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Stock Analyzer June 14, 2010

Industry CMP Recommended Action Averaging Price Band Targets Time Horizon FMCG Rs. 349.4 Buy at CMP Rs. 314-329 Rs. 395 and Rs. 425 6 months

Background Incorporated in 2000, Mr. Adi Godrej promoted Godrej Consumer Products (GCPL) is a leader among India's FMCG companies (Personal & Home Care Products category). GCPL is one of the leading players in toilet soap & hair colour categories. GCPL also has a good presence in other categories like Toiletries & Liquid Detergents. It’s manufacturing facilities are located at Malanpur (MP), Baddi -Thana (HP), Baddi - Katha (HP), Guwahati (Assam) and Sikkim. Over the last 5 years GCPL has strengthened its global presence significantly through inorganic route. The acquisitions have not only enabled GCPL to expand its existing product portfolio, but also enter into new categories like household. Triggers Over the last 5 years, GCPL has established a strong global presence through

inorganic route. GCPL has made 7 acquisitions since FY05. Despite tough operating conditions, international business grew 21% in FY10. GCPL’s international business is expected to grow significantly by 163.9% in FY11 (mainly on account of consolidation of Megasari). While Keyline’s growth could be subdued due to current slowdown in Europe & non-recurrence of Swine Flu in FY11, the other overseas subsidiaries viz; Rapidol, Kinky, Godrej Global Mid East are expected to perform well.

The Megasari acquisition leapfrogs GCPL into being a leading player in Household Insecticides in Asia with strong market share positions in Indonesia, India, Sri Lanka, & Bangladesh. In Household Insecticides, Megasari is the 2nd largest player (market share of 35%), while it is the largest player in Air Care & Wipes (market share of 45% & 80% respectively). The acquisition enables GCPL to leverage its strengths in the Insecticides & Aircare market and also provides it the necessary scale to compete with bigger MNC competitors like SC Johnson, Unilever, etc. Megasari’s sales stood at Rs. 5.5 bn in CY09 & has grown at a CAGR of 25% over CY06-CY09. Its consolidation is expected to add ~Rs. 5.7 bn to GCPL’s total revenues in FY11.

Tura acquisition has given GCPL presence in Nigerian personal care market & acts as a launch pad into the adjacent countries of Ghana, Cameroon & Congo. Tura’s distribution network & production facilities can be leveraged to introduce other GCPL products in the West African market. Further, the latest acquisitions of Issue Group & Argencos have given GCPL an access to fast growing hair colour markets in Argentina, Brazil, Peru & Uruguay. Argencos’ hair colour portfolio complements Issue portfolio well. Issue has a strong presence in mass category while Argencos focuses on the mid-premium space in hair colours. The two companies provide GCPL with tremendous platform for establishing a strong presence in Latin America.

The acquisition of 100% stake (49% in June 2009 & 51% in May 2010) in Godrej Sara Lee (GSLL) [Now known as GHPL - Godrej Household Products Ltd.], a leader in household insecticides category with popular brands like Good Knight, Hit & Jet (which together account for 33% of the total insecticides market in India), further consolidates GCPL’s position in the Indian FMCG space making it the largest Indian home and personal care portfolio in India after the MNCs. GCPL has plans to merge the distribution chains of GSLL, which would enhance the overall reach of the group, enabling household insecticides to ride on the GCPL platform. The acquisition of 51% stake in GSLL is likely to add ~Rs. 4.8 bn to consolidated revenues in FY11.

In order to strengthen its market share in the soaps segment & to stabilize the hair colour market share, GCPL has launched small SKUs to tap rural markets and has launched product variants in its strategy to gain market share by state, instead of an all-India approach. The re-launch of key brands and products at attractive price points is also helping. GCPL has also been expanding its distribution network, which has enabled / would enable it to drive the volumes.

GCPL has ramped up the distribution to 50,000 barbers and offered value for money offer with professional tools and educative leaflets. The measures taken have already started yielding benefits to GCPL, as for the first time GCPL’s hair colour segment’s growth outperformed the industry growth rate in FY10. The segment’s market share improved from 33.5% in FY09 to 33.9% in FY10, which was deteriorating till FY09.

GCPL’s consolidated net sales & PAT is expected to grow by 70.8% & 45.2% respectively in FY11, which would largely be driven through inorganic route.

Godrej Consumer Products Ltd. (GCPL)

Price Chart GODREJCP-Dly .29/10/09-11/06/10 B-532424 TREND

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Stock Details BSE Code 532424NSE Code GODREJCPBloomberg GCPL.INPrice (Rs) as on June 11, 2010 349.4Equity Capital (Rs Mn) 308.2Face Value (Rs) 1.0Eq. Shares O/s (mn) 308.2Market Cap (Rs Mn.) 1,07,685.1Book Value (Rs) 24.8Avg. Volume (52 Week) 78,59852 wk H/L 372.5/ 158.1

Shareholding Pattern (As on March 2010) Domestic Institutions 1.0 Non Promoter Corp Hold 1.9 FIIs 18.5 Promoters 71.8 Public & Others 6.8 Total 100.0

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Consolidated Financials at a Glance (Rs. in Million)

