Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Godrej Consumer Products Limited (GCPL).

 

The rating continues to reflect the strong business risk profile of GCPL characterised by its diversified revenue profile across geographies (mainly India, Indonesia, Africa, the US, Latin America, and the Middle East) and product segments (home care, personal care and hair care). The company has strong brands with leadership position across various segments in all the countries it operates in. The rating also factors in the robust financial risk profile of GCPL due to sizeable cash accrual, prudent cash policy and strong debt protection metrics.

 

In April 2023, GCPL acquired the fast-moving consumer goods (FMCG) business of Raymond Consumer Care Ltd (RCCL) through a slump sale by paying a consideration of Rs 2,825 crore.  With this acquisition, the entire FMCG product portfolio of RCCL along with brands such as Park Avenue (for FMCG category), Kamasutra, KS and Premium moved to GCPL. Post acquisition, the company has been focusing on rationalisation of stock keeping unit (SKUs), reduction in inventory turnover, cost optimisation and integration of the brands with GCPL’s channels. The acquisition has strengthened GCPL’s market position in the personal care segment as well as enabled it to venture into the sexual wellness segment and is expected to drive growth for the company over the medium term.

 

These strengths are partially offset by the macroeconomic, geopolitical and currency risks in overseas operations, exposure to intense competition and susceptibility of the operating margin to changes in raw material prices.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of GCPL and all its subsidiaries as they are in the same business. The CRISIL Ratings’ adjusted net worth differs on account of amortisation of goodwill and trademark with indefinite useful life over 5-10 years.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Diversified revenue profile:

Revenue is diversified across geographies and product segments. In fiscal 2023, 57% of the revenue was generated from India and 43% from overseas. Africa (along with USA and the Middle East) and Indonesia accounted for 26% and 12%, respectively, of total revenue. Revenue is also distributed across product segments. Personal care and home care accounted for 58% and 39%, respectively, in fiscal 2023. GCPL has a demonstrated track record of acquiring strong local brands and generating synergies by combining operations of the acquired entities to drive scale and profitability.

 

In the first nine months of fiscal 2024, businesses in India grew 9% led mainly by home care segment while the Indonesia business saw 14% growth on the back of volume growths and structural initiatives taken last year. However, business in Africa and Latin America de-grew on year in reported currency terms, due to currency devaluation in countries such as Argentina and Nigeria. The consolidated operating margins stood at 19.7% for the first nine months of fiscal 2024, against 17.4% for the corresponding period in fiscal 2023. In fiscal 2025, revenue growth is likely to be supported by strong brand equity, continued focus on category development initiatives and traction from newly launched products as well as brands acquired during fiscal 2024. The operating margin is likely to improve gradually as the newly acquired brands get integrated into GCPL’s operating channels and targeted synergies get realised.

 

Strong brands with market leadership across segments and geographies:

GCPL has a strong brand portfolio in India and abroad. In India, GCPL is a market leader in the household insecticide, hair colour and air fresheners segments and second largest player in the soaps category. It has a leading market position in all segments it operates in - household insecticides, air fresheners and wet tissues in Indonesia and dry hair extensions (hair braids) and ethnic hair colour segments in Africa. Brands acquired during fiscal 2024, such as Park Avenue (second largest in deodorants) and Kamasutra (among top five players in the sexual wellness category) also hold strong market position in their respective categories. The dominant leadership position across various segments provides pricing power in those segments, helping the company to maintain profitability.

 

Moreover, the company has a strong focus on innovation and simplification, which has led to healthy contribution to the overall growth through new launches over the years. Godrej’s strong brand with differentiated price points will support revenue over the medium term. GCPL has successfully cross pollinated some products across markets and has launched new products in the insecticide, detergent and air fresheners segments in India. The new launches during fiscal 2024 have performed well during the initial phases and are expected to drive growth over the medium term. The ability to successfully launch and scale up revenue from new products across geographies will be a key monitorable.

 

Robust financial risk profile with sizeable cash accrual, prudent cash policy and strong debt protection metrics:

GCPL’s debt protection metrics and capital structure are expected to remain robust, over the medium term, on account of strong cash accruals, despite factoring in regular dividend payouts and capital expenditure (capex), including both organic and inorganic. It was net cash positive as of March 2023 and is expected to turn net cash positive again by the end of fiscal 2024 and remain so over the medium term, despite raising short-term debt to fund the RCCL acquisition during the fiscal. 

 

The company continues to maintain adequate cash and bank balances on its books, which further strengthens the financial risk profile. Cash and equivalents (including liquid investments), as on September 30, 2023 stood at around Rs 2,500 crore.

