120 million (Rs532.8 crore) consumer products business. The acquisition fits with GCPL’s goal to become a leading household insecticides player in emerging markets. The Indonesian firm’s key categories are in sync with GCPL’s own categories of household insecticides, air fresheners and wipes (diapers and tissues).

GCPL has not disclosed how much it is spending on the acquisition, but reports indicate a size of Rs1,000-1,200 crore. Megasari would have got a good valuation due to good sales growth, fast growing categories and its leadership position in these categories. GCPL has indicated that the acquisition will contribute to earnings in the first year itself. But lack of enough details makes it difficult to comment on this aspect.

Apart from this transaction, GCPL has spelt out a rather ambitious plan for growth. Over the years, GCPL’s acquisitions have seen it enter markets such as South Africa, UK and, more recently, Nigeria, when it acquired the personal care brand Tura. Between now and 2015, it plans to expand its footprint to cover all countries in South America, Africa and Asia. But it will stay focused on household insecticides, soaps, air fresheners and hair care. That is an ambitious target to be achieved in a relatively short period.

Household insecticides and hair care will be priority areas for the firm. It will choose markets where few multinationals control the market, and strong local brands can be acquired by GCPL. Gradually, it plans to use its basket of products to grow the size of the business in these countries and then use its own growing size to derive benefits of scale in procurement and even product development. The concept appears simple and the benefits are quite evident. But the trick lies in execution. It calls for investment in acquisitions and further investments in growing scale, which may have some effect on its consolidated performance in the short term. But that may be a price GCPL may be willing to pay to become a significant consumer company in the global market.

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