GCPL: Acquiring growth

Acquisition of UK's Soft & Gentle to help GCPL's subsidiary attain scale and drive synergies in personal care products

The consumer sector is not running out of steam anytime soon. The promise this sector holds is apparent from the steps companies are taking to boost their presence across categories and geographies. Godrej Consumer Products Ltd (GCPL) has opened the year with yet another acquisition. The company has acquired deodorant brand Soft & Gentle from Colgate-Palmolive. It is the fourth largest deodorant brand in the UK. In 2011 (calendar), Soft and Gentle’s sales were at Rs 150 crore. GCPL has acquired this brand through its UK-based subsidiary, Keyline, at an undisclosed price. The management has conveyed that the acquisition has been funded by low-cost debt and the deal will be value earnings accretive from the first year itself. GCPL’s current debt/equity ratio stands at 0.57x and the acquisition would possibly lead to an increase in the ratio by 0.03x.

Analysts believe GCPL has acquired this brand to improve its portfolio of brands and product mix. Keyline, which operates in the household and personal care segment, currently has a number of other brands like Cuticura, Aapri, Inecto and Touch of Silver. According to Nomura, while this is not a game changer for the company as a whole, the acquisition shows the management’s focus on driving profitability higher across all markets. This deal will help GCPL build scale in the UK market, which will eventually help the company hive off the UK business into a separate entity over the medium term. Currently, UK accounts for 11 per cent of GCPL’s overall international revenues.

Other than this, GCPL will also get access to the robust distribution network of Soft & Gentle through this deal, which will help its UK subsidiary, Keyline, push its other brands in the market. Also, given that personal care for women as a category is rather attractive, GCPL will look at numerous brand extensions over a period of time. Analysts say the company is looking at both organic and inorganic growth opportunities to push growth. Though the deodorant category in the UK is largely penetrated, this deal will help the management drive synergies, as personal care is a growing category in India. Sharekhan believes the deal will improve the margin profile of GCPL’s UK business. The brokerage says: “At the current market price, the stock trades at 31.1x its FY2013 (estimated) earnings per share (EPS) of Rs 23.2 and 24.2x its FY2014 EPS of Rs 29.9.”