Godrej Consumer has to double Raymond’s consumer business for it to be earnings accretive, say analysts

• GCPL’s MD & CEO Sudhir Sitapati said that the acquisition will turn EPS accretive soon.
  
• Brokerages are concerned that the margins of Raymond Consumer’s business are lower than that of GCPL’s.
  
• GCPL’s distribution reach can help take RCCL’s products to Tier 2 cities, brokerages say.
  

Godrej Consumer Products (GCPL) – known for its portfolio of hair dyes, body washes and home care products like mosquito repellents and more – will enter the prized fast-moving consumer goods (FMCG) categories of men’s grooming once it concludes the acquisition of Raymond’s consumer business.

GCPL managing director and chief executive officer Sudhir Sitapati is confident that the acquisition for which it paid ₹2,725 crore in an all-cash deal, will be EPS (earnings per share) accretive soon. An acquisition is termed EPS accretive if the acquiring firm’s EPS increases after the deal goes through.

The acquisition is done at 4.5 times the expected sales of FY23. “This appears a tad expensive given Raymond Consumer Care (RCCL)’s smaller size and weaker EBITDA margins. RCCL’s business is being sold along with its trademarks of Park Avenue, KS and KamaSutra,” said a research report by Nuvama. The stock of GCPL fell 4.9% on Friday, a day after the announcement.

The earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of Raymond is at 6% in FY22, which is too thin according to brokerages. “Assuming the company is able to quickly scale up operating margin in the business to 17-18% (achievable, in our view), the business would need to double in size for it to be earnings-accretive for GCPL,” says JM Financial.

Low margins but scope for volume growth

While Sitapati did not put an actual date to achieving the EPS accretive target, JM Financial expects it would take three years to reach the target, and would be earnings dilutive for the next couple of years.

“On first-impression basis, we are not able to fully appreciate the need for GCPL to acquire Raymond’s FMCG business. There are cost-synergies to be had for sure, but that is mainly because the overhead structure of the acquired business, as it stands today, is quite inefficient, in our view,” JM Financial said.

Around 80% of RCCL’s business comes from deodorants, which is a heavily competitive business that puts it in direct competition with FMCG majors like Hindustan Unilever and ITC among others. Due to the pressure to promote these products, it will increase its ad spends. As much as 20% of the revenue comes from Kamasutra which is a sexual wellness brand.

But there are synergies that will aid the volume growth in these newly-acquired businesses as well. Park Avenue and Kamasutra both have strong traction in the urban markets but lack distribution reach in Tier 2 cities. GCPL with its wide distribution network can ease this growth.

Moreover, the size of these businesses are large. The size of the male deodorant category is around ₹4,000 crore, while the overall deodorant category is at ₹5,000-6,000 crore. The size of the commercial latex category is ₹1,200 crore, Sitapathi told Business Standard in an interview.

Yet, a few analysts see some clashes in the portfolios of GCPL and RCCL. GCPL’s Cinthol is a legacy brand which has been targeting male grooming for decades now with shaving creams, soaps and deodorant products.

“Why the need for Park Avenue brand when GCPL’s own Cinthol brand is rather underutilised at present. Cinthol itself has a pretty strong brand equity, we believe,” says JM Financial.

Moreover, there are more unanswered questions from the deal. RCCL has presence in the shampoo category too under the brand Beer Shampoo, and minor presence in soaps category as well. It’s yet to be seen how these products will blend into Godrej’s portfolio.