Buy Godrej Consumer; target of Rs 191: IL&FS

Broking house, IL&FS Investsmart is bullish on Godrej Consumer Products and has recommended buy rating on the stock with a target of Rs 191.

IL&FS Investsmart report on Godrej Consumer:

Better pricing power; Attractive valuations

Godrej Consumer Products (GCPL) is one of India’s leading players in the FMCG industry, operating mainly in soap and hair colour segments. During FY06-FY09E, GCPL’s sales and net profits are expected to increase by a CAGR of 24.0% and 24.8% respectively. GCPL’s net sales are estimated at Rs11.38bn in FY08 and Rs13.34bn in FY09 while net profits are estimated at Rs1.88bn and Rs2.36bn respectIvely.The stock is trading at a P/E multiple of 17.5x and 14x based on FY08 and FY09 earnings, respectively. It is one of the best bets in the FMCG sector as it is trading at a FY08E PEG of 0.5. We initiate our coverage on the stock with a ‘Buy’ rating.

Key Investment highlights:

Increasing market share in soaps:

GCPL has increased its market share in the soaps from 6.5% in FY04 to 9.2% in 9MFY07. We expect Godrej No.1 to continue driving the sales of the soaps division. We believe GCPL would be more aggressive in increasing prices, going forward; The division’s revenues are likely to grow at an 19.7% CAGR from FY06 to FY09E.

Hair colours on the growth path:

GCPL’s hair colour division is likely to register a 17.6% CAGR during FY06 and FY09E, supported by the company’s enhanced focus and better pricing power. The growth is likely to driven by the recent increase in product prices and higher growth in cream-based colours.

Synergies from acquisition of Keyline Brands (Keyline) and Rapidol:

GCPL would benefit from the synergies achieved from its acquisitions. Introduction of GCPL products, especially hair colour in the U.K. and S.A. markets, provides great opportunity for the company to drive growth in the international markets.

Valuations:

We expect GCPL to record EPS of Rs8.3 in FY08 and Rs10.4 in FY09. We expect ROCE of 68.8% and ROE of 78.8% in FY08. The stock is currently trading at a P/E multiple of 17.5x and 14x, based on FY08 and FY09 earnings respectively. We initiate a ‘Buy’ recommendation on the stock with a price target of Rs 191, an upside of 31% from the current levels.