'We will be EPS-accretive soon', says GCPL MD & CEO Sudhir Sitapati

Godrej Consumer Products (GCPL) on Thursday announced the acquisition of the consumer products business of Raymond Consumer Care (RCCL), a subsidiary of Raymond, in an all-cash deal of Rs 2,825 crore. After announcing the acquisition, SUDHIR SITAPATI, managing director and chief executive officer, GCPL, in a press conference sheds light on the acquisition. Edited excerpts:

What is the reason behind this acquisition?

We’re constantly building strong capability, especially marketing and market development wherewithal. In terms of portfolio, India is by far the most attractive. We’ve got a large salience for soaps — an otherwise sluggish category.

We would like to increase our total addressable market in the fast-growing categories in India. We felt deodorant and sexual wellness are categories with a long runway for growth and would significantly increase our total addressable market.

Home and personal care categories are areas of relative strength. They are both market-sensitive categories. We have a good understanding of the aerosol business in terms of household insecticides and air fresheners.

This acquisition allows us to complement our business portfolio and growth strategy with the under-penetrated categories.

While both acquisitions give GCPL an entry into two new categories, will you also set up your brands in this space?

This acquisition will open up very large categories for us. Deodorant is already a large category and we will be the No. 2 player. So will premium condoms. 

What is the size of both categories?

The size of the male deodorant category is roughly Rs 4,000 crore. The overall deodorant category is about Rs 5,000-6,000 crore. The commercial latex category is roughly Rs 1,200 crore.

Is this acquisition margin-accretive for GCPL? Which assets will come with this acquisition?

As things stand today, the gross margins of this business are similar to the gross margins of GCPL. But the earnings before interest, tax, depreciation, and amortisation (Ebitda) margins of this business are significantly lower than GCPL’s.

Over time, we anticipate the Ebitda margins of this business to probably beat GCPL’s, given the nature of these categories. In terms of what we’re acquiring, it’s a slump sale. So we’re acquiring all the assets of the company, except the condom factory in Aurangabad. That will continue to be with RCCL and it will supply us condoms from there. 

How will GCPL fund this acquisition?

We’ll make the payment quickly. We are figuring out the cash on our books and the sum to borrow. Over the next few days, we will know what the right balance is.

But it will be an all-cash deal and it will be consummated soon enough. While we have paid Rs 2,725 crore net for the deal, the real value is Rs 2,325 crore as we will have Rs 400 crore lower cash due to slump sale.

Why is the valuation high for this acquisition and what are the margins these two categories can generate?

Once you adjust for tax savings, this is about 3.75x of our sales which, I think, is roughly what the benchmark is. This is lower than a lot of benchmarks in this category. In this category, the business has a high single-digit Ebitda. We can take this quite quickly to our levels of Ebitda, simply because the gross margins are roughly the same.

Logically speaking, both these categories are for the next decade and the two categories are teen-growth ones.

If not in teens, they're in the double digit, which I think would be a very good acquisition if we can match it with our company’s Ebitda and grow this business. Anything above 10 per cent may be considered a good buy. 

Will you rename the brands?

Park Avenue as a male grooming brand and Kama Sutra as a pleasure brand have strong brand equity. The question of renaming them doesn’t arise. 

When do you expect this acquisition to be earnings per share (EPS)-accretive?

It depends a little bit on how fast growth is and where exactly we ended up on growth. We are reasonably confident of the margin expansion on Ebitda because gross margins are the same and the rest of the lines will follow quite fast, depending on whether growth is in double-digits or mid-teens. It will be EPS-accretive quite soon.