We are raising our fair value estimate for Godrej Consumer Products (GCPL) by 5% to INR 1,140 per share (from INR 1,085 per share), as we make adjustments for time-value-of-money since our last update. Our valuation implies a forward 2016 price-to-earnings ratio of 35 times; that compares to a five year earnings CAGR of 24%. With the recent upswing in stock price, we believe the stock is now fairly valued.
Our overall assumptions on revenue growth, operating margins, and returns remain the same as before. Furthermore, our long-term assumption on returns on new invested capital (RONIC) year 2020 onwards remains at 35%, as we believe the acquisitions made in emerging markets will drive improved returns as operating leverage kicks in with the company selling more products through the acquired distribution reach. We assume that the firm will continue to be acquisitive to expand its footprint and build acquisitions in our forecast. Taking these add-on acquisitions into account, we assume an average, top-line growth rate of 17.3% over five-years. The recent acquisition of Frika Hair, South Africa earlier this month confirms our hunch.
In our opinion, the firm runs the risk of overpaying while utilizing an acquisitive strategy. Although we are not too perturbed by their acquisitions as these have been done in regions with low per capita incomes where consumption of packaged goods should rise with rising income. However, we would have preferred greater disclosure on price paid for each acquisition.
For fiscal 2015, we would like the company to end the year with better EBIT (earnings before interest and tax) margins, derived from cost-saving initiatives on the working capital front in its international business while continuing to spend behind brands in its India business, to drive stronger consumption in the future. We maintain our narrow moat rating for the company as we think the company has strong brands that continue to appeal to the emerging market consumer.
