Here's why Godrej Consumer acquired Raymond’s FMCG business

Hygiene and personal care major Godrej Consumer’s (GCPL) recent move to acquire two popular brands - Park Avenue consumer goods and Kamasutra - from Raymond Group comes at a time, when the fast moving consumer goods (FMCG) market is abuzz with mergers and acquisitions. The deal - valued at Rs 2,825 crore - marks the century old Godrej’s Group’s foray into two of the rapidly growing categories - deodorant and sexual wellness. That, however, comes with its own set of challenges that GCPL may have to overcome to taste the fruits of success in the near term.

According to Sameer Shah, Chief Financial Officer, GCPL, the company has extensively studied the two categories and the brands before taking the leap. Shah told Business Today that both of these categories “offer a multi-decadal double-digit sales growth rate possibility. “While we currently do not operate in the deodorant market, we have significant experience in the segment. We have a pretty good understanding of the level of penetration, sales, and consumption patterns, among other aspects, on the two markets,” he said. While GCPL tried its luck in the deodorant market earlier with its brand Cinthol, it had to withdraw from the category a sometime ago.

Pegged at Rs 2,825 crore, while the deal was closed at 4.5 times of the business’ FY2023 revenue of Rs 622 crore. According to Shah, it would essentially cost GCPL some Rs 2,325 crore. “While we have paid Rs 2,725 crore net of cash for the deal, the real value is around Rs 2,325 crore as we will have around Rs 400 crore of lower cash tax due to slump sale. This works out to around 3.75 times value to sales,” he said.

While, under Raymond, the business had a reach of 650,000 outlets, GCPL’s 6.5 million (or 10 times of that) retail reach would be crucial in scaling the brands in the near future.

Analysts, however, point towards multiple challenges that GCPL now faces and the expanding the business would not be easy, they say.

According to Abneesh Roy, Executive Director at Nuvama Institutional Securities, the deal “appears a tad expensive given RCCL’s (the Raymond Group entity that used to own Park Avenue’s consumer goods business and Kamasutra that GCPL has acquired) smaller size and weaker EBITDA margins”. EBITDA stands for earnings before interest, tax, depreciation and amortisation.

In FY2022, the business had raked in Rs 522 crore in sales with an EBITDA of Rs 32.3 crore, which means it was operating at an EBITDA margin of 6.18 per cent. While its net profit margin stood at a meagre 2.76 per cent. These are significantly lower than most personal care and hygiene companies, who operate at an EBITDA margin of 18-22 per cent.

While the deodorant market is growing fast - nearly by 10 per cent CAGR (compound annual growth rate) over the last 10 years, the market is highly competitive with scores of local and global brands fighting for market share. “Increase in competitive intensity as both online and offline players want to participate in men’s grooming categories” would be a key challenge for GCPL, notes Nuvama.

Moreover, high promotional intensity and spending in both the core categories may put pressure on margins especially in a high inflationary cycle that the market is currently undergoing. However, apart from GCPL’s distribution might, Park Avenue and Kamasutra’s strong consumer recall value would prove to be an asset for the company, it says.