Particulars FY07 FY08 FY09 FY10 FY11E Net Sales 9515.2 11025.7 13929.7 20412.0 34859.3% Growth (y-o-y) 36.3 15.9 26.3 46.5 70.8Operating Profit 1796.9 2144.9 2037.2 4073.1 6780.1% Growth (y-o-y) 27.2 19.4 -5.0 99.9 66.5PAT (Adjusted) 1389.7 1592.3 1732.5 3395.9 4930.3% Growth (y-o-y) 16.2 14.6 8.8 96.0 45.2EPS (Fully Diluted) 4.3 4.9 5.3 10.5 15.2% Growth (y-o-y) 52.9 14.6 8.8 96.0 45.2PE 81.6 71.2 65.4 33.4 23.0 Valuations & Recommendation We expect GCPL’s Net Sales & PAT to grow by 70.8% & 45.2% in FY11. The growth would largely be driven through inorganic route. GCPL’s domestic portfolio could continue to do well on the back of company’s strategy to launch smaller SKUs, launch products in sub-segments, gain market share state-wise and expansion of the rural distribution. This would enable GCPL to drive its volumes going forward. We expect the domestic portfolio (standalone) to grow by 15.2% over FY10. Soaps & Hair Colour segments would continue to remain major growth catalyst. Though there could be some pricing pressure on the soaps portfolio due to increasing competition, we expect GCPL to continue to improve the segment’s market share with the launch of new variants, promotional offers & increase in the distribution networks. Further with the expansion of rural distribution & aggressive advertising, the hair color segment’s market share is also expected to stabilize / improve. Even the toiletries & Liquid detergents are expected to grow at a decent rate. However, the pace of growth of domestic business is expected to be lower due to its high base. GCPL’s international business is expected to grow significantly by 163.9% in FY11 (mainly on account of consolidation of Megasari) & its contribution to the total sales is expected to increase from 18.5% in FY10 to 28.6% in FY11. While Keyline’s growth could be subdued due to current slowdown in Europe, the other overseas subsidiaries viz; Rapidol, Kinky, Godrej Global Mid East are expected to perform well. The consolidation of Megasari is expected to drive the international revenues further. The subsidiary is likely to add ~Rs. 5.7 bn to GCPL’s total revenues. Further, the domestic acquisition of 51% stake in GSLL is expected to add ~Rs. 4.8 bn to the total consolidated revenues. The acquisitions would also contribute significantly to GCPL’s profits. GCPL’s profit growth is expected to be lower than in line with sales growth and the margins could come under pressure on the back of pricing pressure expected in soaps segment, increasing cost pressures & expected rise in the interest cost (due to incremental borrowings to fund the recent acquisitions) & depreciation expenses. We expect the Palm Oil prices to increase in FY11. Further A&P spends could continue to remain high on the back of investments in new product / variant launches. We have not factored in the acquisition of Tura, Issue Group & Argencos in our financial projections due to limited information available about the acquisition. However, the management has indicated that these acquisitions would be EPS accretive in the very first year of consolidation. This could lead to GCPL reporting EPS better than our estimates in FY11 & could improve the company’s valuations. Further, the introduction of GST is expected to be key positive for GCPL going forward as it would lower the company’s indirect tax outflows. Also the rationalization of tax could put the unorganized players at a disadvantage and could lead to volume expansion for the company. The timing of GST implementation is uncertain but is likely to happen in the next 12-18 months. GCPL, like other FMGC players, has a good track record of paying dividends consistently since 2002. At CMP of Rs. 349.4, GCPL trades at 23xFY11E EPS, which is at a premium to Bayer Crop Science but at a discount to HUL & Marico. The discount to HUL is not justified considering GCPL’s consistent improvement in the market share of its soaps business compared to HUL, which has witnessed consistent decline in market share of its soaps portfolio; its increasing global presence, which has helped the company not only to expand its existing product portfolio but also de-risk its business profile by entering into new categories like household, and its constant focus on value creation for its

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shareholders. Larger exposure to the fast growing emerging markets (through acquisitions) like Asia, Africa & Latin America could improve the revenue visibility over medium term. Further, the reducing dependence on low margin & highly volatile soaps segment and increasing proportion of high margin hair colour & insecticides business could improve the visibility of bottomline & company’s valuation going forward. The fact that post the series of high cost acquisitions, the debt equity ratio of the company (though higher than in the past and higher compared to its FMCG peers) does not go out of control is another positive. We recommend investors to buy this scrip at current levels and average it on dips in the price band of Rs. 314-329 for sequential price targets of Rs. 395 (26xFY11E EPS) and Rs. 425 (28xFY11E EPS) over the next 6 months.

Investment Rationale Strategy to launch smaller SKUs, launch products in sub-segments & gain market share state-wise and expanding rural distribution to help strengthen the domestic portfolio In order to strengthen its market share in the soaps segment & to stabilize the hair colour market share, GCPL has launched small SKUs to tap rural markets and has launched product variants in its strategy to gain market share by state, instead of an all-India approach. The re-launch of key brands and products at attractive price points is also helping GCPL. The company has also been expanding its distribution network, which has enabled / would enable it to drive the volume growth.

Soaps segment continues to remain a major contributor to domestic portfolio GCPL continues to be the second largest toilet soaps player in India, with leadership in Northern region. The segment continues to drive the company’s domestic portfolio, accounting for 65% of GCPL’s standalone net sales. The segment has reported a CAGR growth of 20.2% over FY07-FY10, thus outperforming the industry growth. With the launch of variants under the segment at attractive price points, the company has been able to improve the category’s market share consistently from 9.1% in FY07 to 10.3% in FY10 (category’s volume share stood at ~12% in FY10). GCPL’s new strategy of launching smaller SKUs, launching products in sub-segments and gaining market share state-wise is working out well. In FY10, the company launched Godrej No. 1 Lime and Aloe Vera and Godrej No 1 moisturizing soap (for winter) were launched. Godrej No.1 Moisturising soap with milk cream and almond is available at Rs.40 for 75 gm pack of 4 and Rs.30 for 75 gm pack of 3. Godrej No.1 was relaunched in April 2010 in a new shape, packaging and with natural oils. Further, GCPL launched small SKUs of Cinthol original in Tamil Nadu, where the brand has a strong presence. Soaps Market Share Trend

9.1%

9.7%

9.4%

10.3%

8.4%

8.6%

8.8%

9.0%

9.2%

9.4%

9.6%

9.8%

10.0%

10.2%

10.4%

FY07 FY08 FY09 FY10

Year End

Mar

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hare

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Soaps Value–wise growth (%): Industry vs. GCPL Brands

15.2

9.6

18.5

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21.019.3

25.0

17.0

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FY07 FY08 FY09 FY10Year End

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Industry GCPL Brands

Hair Colour segment to perform well with new variant launches, aggressive advertising & expansion in distribution GCPL’s Hair Colour segment accounts for 22% of the standalone net sales and commands market share of 33.9% (in FY10). The hair colour segment has grown at a CAGR of 15% over FY07-FY10. GCPL has put aggressive thrust on revitalizing this portfolio. Powder hair dye accounts for a major portion of segment’s total sales. GCPL’s strategy in this segment is to focus more on the powder versions. During FY10, Godrej Nupur Mehendi was re-launched in a new and improved formulation. The product includes nine natural herbs valued for hair care benefits. Godrej Expert, a new generation Powder Hair Dye, which was launched in Feb 2008 has done exceedingly well till now. GCPL’s strategy is to strengthen Godrej Expert proposition going forward. GCPL’s recent strategy to change the Godrej Expert’s packaging configuration to enable retailers to buy smaller pack size (four daughter cartons with 30 cartons of Expert Powder Hair Dye) is expected to strengthen the powder hair dye in smaller wholesale outlets across the country. Though powder hair dye accounts for a major portion of hair colour sales, GCPL is also increasing its focus on the premium hair colour space. With aggressive advertising, GCPL is making efforts to establish its position in this space. New shades of Godrej Renew Plum Crazy & Wine Red have received strong consumer response. Aggressive activation of salon drive is also one of the growth strategies. GCPL has ramped up the distribution to 50,000 barbers and offered value for money offer with professional tools and educative leaflets. Over the next few quarters, GCPL is expected to launch new innovations in hair color. With the launches of new variants, aggressive advertising & distribution expansion, the hair colour segment is expected to grow at a decent rate, possibly ahead of the industry growth rate going forward. Also these measures would enable GCPL to stabilise / improve the segment’s market share. The benefits of these measures taken have already started flowing. This is evident from the fact that for the first time, GCPL’s hair colour segment’s growth outperformed the industry growth rate in FY10. Also the company witnessed an improvement in the segment’s market share from 33.5% in FY09 to 33.9% in FY10.

