After pursuing an acquisition-led strategy for much of the past decade, Godrej Consumer Products Ltd (GCPL), the maker of Cinthol soaps and Hit insecticides, has now paused to take stock of its past investments, said a top executive.
Since 2010, the home, hair and personal care products maker has made about 20 acquisitions, according to Venture Intelligence, a research firm tracking private equity and M&A transactions. The firm now gets close to half its revenue from developing economies of Indonesia, Sub-Saharan Africa and Latin America. This is as per the firms 3×3 strategy that focuses on three verticals in as many geographies. However, Godrej Consumer’s international business has been pulling down Ebitda margins. Ebitda stands for earnings before interest, tax, depreciation and amortization.
In financial year 2018, for example, its India business earned an Ebitda margin of 24.8% but the consolidated margin was lower at 21.3%. Even in the June quarter for 2018-19, the India business earned an Ebitda margin of 21.9% compared with the consolidated level of 18.3%.
“There is a higher scrutiny that we want to place on ourselves before we make any more acquisitions,” said Vivek Gambhir, managing director and chief executive officer, Godrej Consumer, reiterating that the company does not expect any meaningful acquisitions over the next 12-24 months at least.
The promoters, though are not averse to acquisitions. “We will always look at acquisitions and disinvestments,” said Adi Godrej, chairman, Godrej Group. However, this time round, the management will wait till it “earns the right” to make capital demands.
One of the reasons for the lower return on capital is Africa, which accounts for nearly half of its international revenues. The macroeconomic issues in South Africa—such as, currency devaluation, higher fuel inflation, increase in taxes and transporter strikes have impacted the region. To be sure, the sale of its UK consumer business during the July-September 2018 quarter is likely to improve profitability. However, GCPL’s sales growth may get affected since it contributed to only 5% of sales in fiscal 2018.
On the bright side, the Indonesia business, which accounts for close to 30% of the total international business, is rebounding as the company has now tweaked its operating model and also launched new products that are doing well. “The Indonesia business reported 10% growth over the year-ago period in constant currency terms after reporting revenue decline for seven straight quarters,” said Tejashwini Kumari, analyst at brokerage India Infoline Ltd.
Meanwhile in India, the firm has entered into new categories like air purifiers and handwash. It has also forayed into the salon segment with Godrej Professional hair colour. “We will get into a few more categories in the next 6-12 months. In India, it is better to grow organically as we are not finding any interesting brands to acquire,” said Gambhir, who feels it’s easier to build than buy niche brands as they are not likely to cross ₹100 crore in revenues.
This is in contrast to peer Marico Ltd’s strategy. The Parachute and Saffola oils maker plans to grow in the premium space by acquiring 4-5 niche brands and also launching some of its own brands over the next two years. The idea is that even if two of these brands cross ₹100 crore in revenues they would be considered a success, Saugata Gupta, managing director and chief executive officer, Marico had told Mint in August.
Also valuations are steep. “There aren’t many interesting candidates with scale and, second, the size of the deal will have an impact on the return on capital due to high valuations,” said Gambhir.
Source: Mint