How complete gets Godrej after buying out Raymond's? Whiff of scepticism in the air

Tough category

Though Godrej Consumer expects the acquisition to be EPS (earnings per share) neutral by FY24-25, Pawaskar believes it might take longer given the intense competition. In India, Fogg, Axe, Nivea, Engage, Park Avenue, and Wildstone are some of the big brands in the deodorant segment. Axe belongs to Hindustan Unilever and Engage to ITC, which have the financial muscle to run high-decibel campaigns.

The market size for deodorants is Rs 5,000 crore, said the GCPL management in an analyst call, adding that the category is underpenetrated (~20 percent in urban markets). This is because in India, deodorants are often viewed as a luxury item rather than a necessity.

Also Read: We didn't overpay for Raymond's FMCG business: GCPL vows to level off margins

But not everyone shares that view. “Deodorants are now becoming more and more of a commoditised category. Fogg dominates the non-gas category. High contribution of modern trade means perpetual 2+1 offers running as EDLP pricing,” replied Nishchay Bahl on a Twitter thread. EDLP in marketing jargon expands to ‘Every day, Low pricing.’

Interestingly, Bahl is the Chief Business Officer at Good Glamm Group, which was earlier in talks to acquire Raymond’s consumer care business.

Aggressive pricing is not the only factor. The average MRP of a deodorant can is around Rs 200-220, whereas the NSP (net selling price), which is adjusted for discounts, is Rs 120-130, implying that trade channels have a strong say in what gets pushed.

For Raymond Consumer, with an annual turnover of Rs 622 crore in FY22-23, about 60 percent of sales came from deodorants. Godrej expects this business to grow by ~10 percent-plus year-on-year.

That optimism aside, some analysts even questioned the rationale for multiple deodorant brands. “Why the need for the Park Avenue brand when GCPL’s own Cinthol brand is rather under-utilised at present,” asks JM Financial’s Richard Liu and Mehul Desai. Cinthol itself has pretty strong brand-equity, they believe.

Plus, they also see a risk in Godrej Consumer sharing the Park Avenue FMCG trademark with Raymond’s apparel trademark. “This could have its own repercussions in the event of any adverse development in the other entity.”

Distribution play

Even the sexual wellness category has aggressive competitors like Mankind and Reckitt Benckiser. Still, the total addressable market for commercial condoms, at Rs 1,200 crore, has a huge runway, believe analysts. With Kamasutra among the top three condom brands in the country, GCPL’s focus will be on premiumisation.

Also Read: Godrej Consumer’s price tag for Raymond’s FMCG brands leaves little room for error

That said, both condoms and deodorants have single-digit operating margins. Godrej Consumer, on the other hand, has an 18-20 percent operating margin. The management’s aim is to scale up the margins of the former to the levels of the latter by FY24-25, thus making the deal EPS neutral.

GCPL plans to leverage its general trade and alternative channels to expand distribution. “Our direct distribution is 4X that of Raymond Consumer Care. So, the products will reach farther and wider,” said Managing Director and CEO Sudhir Sitapati after the acquisition.

How soon the scale-up plays out remains a key monitorable. With challenges ahead, the Street views the acquisition as expensive at a 3.75X EV/sales ratio.

“Coupled with higher interest costs and initial investments required to integrate RCCL’s business, overall EPS would see a dilution of 4 percent/2 percent for FY24E / FY25E,” feels Nuvama Institutional Equities. Meanwhile, Motilal Oswal Securities has cut GCPL's EPS by 3 percent for FY24, and sees no material change for FY25.

The ‘buy’ rating on the stock remains intact, largely on the back of its air freshener and home insecticides business. Godrej Consumer's Indonesia business is also expected to turn around in FY23-24.

As per Trendlyne, the consensus target on the stock is Rs 1,020, which represents an upside of 12 percent from the last traded price.

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