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Hair Colour Market Share Trend

35.2%

33.5%

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Hair Colour Value–wise growth (%): Industry vs. GCPL Brands

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Toiletries & Liquid Detergents continue to report strong growth The toiletries segment accounts for 7% to GCPL’s standalone net sales. The segment has grown at a CAGR of 23.3% over FY06-10. In FY10, GCPL extended its Cinthol brand portfolio with the launch of two new deo sprays ‘Rainstorm’ & ‘Unleash’. Rainstorm is a contemporary aquatic fragrance with undertones of lemon and bergamot and Unleash has a spicy woody fragrance built on a base of cedar wood, with a touch of leather. The company launched small SKUs of Cinthol Deo in Maharashtra, where Deo’s presence is strong. Further, GCPL also forayed into the hand hygiene category as it launched Godrej Protekt - Hand Sanitizers, Hand wash and Wipes during the year. Godrej Protekt hand sanitizer, hand wash & wet wipes are available in 3 variants - Original, Citrus & Blossom. Godrej Protekt instant hand sanitizer integrates the “Insta sanitize technology” that kills 99.99% of most common illness causing germs in 15 seconds. GCPL also launched Cinthol skin protection talc in South India during the year. With these new launches, we expect the toiletries segment to maintain its growth momentum going forward. In the high margin liquid detergents category, GCPL continues to maintain the leadership position with a market share of ~76%. However, the segment’s contribution to the

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domestic portfolio is only 4%. Ezee is the leading brand and a major contributor to the category growth. Ezee possesses a Woolmark certification that indicates that it is ideally suited to wash all woolen materials. The segment has grown at a CAGR of 9.3% over FY06-10 and is expected to perform well going forward.

Rural distribution expansion could drive the volumes & create brand awareness

GCPL has been expanding its presence in the rural & semi urban markets significantly. The company’s strategy of increasing advertising in regional media, presence across the price spectrum and introducing new low-price-unit (LPU) products to tap rural demand is working out well. In FY10, Rural India contributed 25% of GCPL’s sales & its contribution to its growth in sales (domestic business) was 45%. The Superstockist Sales increased by 30% in FY10, while the number of Superstockist & Substockist increased by 58.2% & 44.6% over FY09 to 262 & 5161 respectively.

Rural Distribution Expansion

Parameters

FY10 Superstockist Sales Rs. 2880 mn 30% Growth No. of the Superstockist - March 10 262 +96 - Inc over March 09 No. of Substockist - March 10 5161 +1593 - Inc over March 09

% Contribution to total Sales Contribution to % growth in sales

Rural25%

Urban75%

Rural45%

Urban55%

The company has plans to double its small-town coverage from 4,000 to 8,000 in three years and village coverage from 15,000 at present to 50,000. The company has ramped up the distribution of its products like hair colours, shaving cream, talcum powders and soaps through saloons (to 50,000 barbers). These measures are expected to drive the volumes across its product segments, create brand awareness and improve market share across its product categories.

Establishing a global presence through inorganic growth Over the last 5 years, GCPL has established a strong global presence through inorganic route. The company has made seven acquisitions since FY05. The international business accounted for 18.5% of GCPL’s total turnover in FY10. Despite recession and tough operating conditions, international business grew 21% in FY10 (in Rupee terms)

UK Business Keyline Brands: In October 2005, GCPL acquired 100% stake in Keyline Brands Ltd, UK for ~Rs. 1 bn. The company has presence in Toiletries & Personal Care segments with a portfolio of brands like Cuticura (Talcum Powder, Hand Hygiene Gels), Bio Oil (Medicated Bath Oil used for skin treatment), P20 (Sun Screen Lotion), Nulon (Hair Creams & Lotion), Aapri (Skin Care - Facial Scrubs), Erasmic (Shaving Products), Adorn (Hair Spray) and Inecto (Range of toiletries, skin & hair care, hand care and body care with coconut

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properties). Besides the ownership of these brands (except Bio Oil and P20 owned by the distributors), GCPL also got access to Keyline’s quality customer base & has enabled GCPL to widen its geographical presence and access trade channels in key areas like Europe, Australia, Canada and Middle East. UK & Ireland are the major markets of Keyline, which together account for 90% of the total sales. Bio Oil, P20 & Cuticura are Keyline’s major brands. Keyline’s sales & PAT have grown at a CAGR of 9.3% & 12.1% respectively over FY07-10. The company accounted for 57.9% of the total international business in FY10. Despite tough economic environment in UK, Keyline managed to post decent growth of 9% in FY10 on a higher base, while its PAT grew by 39%. The company rolled out New Cuticura 50 ml and 1,000 ml SKUs to new retail chains during the year. The growth was also helped by higher sales of Hand Hygiene Gel due to the H1N1 virus scare in Q3FY10. Cuticura grew by 83% and is the market leader in volume terms. South African Business Rapidol: In September 2006, GCPL acquired South African Hair Colour business of Rapidol for ~Rs 500 mn (100% acquisition). This inorganic initiative gave GCPL an entry into a large ethnic hair color markets where Rapidol enjoys 90% of the market share. GCPL acquired the Inecto and Soflene trademarks, that has allowed it much larger territorial rights. Rapidol’s distribution network is spread across South Africa and other African nations such as Zambia, Mozambique, Tanzania, the Democratic Republic of Congo, Swaziland, Ghana, Namibia, Zimbabwe, Mauritius, Seychelles and Madagascar. Kinky: In April 2008, GCPL acquired 100% stake in Kinky Group, engaged in business of Hair Care and Hair extensions, for $34 mn. This acquisition has given GCPL an opportunity to enter into a new line of business and diversify its hair product portfolio. Through Kinky, the company has been able to further expand its presence in South Africa where it is already present with the acquisition of Rapidol. The Kinky Group offers hair, hair braids, hair pieces, wigs and wefted pieces. Kinky also offers hair accessories like styling gels, hair sprays, oil free shampoo. The products are manufactured at plants located in South Africa at Johannesburg and Durban and sold through cash n carry outlets and Kinky’s stores. The unorganized hair extension market in Africa is ~$2 bn. Given the genetic traits, women in South Africa have short & wiry hair. They aspire for long hair & hence potential for wigs / hair extention is high.

