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  • Godrej Consumer Products divests 100% stake in UK business: Things to know

    Publish Date: September 04, 2018

    On 31 August, Godrej Consumer Products Ltd (GCPL) announced its decision to exit its business in the United Kingdom (UK). The company will be selling its entire stake to JZ International, a pan-European private investment bank based in London, for GBP 34 million (Rs 310 crore).

    The UK subsidiary’s contribution to GCPL’s overall revenues had been heading south over the past decade. It stood at a mere 4.7% last year. GCPL justified the sale by saying it wants to optimise its portfolio as a long-term strategy and concentrate on emerging markets.

    Low valuation

    At Kotak Institutional Equities (KIE), we feel GCPL’s sale of the UK business gels with the company’s strategy to focus on emerging markets. What we did not expect was the low valuation of the deal.

    Curious case of India multiples to non-India earnings

    We also failed to understand the application of ‘India’ multiples to ‘non-India’ earnings. After all, almost 40% of GCPL’s EBITDA (earnings before interest, taxes, depreciation, and amortisation) is non-India. GCPL’s earnings have the lowest ‘India’ component in the sector.

    The divestment of stake in its UK business has happened at multiples way lower than GCPL’s consolidated multiples. Sector multiples in GCPL’s international markets like Asia, Africa, and Latin America are generally lower than in India, we felt.

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    How good was the UK business?

    Godrej Consumer Products (UK) had brands like Cuticura, Touch of Silver, and Soft & Gentle in its portfolio. Cuticura still has high brand recall in India. But GCPL failed to leverage its potential in India owing to license issues.

    At KIE, we found that the subsidiary clocked revenues, EBITDA, and PAT of GBP 53.9 million (Rs 4.61 bn), GBP 7.1 mn (Rs 607 mn), and GBP 4.6 mn (Rs 390 mn) in FY2017-18, respectively. Revenues and EBITDA grew at 15% and 23% CAGR (compounded annual growth rate) in the past seven years (FY2011-18) in rupee terms.

    Renewed strategic focus

    The UK business, which GCPL acquired in 2005, was a drag on the company. It accounted for 4.7% of revenues, 2.9% of EBITDA, and 2.7% of net profit during the financial year 2017-18. About 10 years back, the UK business was far better, contributing almost 15% of GCPL’s revenues.

    GCPL said that the company’s long-term objective of optimising the portfolio led to the sale of the UK business. Following the sale, GCPL would have better capital allocation choice in its focus markets of Asia, Africa and Latin America. It would be looking at three core categories (home care, hair care, and personal care) in the fast-moving consumer goods (FMCG) space.

    The divestment also marks GCPL’s exit from the only developed market apart from the US. This may help the company to maintain a strategic focus on the stated geographies.

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    Dilution of EPS

    The low valuation of the deal has made the GCPL stock marginally earnings dilutive. A 6% post-tax yield on the deal value of Rs 3.1 billion would generate Rs 187 million at the net profit level. Moreover, the loss in profit after tax (PAT) owing to the UK business divestment would be close to Rs 500–550 million, according to our calculations. The PAT dilution is expected to be Rs 310-360 million (at the current GBP/INR rate) or 1.6–1.9% of our estimates for 2020. We expect the impact will lower GCPL’s PAT for 2019 too.

    Conclusion

    GCPL’s divestment of its UK business is a sound decision to realign the company’s focus areas. It will augur well for the FMCG company that has now trained its guns on the emerging markets of Africa, Asia, and Latin America. What came as a shocker was the low valuation of the deal. GCPL could have easily pursued a better valuation for its UK business, considering it had some key brands in its portfolio.

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