Event update: Godrej Consumer Products (Neutral) - Divestment of UK business, higher focus on emerging markets

Event

Godrej consumer products (GCPL) announced that it has divested its entire stake in its UK business, Godrej Consumer Products UK Limited, to JZ International, a leading pan-European PE business based in London.

Key details

• GCPL had inorganically built the UK business, through acquisition of Keyline brands (Touch of Silver, Cuticura) in 2005 and Soft & Gentle in 2013.
• As of FY18, the UK business accounted for 4.6% of consolidated revenues (Rs4.61bn) and 10% of the international business revenues. On the operating front, the business contributed ~3% of consolidated EBITDA (Rs622m) and 8% of international business EBITDA as of FY18.
• As per the agreement, sale of UK business will result in proceeds (adjusting for marginal expenses) of GBP34m (~Rs3.1bn), valuing the transaction at 1.5x FY18 sales. The date of sale will be 31 August which means FY19 will not have seven months of the UK business. Factoring the impact of sale, we have downwards revised our FY19/20/21 earnings estimate by 1%/2%/2%.

Our view

GCPL’s international business journey started in 2005 with a foray into UK, through the acquisition of Keyline brands.We believe the sale of the UK business is a step in right direction considering a)relatively smaller size of the UK business, b) lower rate of growth in the developed markets c)presence in highly competitive and well penetrated hair & personal care categories. Most importantly, the UK business does not fit into the company’s 3 by 3 approach to focus on 3 key geographies (Asia, Africa and Latam) and 3 core categories (home care, hair care and personal care). Further, this improves the company’s bandwidth to focus on core geographies where we believe GCPL has better scale and an overall greater opportunity to drive double digit growth. We remain positive on GCPL’s growth outlook; however, current valuations at 48x/41x FY20E/21E provide limited room for upside. Maintain Neutral.