During the year, GCPL merged the operations of Rapidol and Kinky into one operational unit and this strategy has already started reaping synergy benefits. This is also helping GCPL to garner the cross selling opportunities and to expand the geographic reach. In FY10, Radipol’s & Kinky reported robust revenue growth of 42% & 41% respectively over FY09. In FY10, the Kinky Group opened 2 new ‘Kinky’ Owned stores in FY10, taking the total number of stores to 24. Rapidol’s “Inecto” Powder Hair Colors (PHC) & Henna continued to perform well. During the year, the company launched new colours, Natural Brown and Auburn in the ‘Inecto’ Powder Hair Colours range. Further, GCPL’s “Renew” Hair Colors marketed and distributed in South Africa continued to do well. During the year, GCPL also introduced Godrej No. 1 soap in South Africa through wholesale channels. Presence in Middle East: Godrej Global Mideast FZE (GGME): With an aim to establish its presence in the Gulf region, in October 2007, GCPL acquired 100% stake in Godrej Global Mid East (GGME) for Rs. 58 mn. GGME was established in Sharjah with the objective of distributing FMCG products in the Middle East and has a strong network of distributors and sales personnel in countries like Oman, Saudi Arabia, Kuwait and Bahrain. This acquisition has enabled GCPL to consolidate its presence in the Gulf Cooperation Council (GCC) countries and the Middle East region. GCPL has leveraged the marketing, sourcing and distribution platforms of GGME to introduce Godrej products in the GCC & Middle East. In FY10, GGME’s sales increased by 45%. During the year, the company distributed soaps, hair colours & toiletries in UAE & GCC countries. It also rolled out Expert Hair colors & launched Nupur Mehendi in GCC countries, which was received well by trade & consumers. Further, the company introduced Cuticura Hand Hygiene products as well.

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Entry in the Indonesian, Nigerian and Latin American markets Megasari Makmur Acquisition - A Strategic Move In April 2010, GCPL announced the acquisition of 100% stake in Megasari Group of Indonesia, including its distribution arm. The acquisition was completed in May 2010. PT. Megasari Makmur was established in 1996 and has 6 factories located in Indonesia. The group is a manufacturer of various household products including household insecticides, air fresheners, wet tissues, baby care, car and motorcycle products, food wrappings, drain openers, bleach, metal polishers and fly & rat glue. The company is driven by an extensive distribution network and ubiquitous brands with strong consumer equity. Hit, Stella, Mitu, Simba are household names in Indonesia. The company has a wide spread distribution network across Indonesia including 11 branches, 619 salesmen, 90,000 outlets and 74 regional distributors. The acquisition price is estimated to be Rs. 12 bn (2.2xCY09 sales) and seems to be at a significant premium. The funding is expected to be done through overseas borrowings & internal accruals. GCPL has already arranged for a long-term offshore dollar loan (5 year loan, interest rate LIBOR + 175 bps). The company had turnover of US$120mn (~Rs. 5500 mn) in 2009 and an EBITDA margin of around 20% and PAT margin of 15-16%. Its revenues & EBITDA have grown at a CAGR of 25% & 53% respectively over CY06-09. Megasari has a large presence in Household products category, with Household Insecticides, Air Care, Wipes & Breakfast Cereals accounting for ~81.7% of the total sales. In Household Insecticides (which accounts for ~42% of company’s total turnover), the company is the 2nd largest player with 35% market share, while it is the largest player in Air Care & Wipes commanding market share of 45% & 80% respectively. The top three brands are Hit, Stella & Mitu, which contribute ~72% to the total sales. The table below gives an overview of sales & market share of Megasari’s key product categories along with the category’s market size in Indonesia & positioning of Megasari in that category:

Category Brand Size (US$ mn)

Market Share (%)

Sales (US$ mn)

House Insecticides Hit 150 35 50 Air Care Stella 68 45 30 Wipes Mitu 21 80 15 Breakfast Cereals Simba 17 15 3

(Source: Company)

This acquisition seems to be a strategic move, as it leapfrogs GCPL into being a leading player in Household Insecticides in Asia with strong market share positions in India, Sri Lanka, Nepal, Bangladesh & Indonesia. It also enables GCPL to leverage its strengths in the Insecticides & Aircare market. The business also provides a platform for launching GCPL’s other home care & personal care products in Indonesia, which has population base of 240 mn and is one of the fastest growing economies with demographics similar to India. Further, this acquisition could provide GCPL the necessary scale to compete with bigger MNC competitors (like SC Johnson, Unilever, etc).

Tura Acquisition: In March 2010, GCPL announced 100% acquisition of Nigerian personal care company Tura, which manufactures and distributes a range of beauty products, including medicated soaps (which account for 81% of total sales), non-medicated soaps, creams & lotions etc. Its medicated soap bar is among the top three in its category in Nigeria. The company has a 12% market share in the medicated soaps category. Tura is Nigeria’s only ‘Super Brand’ in the personal care category. The company has its own high quality soap manufacturing facility in Nigeria & is the first company in the personal care category in Nigeria to be awarded the ISO 9001:2000 quality standard. The acquisition process is in the final stages of completion and is expected to be done within the next one month. The Tura brand has achieved growth of 62% across FY07 to FY09 with sales of N 1,635 mn. However, we have not factored in the potential benefits from this acquisition in our financial projections due to limited information available. The funding would be done through internal accruals & borrowings. The management has specified that the acquisition would be EPS accretive in the very first year of consolidation.

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The acquisition seems to be a strategic fit as it gives GCPL presence in Nigerian market and acts as a launch pad into the adjacent countries of Ghana, Cameroon and Congo. The Nigerian economy has enjoyed strong oil-fuelled recent growth - real GDP grew at 7.1% in 2007, 7.5% in 2008 & estimated to be grown by 3.5% in 2009, reflecting Nigeria’s resilience from the impact of the global economic slowdown. It is has the largest black population in the world. Nigeria is the largest market for the Hair extension products estimated to around $900 mn. GCPL intends to build on Tura’s position and further accelerate growth in the company’s core categories by leveraging the strength of Tura’s beauty credentials in Nigeria and other West African countries, its strong distribution and consumer reach and its capable management team. Tura’s distribution network and production facilities can be leveraged to introduce other GCPL products in the West African market. While Tura’s current management team will continue to lead the business, GCPL will put in place a cross functional team consisting of Tura, Rapidol, Kinky & India team members to ensure full capture of synergies.

