We are raising our fair value estimate for Godrej Consumer (GCPL) by 13% to Rs 1,085 per share (from Rs 960 per share), which implies a forward fiscal-year 2015 price-to-earnings ratio of 41 times, and fiscal 2016 price-to-earnings ratio of 31 times. This compares to a five-year net income CAGR of 24%. While 10% of our change is due to time-value-of-money adjustment to our last update, 3% is due to modestly higher growth assumed in the Africa business where the company is launching several new products. Our overall assumptions on consolidated revenue growth, operating margins, and returns remain the same as before. We are confident that GCPL will execute well on its Africa and Indonesia acquisitions, by deriving the benefits of scale as it sells more products through its acquired distribution network.
We are particularly impressed with the B:Blunt investment, as it gives GCPL access to a premium brand without overspending on a full-blown acquisition. The company acquired a 30% stake in the salon chain in 2013, and will pay B:Blunt a small (low-single digit) royalty fee for selling hair products like shampoo, conditioners, hair gels and serums, hair extensions, with the B:Blunt label on it. We remain hopeful that the newly launched hair care products will find traction with the consumers, and will be watching developments on this front closely.
In our opinion, gaining access to a salon brand may enable GCPL to launch a mass-premium variety of hair color under the B:Blunt umbrella in the future, a possibility that it could not explore with the Godrej brand, which is positioned as "value-for-money." However, we remain skeptical about its ability to charge the high prices L’Oreal charges its salon customers. Overall, we think the company is adequately investing in its brands to continue generating returns beyond cost of capital. We maintain our narrow moat rating on the company. With the recent upswing in the stock price, we believe the shares are fairly valued.