 

Weaknesses:

Exposure to macroeconomic, geopolitical and currency risks in overseas markets

GCPL has a presence in Asia, Africa and Latin America. These economies may face macroeconomic challenges as seen in the past, which can limit growth in the overseas operations of GCPL. Also, geopolitical events such as change in government and local unrest could also affect operations. This risk in Africa has been mitigated by diversified presence in countries in south, west and east Africa. Currency fluctuations can harm the profitability of overseas operations, which have been volatile over the past few years. Recent devaluation of currency seen in Argentina and Nigeria led to decline in revenues from those countries in reported currency terms during fiscal 2024. CRISIL Ratings will continue to monitor developments in these geographies for any adverse impact on operations.

 

Susceptibility to intense competition and fluctuation in raw material prices

Palm oil and crude derivatives (chemicals) are the major raw materials. Over the past fiscal, a decline in raw material prices helped improve operating profitability. The CRISIL Ratings-adjusted operating margin was 18.3% in fiscal 2023, against 19.6% in fiscal 2022 on account of higher raw material prices. However, it improved during the first nine months of fiscal 2024 to 19.7%, supported by softening of input prices and the company’s category development initiatives to boost demand for its products.

 

Also, the Indian FMCG industry has both organised and unorganised players across various segments and product categories. GPCL continues to face stiff competition from existing as well as new entrants in the segments it operates in. That said, product launches and cross-pollination of products have helped the company maintain its market share and operating profitability.

Liquidity: Strong

GCPL is expected to maintain its net cash position despite acquisition of brands from RCCL and interim dividend payout during fiscal 2024. The company has sizeable capex plans (Rs 600-700 crore annually) to augment manufacturing capacities over the medium term, which are expected to be funded through internal cash accrual. Liquidity is also supported by bank limits of Rs 120-130 crore having minimal utilisation in the 12 months through December 2023. The healthy cash accrual will be driven by steady revenue growth and stable operating margin over the medium term.

 

ESG profile of GCPL

CRISIL Ratings believes that the Environment, Social, and Governance (ESG) profile of GCPL supports its already strong credit risk profile. The FMCG sector has moderate environmental and social impact, driven by its raw material sourcing strategies, waste intensive processes, and its direct impact on the health and wellbeing of customers.

 

GCPL has focused on mitigating its environmental and social risks over the past several years.

 

Key ESG highlights of GCPL:

• GCPL has deployed strategies to reduce the carbon footprint in its production process. The specific greenhouse gas (GHG) emissions reduced by 48% as of March 2023 from the fiscal 2011 baseline and the company intends to achieve Scopes 1 and 2 carbon neutrality and reduce GHG emission intensity by 45% by 2025.
• The share of renewable energy improved to 33% and specific energy consumption (SEC) has reduced by 37% as of March 2023. The company intends to achieve 40% reduction in SEC and 35% renewables in energy mix by 2025.  
• GCPL plans to cover 75% of suppliers in India (by procurement spends) and 50% of those in other geographies under its Sustainable Procurement Policy by 2025. It has already covered 71% of Indian suppliers (by spend volume).
• As a part of Corporate Social Responsibility, the company intends to and is working towards empowering 2,00,000 women in beauty skills across emerging markets globally by fiscal 2026, strengthening public healthcare systems in three states in India and protecting 3 crore people from vector-borne diseases by fiscal 2025.
• The governance structure is characterised by 50% of the board comprising independent directors with presence of a lead independent director, split in chairman and CEO position, investor grievance redressal cell and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. GCPL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the high share of market borrowings in its debt and access to capital markets.

Rating Sensitivity factors

Downward factors

• Significant decline in market share and operating margin, impacting the business risk profile
• Large, debt-funded capex or acquisitions, weakening the financial risk profile
• Interest coverage ratio below 6 times on sustained basis

About the Company

GCPL, part of the Godrej group, was formed in 2001 when the personal care segment of Godrej Soaps Ltd was demerged into a separate entity. GCPL's standalone business includes household insecticides, soaps, hair colourants, air fresheners and liquid detergents. Its manufacturing plants are in Assam, Himachal Pradesh, Jammu and Kashmir, Madhya Pradesh, Meghalaya, Puducherry, Sikkim and Tamil Nadu. Over the past 10 years, GCPL has made several overseas acquisitions to build its presence in key emerging markets outside India, with focus on Asia, Africa and Latin America. It also acquired the FMCG business of RCCL during April 2023, having brands such as Park Avenue (for deodorants), Kamasutra, KS and Premium in a slump sale transaction, to enter underpenetrated product categories of deodorants and sexual wellness.

 

For the first nine months ended December 31, 2023, profit after tax (PAT) was Rs 1,333 crore and total income Rs 10,711 crore, compared with Rs 1,250 crore and Rs 10,116 crore respectively for the corresponding period of the previous fiscal.

Key Financial Indicators^

Particulars	Unit	2023	2022
Operating income	Rs.Crore	13,316	12,277
Profit After Tax (PAT)	Rs.Crore	1,611	1,542
PAT Margin	%	12.1	12.6
Adjusted debt/adjusted networth	Times	0.12	0.23
Adjusted interest coverage	Times	14.9	20.7

^As per analytical adjustments made by CRISIL Ratings

Any other information: Not Applicable