Issue Group Acquisition: On May 23, 2010, GCPL announced that it has entered into an agreement to acquire a 100% stake in Laboratoria Cuenca, Consell SA, Issue Uruguay and Issue Brazil (Collectively referred to as ‘Issue Group’). The Issue hair colorant brand enjoys volume leadership in Argentina with a market share in excess of 20%. The business had revenues of over $33 mn in 2009. Issue Group is also the market leader in hair colours in Peru, Uruguay and Paraguay and has an emerging presence in Brazil Issue group is the largest player in the mass segment, which complements GCPL’s strengths in India. The business provides a self-sustaining platform for GCPL’s portfolio of products - Hair care and Household insecticides throughout Latin America. The acquisition is valued at approximately 8 times EBITDA and is expected to be EPS accretive in the first year of operations. The consolidation is expected be done for 10 months in FY11. However, we have not considered the acquisition for our financial projections. Argencos SA Acquisition: On June 02, GCPL entered into an agreement to acquire 100% stake in Argencos, a mid-sized Argentine hair care company. The acquisition is expected to be completed by June end or in July. The company has a strong portfolio of brands in the hair care space. Argencos is one of the largest players in the kit format in hair colours with a market share of 17% in the format. In Hair Spray, it is No.1 with its brand ‘Roby’ having immense brand equity in Argentina. Argencos has a manufacturing plant located in La Rioja, which enjoys tax benefits due to its location. We have not considered the acquisition in our financial projections due to limited information available. The company exports to 10 countries contributing 14% of its total revenues. In CY09, the company’s revenues stood at $12mn.

The hair colorants market in Argentina is estimated to be around US$200mn growing at a CAGR of more than 22% over the last two years. The combined sales of the two Argentine transactions (Issue & Argencos) stood at Rs. 2000 mn (~$45 mn), while their EBITDA margins stood at 14%. The equity value for both transactions is ~$43 mn. Both the acquisitions are expected to be funded through a mix of borrowings & equity dilution (QIP placement). With these two acquisitions, the Godrej hair colour portfolio will now enjoy a volume market share more than 25% in hair colours & almost 50% in hair styling sprays. Argencos’ hair colour portfolio complements the Issue portfolio very well. Issue has a strong presence in the mass category while Argencos focuses on the mid-premium space in hair colours. The two companies provide GCPL with a tremendous platform for establishing a strong presence in Latin America.

Scouting for more overseas acquisitions GCPL has said that it would continue to scout for targets in countries like Brazil, Mexico, China and Malaysia as it feels that these markets offer huge potential to expand categories and a market leadership in them can help GCPL ride the material growth. Godrej Sara Lee Ltd. Acquisition (Now known as GHPL - Godrej Household Products Ltd.) - A strategic move In June 2009, GCPL acquired 49% stake in Godrej Sara Lee Ltd. (GSLL), a premier FMCG company in India, with market leadership in the household insecticides category with popular brands like Good Knight, Hit & Jet. The acquisition was by way of amalgamation of Godrej Group companies Godrej Consumer Biz Ltd. (GCBL) & Godrej

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Hygiene Care Ltd. (GHCL), which held 29% & 20% respectively in GSLL, into GCPL with balance 51% stake held by Sara Lee Corporation, based in US. The acquisition was funded through the issue of shares of GCPL to shareholders of GCBL & GHCL. GCPL issued & alloted in total 51.2 mn shares (30.3 mn shares to GCBL & 20.9 mn shares to GHCL). Further, in May 2010, GCPL entered into an agreement to acquire the balance 51% stake for $233.7 mn (Euro 185 mn & ~Rs. 10.55 bn), which would be funded through a mix of equity dilution (PE / QIP placement) and borrowings. GSLL has market leadership in the household insecticides category, which accounts for ~78% of the company’s total turnover. Its brand “Goodknight” has been adjudged as a Superbrand and is a generic name in the household insecticides category. Its other brands such as Hit and Jet have also been pioneers based on strong consumer-centric innovations. Goodknight, HIT & Jet together account for 33% of the total insecticides market in India. GSLL is also present in other household categories like Hair Styling Cream (Brand: Brylcream), Shoe polish (Brand: Kiwi) & Air Freshner (Brand: Ambipur), which account for balance 15% of total sales. GSLL’s manufacturing footprint is spread across the country and its distribution network reaches more than 16 lakh outlets. Its manufacturing facilities are located in Pondicherry, Chennai, Guwahati, Meghalaya, Jammu and Goa. GSLL exports to 51 countries with a significant proportion of its exports going to markets within the SAARC Countries and South-east Asian region. It also has full-fledged operations in Sri Lanka and Bangladesh. The company has a state-of-the-art research center based in Vikhroli, Mumbai. With 100% stake in GSLL, GCPL’s position would get further consolidated in the Indian FMCG space making it the largest Indian home and personal care portfolio in India after the MNCs. Along with the Megasari acquisition in Indonesia, this purchase makes GCPL the second largest household insecticide player in Asia (outside Japan). Household Insecticides market in India is worth Rs. 22 bn and has been growing at a CAGR of 12% over the last 3 years. The market is dominated by four players viz; GSLL, Reckitt Benckiser, SC Johnson & Jyothi Labs, which command a combined market share of over 80%. GCPL has plans to merge the distribution chains of GSLL, which would enhance the overall reach of the group, enabling household insecticides to ride on the GCPL platform, while at the same time enabling categories such as soaps to benefit from GSLL’s reach in chemist shops. This could drive the revenue going forward. Further, it could also reduce the redundancy in costs and improve margins. In FY10, GSLL generated net revenues of Rs. 9426 mn (20% growth over FY09) and PAT of Rs. 1370 mn (31% growth over FY09). EBITDA margins stood at 20%, while PAT margins stood at 14.5%. We expect the 51% acquisition to be consolidated in GCPL’s accounts for 10 months in FY11. The acquisition is expected to be highly EPS accretive for GCPL. Consolidated Net Sales & PAT to grow by 70.8% & 45.2% in FY11, however, margins likely to decline GCPL’s Consolidated Net Sales, Operating profit & PAT have grown at a CAGR of 30.8%, 30.3% & 29.8% respectively over FY06-10. While OPM improved from 18.9% in FY07 to 20% in FY10, PAT margins improved from 14.6% in FY07 to 16.6% in FY10. Robust performance by its international subsidiaries like Keyline, Rapidol, Kinky, Godrej Global Mid-East, growing domestic portfolio with traction in its major categories viz; soaps & hair colour & the acquisition of 49% stake in GSLL in Q1FY10 (Consolidation w.e.f June 01, 2009) have been the major growth drivers. Profitability wise, much of the growth came in FY10 due to acquisition of GSLL. The consolidation added Rs. 4088.5 mn & Rs. 639.4 mn to GCPL’s revenue & PAT in FY10. In FY11, we expect GCPL’s consolidated net sales to grow by 70.8%, which will largely be driven through inorganic route. Strategy to launch smaller SKUs, launch products in sub-segments and gain market share state-wise and expanding the rural distribution is expected to strengthen the domestic portfolio further. We expect the domestic portfolio (standalone) to grow by 15.2% over FY10, which would be driven by robust growth across all the categories. Soaps & Hair Colour segments would continue to remain major growth catalyst. Even the toiletries & Liquid detergents are expected to grow at a decent rate. The growth across all its categories is largely expected to be volume driven.

