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GCPL acquires the FMCG business of Raymond Consumer Care Ltd About the deal:

* Brief about the company: Established in 1969, RCCL specializes in the production and distribution of personal care and hygiene products. The company, based in Thane, Maharashtra, India, is primarily engaged in the manufacturing and marketing of personal care and grooming products, including deodorants, perfumes, and shaving products, under various brand names such as Park Avenue, KamaSutra. RCCL holds a dominant position as a leader in the Indian markets for deodorants and condoms, and also maintains a strong competitive presence in several other product categories. With a reach spanning over 6.5 lac point of sales in India, RCCL's growth trajectory continues to rise steadily.

* Consideration to be paid: INR28.25b

* Period: Acquisition expected to be completed by 10 May’23.

* Turnover in the last three years: INR62.2m/INR52.2m/INR41.1m in FY23/FY22/FY21.

* The FMCG business of RCCL was acquired for a total consideration of INR28.25b. RCCL’s business has demonstrated an impressive CAGR of 23% over FY21-23 with FY23 sales at INR6.22b. This suggests a valuation of 4.5x RCCL’s FY23 sales.

* However, the management highlighted that it would also be acquiring INR1b cash and would get INR4b tax break due to the acquisition, hence, the effective cost of acquisition would amount to INR23.25b, implying valuation of 3.7x FY23 sales.

Management conference call highlights

* The total addressable market of deodorants and sexual wellness category is ~INR50b and ~INR12b, respectively. Park Avenue is number 2 brand in deodorants category in India and Kama Sutra is number 3.

* Despite new entrants in the category, Park Avenue has held its market share steady at ~18-19% over the past few years.

* Deodorants and sexual wellness category is currently underpenetrated, meaning that there is significant scope for growth. Through market development activities, GCPL would increase penetration and drive growth within the category.

* GCPL would focus on rationalizing non-core and low margin SKUs and reduce the MRP to NSP leakage.

* The deal would be EPS dilutive in FY24 and neutral in FY25.

Valuation and view

* We have incorporated RCCL financials in our estimates. Changes to the model have resulted in a ~3% decrease in EPS estimates for FY24 and no material change for FY25.

* The acquisition would provide GCPL entry into newer categories (deodorants and sexual wellness); however, we need to keep a close track on the efforts taken by management to increase the market penetration and drive growth in these categories.

* We reiterate our BUY rating with a TP of INR1,050 (based on SoTP valuation: 50x domestic business, 20x Indonesia business, 15x GAUM, other business and RCCL)

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