Tuesday, April 6, 2010

Godrej acquires Indonesian company for Rs12.0 bn, 10-14% upside in the GCPL from CMP

Godrej Consumer acquires Indonesian company for Rs12.0 bn, it is both earnings accretive and value accretive

Godrej Consumer Products Ltd (GCPL) on 6th April 6, 2010 announced that it has entered into an agreement to acquire PT. Megasari Makmur Group and its distribution company PT. Intrasari Raya in Indonesia. Megasari Group manufactures and distributes a wide range of household products including household insecticides, wet tissues, baby care products and air fresheners.

About Megasari

The Megasari group is a leading consumer products manufacturing company operating in the household and cleaning product segments of Indonesia. The company has 6 factories and a strong distribution network with presence across 90,000 outlets and 74 regional distributors. The company is one of the leading players in the Insecticide and Air care business. Megasari recorded revenues of USD120 mn or Rs5.4 bn approximately in CY09 with a 20% yoy growth. Its key brands are HIT, Mitu and Stella - these brands contribute approximately 71.8% to the company's total sales.

Impact – Financial

The acquisition value is Rs12.0 bn in all cash deal, hence translating into valuation of 12X EV/Ebidta and 2.2X EV/Sales. We believe that acquisition is attractively priced - leaving tremendous room for value accretion - GCPL itself trades at EV/Ebidta of 21X and EV/Sale of 3.8X on its FY10 estimates. Further, current acquisition adds approximately 25% to FY10E Revenues and Ebidta of the company. Upfront the acquisition is earnings accretive and value accretive for the company. The clear-case arbitrage in valuation of Megasari and GCPL will result in 10-14% upside in the GCPL from CMP to fully-factor the acquisition.

Impact – Structural

Megasari acquisition is in sync with previous acquisitions and broader corporate strategy i.e. becomes an emerging market consumer play in next 5 years. Hence, all previous acquisitions i.e. Rapidol, Kinky, Tura and recent acquisition Megasari is step in the same direction. With Megasari under-fold, GCPL would now get access to Indonesia one amongst four fastest growing consumer markets in Asia. We believe that the Megasari acquisition is both complimentary and synergistic.

Prima facie, we give thumbs-up to the acquisition and upgrade our price target from Rs246/Share to Rs299/Share. We maintain our positive bias on GCPL with 'HOLD' rating and price target of Rs299/Share.

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