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GCPL’s international business is expected to grow significantly by 163.9% in FY11 (mainly on account of consolidation of Megasari) and its contribution to total sales is expected to increase from 18.5% in FY10 to 28.6% in FY11. While Keyline’s growth (which accounts for 57.8% of GCPL’s international business turnover) could be subdued due to current slowdown in Europe and non-recurrence of Swine Flu in FY11 (which helped the sales of hand hygiene products in FY10), the other overseas subsidiaries viz; Rapidol, Kinky, Godrej Global Mid East are expected to perform well. Moreover, the consolidation of Megasari (expected to be for 10.5 months) is expected to drive the international revenue further. The Indonesian subsidiary has grown at a CAGR of 25% over CY06-09. The large population coupled with its stable GDP growth makes Indonesia a highly attractive investment destination. With the favourable economic outlook, we expect Megasari’s growth momentum to continue going forward. However, on a conservative basis we have factored 18% growth rate in sales over CY09 (Sales in CY09 stood at Rs. 5500 mn). We expect GSLL’s sales to grow by 17% over FY10. The consolidation of remaining 51% stake (consolidation likely for 10 months) is expected to add Rs. 4.8 bn to GCPL’s consolidated turnover. Including GSLL, GCPL’s domestic business is expected to contribute 71.4% to the total consolidated sales (down from 81.5% in FY10). We have not factored in the acquisition of Tura, Issue Group & Argencos in our consolidated accounts, due to limited information available on the same

The chart below gives an overview of GCPL’s consolidated net sales since FY07, along with our projections for FY11:

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. We expect GCPL’s operating profit & PAT to grow by 66.5% & 45.2% respectively in FY11. The growth is expected to be lower than the sales growth mainly on account of pricing pressure expected in soaps segment, increasing cost pressures & higher interest & depreciation. We expect the prices of key input (palm oil) to increase in FY11. Further, the A&P cost is expected to remain high on the back of launches of new product / variants. As a result, OPM is expected to decline to 19.5% in FY11. This coupled with higher depreciation (due to consolidation of assets of Megasari and 51% stake acquired in GSLL) and expected increase in interest expense (on account of expected increase in borrowings to fund the acquisition cost) is expected to pull down the PAT margins to 14.1% in FY11. The tax rate (India) is expected to remain in the range of 18-20% due to manufacturing out of tax-free locations. Further with the recent acquisitions, the dependence on highly volatile & low margin soaps business would reduce and higher proportion of hair colour & insecticides business, which relatively offer better margins could improve the visibility of bottomline & improve the valuations accordingly.

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The chart below gives an overview of GCPL’s Operating Profit & PAT since FY07 along with our projections for FY11:

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Industry Outlook Robust outlook of Indian Economy to create major opportunities for Indian Consumer Product companies As rapid socio-economic changes sweep across India, the country is witnessing the creation of many new markets and an expansion of the existing ones. Bottom-of-Pyramid consumer segment in Rural India is estimated at around 350 mn and is the largest and the fastest growing sector in the country. With the increase in the disposable income, the rural consumption levels are expected to rise to current urban levels by 2017. Such developments in India’s markets are expected to create major opportunities for Indian Consumer Product companies. According to a study by McKinsey Global Institute (MGI), Indian incomes are likely to grow threefold over the next two decades and as a result, India will become the world’s fifth largest consumer market by 2025. Approximately more than 315 hyper markets are expected to be operational in tier-1 and tier-2 cities across India by the end of 2011, riding on the organised retail boom says a joint study by consultancy firm KPMG and industry body ASSOCHAM. The study states that 212 Indian towns are already capable of sustaining the development of such hypermarkets. On a cumulative basis, FDI equity inflows of US$ 20.9 bn were recorded during April-Dec 2009. The size is estimated to rise to $ 47 bn by 2013 & $ 95 bn by 2018. Implementation of the proposed GST & the opening of FDI is expected to be key positive for organised FMCG players. The rationalization of tax could wipe out the unorganized players and could lead to volume expansion for established FMCG players like GCPL. Favourable outlook of Indonesian economy – Beneficial to GCPL Favourable economic indicators

- Fitch has rated Indonesia’s sovereign credit fundamentals as “Stable” - Interest rates are expected to be stable at 7% - 8% upto 2011 - The new government is expected to focus on economic growth

Favourable demographics

- Population of 240 mn with growth rate for FY09E at 1.2% - GDP per capita at US$ 2,300 - Favourable demographic trends such as (i) rapid urbanisation (ii) high proportion of working women (iii) increasing literacy levels

Equity market

- Has been the best-performing emerging-equity market in 2009

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- Net FDI brought into the country in 2009 stood at US$ 3.7 bn Indonesia’s large population coupled with its stable GDP growth makes it a highly attractive investment destination. The favourable outlook of the economy is expected to benefit GCPL immensely, which has recently made an entry in the market through acquisition of Megasari Group.

South African haircare market growing in double digits The South African haircare market, both professional and consumer, is growing at a very fast rate (in double digits) and this strong growth momentum is expected to continue in 2010 & beyond. The economy fundamentals are positive & the employment is expanding fast. The number of people in image or appearance conscious workplaces - such as consumer service industries, media sector and the professions - is growing strongly. The middle classes, in particular the black middle class, are increasing in size and influence. In South Africa, patterns of consumption of hair services and products differ by consumer segment & by ethnic group. The ethnic African segment is the single largest consumer group and this market has the most potential. Chemical relaxing and African hair styling are the most popular services accounting for almost 80% of salon business. Hair relaxing is the leading service category and will continue to be the mainstay of the African professional and consumer hair care market. The complex relaxing process consists of a package of services with many procedures. There is strong - as yet unmet- demand for colourants suitable for using on relaxed hair. African styling is the next most important service category in black salons. This term is used to cover a number of styles such as braiding, hair extensions and pieces, dreadlocks or dreads, bonding, their infinite variations and many combinations. These hairstyles can last for up to three months, during which time they require the on-going use of conditioners and treatments to prevent damage and breakage. South African consumers - for reasons of convenience and comfort - need salons and hairdressers. GCPL’s 100% subsidiary ‘Kinky’ offers hair, hair braids, hairpieces, wigs & wefted pieces. It also offers hair accessories like styling gels, hair sprays, oil free shampoo. The unorganized hair extension market in Africa is $2 bn. Given the genetic traits, women in South Africa have short and wiry hair. They aspire for long hair & hence potential for wigs / hair extention is high. GCPL is expected to benefit immensely from the opportunities available in the African Hair Care market.

Rising Input Cost could put pressure on margins The improved economic scenario & increase in the disposable income have enabled most of the FMCG players to pass on the input cost increases easily to its consumers over the last 12-15 months. However, if food inflation continues to remain high, then it could reduce the consumer spending & could make it difficult for FMCG players to pass on further price hikes (in case input prices increase further) to protect their volumes. This could lead to margin contraction. Over the last few months, the palm oil prices have been rising. This could impact margins of players having large presence in soaps business like GCPL & HUL, since palm oil is major input for soaps.

