What Raymond's FMCG Business Acquisition Means For Godrej Consumer

Godrej Consumer Products Ltd. announced on Thursday that it is acquiring the consumer goods business of Raymond Consumer Care Ltd., as it seeks to grab a bigger share of India's fast-growing household and personal care market.

The cost of the acquisition is Rs 2,825 crore and it is expected to be completed by May 10, Godrej Consumer said in a stock exchange filing. Raymond Consumer Care has Rs 100 crore cash on books, so the net cost of acquisition stands at Rs 2,725 crore for Godrej Consumer.

"This acquisition allows us to complement our business portfolio and growth strategy with underpenetrated categories that offer a long runway of growth," said Sudhir Sitapati, chief executive officer at Godrej Consumer Products.

In terms of valuations, Godrej Consumer's Chief Financial Officer Sameer Shah said that while the company will pay Rs 2,725 crore net of cash for the deal, the real value is around Rs 2,325 crore. "That's because we will have around Rs 400 crore in tax savings due to (a) slump sale," Shah said.

So, this works out to around 3.75 times value to sales.

Raymond Consumer Care is an associate company of Raymond Ltd., a branded textile and real estate company.

The Raymond Group holds 47.66% in the consumer care business, which recorded annual sales of Rs 622 crore in the previous fiscal.

The Singhania family-owned group has been in talks with multiple potential suitors over the last two years to sell its business.

Last year, there were talks of Good Glamm Group, the direct-to-consumer beauty and personal care conglomerate, acquiring Raymond’s consumer business. But the talks fell through, likely because of valuation concerns.

In FY22, Raymond recorded Ebitda margin of 6%, which is significantly lower than Godrej Consumer's Ebitda margin at 19.5%. But, Sitapati said that the gross margin of both the businesses are similar.

"Over a period of time, relatively shortly, we anticipate that the Ebitda margins of this business [Raymond] meet and then probably beat GCPL given the nature of these categories," he said.

"If we can match the company Ebitda with GCPL level and grow the newly acquired business at anything over 10% or mid-teens, which I think we will ... it will be a good acquisition for us," said Sitapati.

In India, Godrej Consumer has got salience in the soap segment.

"But it is a relatively slow growing category. So, we would like to increase our total addressable market on the fast-growing categories in India, and we felt that both deodorants and sexual wellness categories have a long runway of growth, which would help us significantly expand our TAM in areas that are GCPL's strengths, i.e., the household and personal care segment," Sitapati said at a press briefing.

Godrej Consumer is yet to announce how the acquisition will be funded. It roughly has Rs 2,000 crore of cash on its books.

"We will figure it out in the next few days," said Sitapati.

Popular personal care brands like Park Avenue perfumes, Kamasutra condoms as well as KS deodorants are being sold to Godrej Consumer through a slump sale as part of the deal, the filings showed.

This essentially means that Godrej Consumer will be foraying into two new categories—men's personal care and sexual wellness. Some of the other categories where it already operates in include soaps, household insecticides, hair colour, air care, and laundry detergent.

According to Sitapati, the Indian deodorant market is roughly about Rs 6,000 crore, two thirds of which is dominated by the male category. The commercial condoms' market is roughly about Rs 1,200 crore, growing in double digits, he said.

These categories have the potential to deliver double-digit multi-decade growth, given the low per capita consumption of deodorants in India, in comparison with similar emerging markets and the opportunity to premiumise the condom category, Sitapati said.

"The per capita consumption of deodorants in India is 0.4 times that in Indonesia, 0.05 times that in Brazil and 0.04 times that in the U.S.A.," he said.

The company is looking to build on this potential by unlocking the integration synergies with Godrej Consumer's business, said Sitapati.

However, the Indian deodorant market is very competitive with much larger players like Hindustan Unilever Ltd. and ITC Ltd.

The Godrej group firm will acquire all the assets as part of the deal, except Raymond Consumer Care's condom manufacturing facility, with a 40-crore capacity per annum, in Aurangabad, Maharashtra.

Raymond will continue to manufacture all these brands on a contract basis and sell them to Godrej Consumer Care. It will also continue to export these brands, especially the condoms, apart from continuing the business-to-business sale in the domestic market.

Currently, it exports to over 25 countries.

Raymond is the second largest player in the men's deodorants category and the third largest in the branded condom segment, Sitapati said.

Both Park Avenue and Kamasutra are major brands with high awareness in urban India. The two brands are extendable to adjacent segments like men's grooming and sexual wellness. The KS Spark Deo under the Kamasutra brand is also the top variant among consumers.

However, it is a fringe player in the mainstream soaps and shampoo market, according to Abneesh Roy, executive director at Nuvama Institutional Equities. "So, there will be an overlap in deo as Godrej Consumer has Cinthol."

Godrej Consumer will also be able to provide a wider distribution scale to the newly acquired brands.

Raymond has a presence in over 6.5 lakh retail outlets, with strong reach in the chemist channel, modern trade and e-commerce, according to its 2022 financial year annual report. Godrej Consumer, on the other hand, has a direct reach of 13 lakh outlets and a total reach of 58 lakh outlets.

"But, how easy will that be given limited shelf space at mom-and-pop shops remain to be seen," Roy said.

"Having brought these brands at the forefront of consumer recall, we believe that Godrej Consumer Products will provide the requisite impetus to further drive the growth of these brands," said Atul Singh, vice chairperson at Raymond Group.

On Thursday, shares of Raymond closed 6.55% higher on the BSE in anticipation of the deal, while Godrej Consumer Products ended 2.35% lower as against a 0.57% gain on the benchmark Nifty.