Rating Rationale

Strengths
* Diversified revenue profile
Revenue is diversified across geographies and product segments. In fiscal 2020, 54% of the revenue was generated from India and 46% from overseas. Africa and Indonesia contributed to 23% and 17%, respectively, of total revenue. Revenue is also distributed across product segments, with Personal wash, hair care and household insecticide contributing 22%, 31% and 28%, respectively, in fiscal 2020. The growth in revenue from overseas operations is driven primarily through acquisitions. The company 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. Consequently, the proportion of revenue from overseas operations has increased from 23% in fiscal 2010 to 46% in fiscal 2020. The operating profitability of overseas operations has grown from 12% in fiscal 2010 to about 16% in fiscal 2020

In the first quarter of fiscal 2021, businesses in India and Indonesia witnessed growth of 5% led by growth in household insecticide segment and strong traction in health and hygiene; however, the Africa business saw weaker sales, given the discretionary nature of products. While the India and Indonesia businesses registered heathy operating margin, the Africa business witnessed sharp decline in margin due to lower economies of scale. In fiscal 2021, revenue growth is likely to be supported by strong brands, focus on health and hygiene and product launches. Operating margin is likely to remain healthy supported by cost optimizations undertaken, strong brands and established market position.

* Strong brands with market leadership across segments and geographies
GCPL has a strong brand portfolio in India and overseas. The company is a market leader in household insecticide and hair colour segments and the second largest player in the soaps category in India. It has a leading market position in all the 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. The dominant leadership position across various segments provides pricing power in those segments, thus helping the company to maintain profitability.

The company also has strong focus on innovation, which has led to new launches contributing a healthy share to the overall growth. In fiscal 2021, it has launched about 41 new products across geographies in the health and hygiene segment. Godrej's strong brand with differentiated price points will support revenue over the medium term. It has successfully cross pollinated some products across markets, and has launched new products in the insecticide and hair colour segments in India and overseas. The new launches are expected to drive growth over the medium term. GCPL's ability to successfully launch and scale up revenue from new products across geographies will be a key monitorable.

* Healthy financial risk profile with sizeable cash accrual, prudent cash policy and strong debt protection metrics
GCPL has healthy financial risk profile as reflected in interest coverage ratio of 9.9 times and net debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio of 1 time in fiscal 2020, compared with 9.4 times and 0.9 time, respectively, in fiscal 2019. The marginal weakening in net debt to EBITDA ratio was on account of rupee depreciation, borrowing to conserve cash on account of Covid-19 and debt raised towards acquisition of additional stake in the subsidiary. The gross debt to EBITDA ratio was 1.6 times as on March 31, 2020, and is expected to remain below 2.0 times over the medium term.

Cash accrual is expected to be around Rs 1,500 crore in fiscal 2021. Also, as the company does not plan to declare dividend, accrual in the first half of fiscal 2021 along with cash was used to reduce debt by about Rs 1,500 crore. Going forward, accrual is expected to remain healthy at about Rs 700 crore (post dividend payout) as the company has limited capital expenditure (capex) plans and no acquisition planned in near to medium term. Also, the company maintains adequate cash and bank balance of at least equal to one year of debt obligation, which further strengthens the financial risk profile.

Weaknesses
* Debt-funded acquisitive nature of expansion
The company has grown its overseas business primarily through acquisitions. Most of these acquisitions have been funded through debt guaranteed by the Indian entity. Some of the major acquisitions include Godrej Sara Lee Ltd in India, the Megasari group in Indonesia and the Darling group in Africa. In fiscal 2017, the company acquired Strength of Nature (SON) for a consideration of about Rs 2,100 crore. GCPL has put/call liability and payouts on account of past acquisitions, which are likely to be paid though a mix of cash accrual and debt. It has a clear philosophy of acquiring brands in home care, personal care and hair care segments and only in the geographies where it is present. The ability to create value from any large, debt-funded acquisition in a timely manner will continue to be a key monitorable.

* Exposure to macroeconomic, geopolitical and currency risks in overseas markets
Outside India, the company has presence in Asia, Africa and Latin America. The economies in these regions might face macroeconomic growth challenges as seen in the past, which can limit the growth in overseas operations. Also, geopolitical events such as change in government and local unrest could affect operations. This risk in Africa has been mitigated by diversified presence across countries in south, west and east Africa. Currency fluctuations can harm profitability of the overseas operations, which have been volatile over the past few years. Nonetheless, CRISIL 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 few years, a decline in raw material prices has helped improve operating profitability. On a consolidated basis, the operating margin was 22% in fiscal 2020, against 21% in fiscal 2019. The margin dipped in fiscal 2019 on account of higher raw material prices and upfront investment in the Africa business but improved in fiscal 2020 supported by lower raw material prices and advertising spend.

Also the Indian FMCG industry is marked by the presence of both organized and unorganized 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. With product launches and cross-pollination of products, the company has been able to maintain sits market share and operating profitability.