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Palm Oil Price Chart (ex tank Kandla - Rs. per 10 kg)

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Company Background & Business Profile

Incorporated in 2000, Mr. Adi Godrej promoted Godrej Consumer Products (GCPL) is a leader among India's Fast Moving Consumer Goods companies, with Personal and Home Care Products. GCPL is one of the leading players in the toilet soap and hair colour categories in the Indian FMCG market. In the hair colour category, the company is number 1 player, which provides variety of offerings across product formats and price points to cater to a large range of consumers. Its brands include Godrej Hair Dye (liquid and powder), Nupur hair dyes, Godrej Kesh Kala oil and Kali Mehendi at the lower end, while Renew and Coloursoft are the premium brands. The company enjoys market share of 33.9% in this category. In the toilet soap category, the company is the second-largest player after HUL with a ~10.3% market share. Its primary brands include Godrej No. 1, Cinthol, and FairGlow. GCPL also has a good presence in other categories like Toiletries (which include Godrej Shaving Cream, Gel, Deodorant Spray, Talcum Powder [Cinthol & Godrej No 1], Snuggy Dry & Godrej Protekt Hand Sanitizer, Hand Wash & Wipes and Liquid Detergents (including brands like Godrej Dish Wash & Ezee).

GCPL’s Product Profile (Standalone)

Soaps is the largest category, accounting for 65% of GCPL’s net sales. Hair Colour accounts for 22%, while Toiletries & Liquid Detergents contribute 7% & 4% respectively.

Soaps Hair Colour Toiletries Liquid Detergents

Cinthol Godrej No 1 Fairglow Vigil Shikakai

Godrej Renew, Color Soft Godrej Hair Dye

(Liquid & Powder) Godrej Kesh

Kala Oil Godrej Nupur,

Kali Mehendi

Godrej Shaving Cream, Gel. Deodorant Spray Talcum Powder (Cinthol & Godrej No 1) Snuggy Dry Godrej Protekt Hand Sanitizer, Hand Wash, Wipes

Godrej Dish Wash Ezee

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GCPL’s Sales Mix (Standalone)

By-products2%

Toiletries7%

Liquid Detergents

4%

Hair Colour22%

Soaps65%

GCPL’s branch Offices in Mumbai, Delhi, Kolkata and Chennai ensure pan-India coverage, while its manufacturing facilities located at Malanpur (Madhya Pradesh), Baddi -Thana (Himachal Pradesh), Baddi - Katha (Himachal Pradesh), Guwahati (Assam) and Sikkim cater to the diverse requirements of its product portfolio. GCPL has a wide sales & distribution network with a total reach through 3 mn stores, 5000 distributors and 261 superstockist & 5161 sub-stockist who support the sales force. The company also has a well-equipped R&D Laboratory to indentify new products, variants & applications based upon consumer insights & feedback. GCPL (as a standalone company) is predominantly a domestic player, which derives almost 97.5% of its revenue from the domestic market. The exports from GCPL are only 2.5%. The company currently exports its products to 31 countries including key nations like UAE, Sri Lanka, Bangladesh, Thailand, South Africa, Mauritius and Afghanistan. Over the last 5 years, GCPL has established a strong global presence through inorganic route. With the acquisition of 100% ownership of Keyline Brands Ltd (in Oct 2005), a FMCG Company in the UK, GCPL owns international brands (like Cuticura, Bio Oil, P20, Nulon, Adorn, Aapri, Erasmic & Inecto - pure coconut) and trademarks in developed markets that include Europe, Australia and Canada. The acquisitions of 100% stake in Rapidol (in September FY06) and Kinky (In April 2008) in South Africa has given GCPL leading positions in the fast growing South African ethnic hair care market. GCPL also has a 100% stake in Godrej Global Mideast FZE, which was acquired in FY08. Godrej Global Mideast FZE has a strong network of distributors and sales personnel in countries like Oman, Saudi Arabia, Kuwait and Bahrain. As part of increasing its global footprint further, GCPL during March 2010 acquired Tura, a leading beauty brand in West Africa and during April 2010, it acquired PT. Megasari Makmur Group and its distribution company in Indonesia. Megasari Group manufactures and distributes a wide range of household products including household insecticides, wet tissues and air fresheners. The company further strengthened its hair colour portfolio by acquiring 100% stake in Issue Group (in May) & Argencos (in June), thus gaining access to the fast growing Latin American markets like Argentina, Brazil, Peru, Uruguay & Paraguay. In FY10, the international business accounted for 18.5% of GCPL’s total consolidated revenue.

Besides the overseas acquisitions, in June 2009, GCPL also acquired 49% stake in Godrej Sara Lee Ltd., a premier FMCG company in India, with market leadership in the household insecticides category with popular brands like Good Knight & Hit. In May 2010, GCPL entered into an agreement to acquire the balance 51% stake (for $233.7 mn), which is owned by JV Partner Sara Lee Corp, US. This acquisition further consolidates GCPL’s position in the Indian FMCG space making it the largest Indian home & personal care portfolio in India after the MNCs. Along with the Megasari acquisition, this purchase makes GCPL the second largest household insecticide player in Asia (outside Japan).

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Product Portfolio of GCPL’s Subsidiaries (International & Indian)

Subsidiaries Product Category Key Products / Brands Overseas Keyline Brands (UK) Toiletries and

Personal care Talcum Powder, Hand Hygiene Gels (Brand: Cuticura); Medicated Bath Oil for skin treatment (Brand: Bio Oil*); Sunscreen Lotion (Brand: P20*) Shaving Products (Brand: Erasmic); Hair Spray (Brand: Adorn); Hair Creams & Lotions (Brand: Nulon); Skin Care - Facial Scrubs (Brand: Aapri); Range of toiletries, skin & hair care, hand care and body care with coconut properties (Brand: Inecto).

Rapidol (South Africa) Hair Care Ethnic Hair Colour brands like Inecto & Soflene. Kinky Group (South Africa) Hair Care & Hair

extensions Offers variety of products sold under Kinky brand, which include Hair braids, hairpieces, wigs and wefted pieces. Also offers hair accessories like styling gels, hair sprays and oil free shampoo.

Megasari Makmur (Indonesia) Household & Cleaning (large presence) and others like Car & Motorcycle Products, Metal Polishers, Food Wrappings etc (Small Presence)

Household Insecticides (Brand - HIT); Air Freshner (Brands: Stella & Fogo); Wet Tissues, Baby Care Wipes (Brand: Mitu); Breakfast Cereals (Brand: Simba); Car & Motorcycle Products (Brand: Carrera); Food Wrappings (Brand: Klin Pak); Drain Openers (Brand: Shock); Metal Polishers (Brand: Autosol); Fly & Rat (Brand: Cap Gajah).

