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Motilal Oswal - MOST Value Dec 2005

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Profit From Profitable PSUs

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Sharekhan - Godrej Consumer

Godrej Consumer Products
Cluster: Apple Green
Recommendation: Buy
Price target: Rs674
Current market price: Rs506

Rich lather and colour

Key points

• Godrej Consumer Products Ltd (GCPL) is a play on the expected consumption boom in India. A huge migration of households towards the above Rs90,000 annual income category and the rising proportion of middle-income families will translate into a strong demand for products like soaps, hair colour and toiletries. With its dominant position, GCPL is one of the best plays on the consumption boom in India.
• The gains in the market share in the soap segment through the consolidation of brands (Godrej No 1) and the launch of new products will see robust growth. Although the soap market is expected to grow in a single-digit number, we expect GCPL to grow at a compounded annual growth rate (CAGR) of 15% in FY2005-08 on the back of its prudent strategy.
• The hair dye market is expected to grow at 16% and the cream colour segment to grow at 25% annually (average growth in the hair colour segment at 19%). With a 30% market share, a quality products basket and an unexplored market, GCPL should post robust growth (around 19% CAGR in FY2005-08) and reap handsome gains.
• Cash flows are expected to grow at a CAGR of 22% in the FY2005-08 period; the same will be deployed in purchasing growth (shift from the earlier stance) through augmenting capacities and inorganic growth aspirations (attractive acquisitions like Keyline Brands Limited will be a positive surprise).
• GCPL should command premium valuation considering its inorganic growth triggers and shareholder value maximising strategy. We have valued the company at 20x its FY2008E consolidated earnings and recommend a BUY with a price target of Rs674, an upside of 33.2% from the current price.