Tura (Nigeria) Personal Care Medicated & Non-medicated Soaps, Moisturizing Lotions & Skin Toning Creams.

Issue Group (Argentina, Brazil) Hair Care Hair Colour brand - Issue Argencos (Argentina) Hair Care Hair Styling Sprays (Brand - Roby), Mid-premium

Hour Colour space (Brand - 919) Indian Godrej Sara Lee Household (largely in

household insecticides)

Household Insecticides (Brand: Goodknight, HIT & Jet); Hair Styling Cream (Brand: Brylcream); Shoe polish (Brand: Kiwi); Air Freshner (Brand: Ambipur);

Godrej Hygiene Products Ltd. Paper based absorbent hygiene products

Sanitory Napkins & Baby Diapers (Brand: Snuggy)

*= Bio Oil and P20 brands in Keyline owned by distributors

Equity Dilution To part fund the acquisition of 51% stake in Godrej Sara Lee, GCPL is expected to raise around $120mn (~Rs. 5500 mn) through private equity route or qualified institutional placement. This would lead to 5.3% dilution in GCPL’s equity capital (at ~Rs. 340) from Rs. 308.2 mn in FY10 to Rs. 324.4 mn in FY11.

Competitive Profile

GCPL faces competition from other established FMCG listed players like HUL (in Soaps & Shampoos), Marico (in Hair Care) & Bayer Crop Science (in Household insecticides). In the household category (post the acquisition of GSLL & Megasari), the company also faces competition from MNC players like S C Johnson & Reckitt Benckiser & Indian player like Jyothi Labs. At CMP, the stock trades at 23xFY11E EPS, which is at a discount to HUL & Marico, but at a premium to Bayer Crop Science. We feel that GCPL deserves to trade at a premium to HUL considering its consistent improvement in the market share of its soaps business, compared to HUL which has witnessed consistent decline in market share of its soaps portfolio. GCPL has the highest operating & PAT margins amongst its peers. Further, with the acquisition of profitable companies like Megasari (Indonesia) &

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Godrej Sara Lee (India), GCPL has become the largest player in household insecticides in India & the second largest player in Asia. Over the last five years, GCPL has aggressively expanded its business size through inorganic route. While this has increased its exposure & dependence on the overseas markets like Europe, South Africa, Nigeria & Indonesia & Argentina, it has also led to substantial value creation for its shareholders, since the acquisitions have been highly EPS accretive. Looking at its future growth prospects, we feel that GCPL could command premium valuations as compared to its peers.

Peer Comparison:

Company Name FY11E

OPM (%)

NPM (%)

EPS(Rs.)

CMP (Rs.) PE Mark. Cap

(Rs. In Mn) Net Sales

(Rs. In Mn) Mk. Cap/Sales

HUL 13.6 11.3 10.0 252.5 25.3 550879.3 192761.8 2.9Bayer Crop Science 12.8 8.4 38.2 740.9 19.4 29265.6 17982.0 1.6Marico 13.8 9.3 4.7 113.4 24.1 69060.6 30500.0 2.3GCPL 19.5 14.1 15.2 349.4 23.0 113357.7 34859.3 3.3

(Source: HDFC Sec Estimates) Risks and Concerns The recent international acquisitions of Megasari (Indonesia) & Tura (Nigeria) are still

at the integration stages. Any delay in integration could impact GCPL’s earnings growth. In order to prove its execution capabilities, GCPL needs to successfully integrate these businesses.

Over the last five years, GCPL’s international exposure has increased significantly with the acquisitions of Keyline (UK) in FY06, Rapidol (South Africa) in FY07, Godrej Global Mid East in FY08, Kinky Group (South Africa) in FY09, Tura (Nigeria) in March 2010, Magasari (Indonesia) in April 2010, Issue Group (Argentina, Brazil) in May 2010 & Argencos (Argentina) in June 2010. Hence slowdown in key markets like UK, Indonesia, Nigeria, South Africa, Argentina & Brazil could slow down the growth of international business and impact GCPL’s consolidated performance significantly going forward. Further with these acquisitions, GCPL could face Forex / Translational issues on account of exposure to currencies like SAR / INDORUP/Arg Peso.

The competition in the soaps segment is increasing due to No 1 soaps player HUL’s right pricing of Breeze, which is a low- end soap brand. Though GCPL has managed to improve soaps market share over the last two years, intentifying competition could result in aggressive price war and could impact GCPL’s ability to gain market share in this segment. Further, the entry of players such as L’oreal and Schwarzkopf have put pressure on GCPL’s hair colour business, which has resulted in the decline in segment’s share at the top end of the market. In the premium cream hair color category GCPL’s major brands are Godrej Renew & Color soft. Entry of more foreign players could spoil the situation.

To remain in the competition, GCPL will have to continuously launch new products / variants across the product category to suit the consumer preferences. This could increase the A&P cost more than we anticipate & could impact GCPL’s operating margins.

Increase in the prices of key raw materials like Vegetable / Palm Oil (main input for soaps) and chemicals, perfumes, colours (input for Hair Colour and other toiletries) could impact the margins and reduce earnings growth if GCPL finds it difficult to pass on input cost increases completely to its consumers.

If the food inflation continues to remain high, then it could reduce the spending from the lower strata of population & could slow down GCPL’s growth in the coming quarters.

GCPL’s return ratios have been on a declining trend since FY07. While its ROCE has declined from 58.6% in FY07 to 40.8% in FY10, its RONW has declined from 113.9% in FY07 to 44.4% in FY10. This has been mainly due to acquisitions / investments in Subsidiaries & JV made by GCPL during that period as well as the Rs. 4 bn rights issue in FY08 made by the company for funding its routine CAPEX & investments / acquisitions. The return ratios are expected to reduce further in FY11 (ROCE & RONW expected to decline to 22.4% & 30.1% respectively) on the back of recent 100% acquisitions of Megasari & Tura and balance 51% acquisition of Godrej Sara Lee. GCPL is expected to fund these acquisitions through a mix of borrowings & equity dilution. However, GCPL believes that maintaining high ROCE results in loss of

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good business opportunities. Hence, its primary focus will be on EVA, which in turn will help in shareholders’ value creation.

GCPL’s debt-equity ratio is likely to increase in FY11 (to 0.9), since the company is going to increase its borrowings significantly to fund the acquisition of Megasari & Godrej Sara Lee.

Results Update (Consolidated) Quarterly Y-o-Y: GCPL’s consolidated performance was impressive on Y-o-Y basis mainly on the back of consolidation of numbers from Godrej Sara Lee (GSL). Its net sales grew by 48.1% to Rs. 5091.9 mn [Q4FY09: Rs. 3438.9 mn], while its operating profit grew by 59.7% to Rs. 1075.2 mn [Q4FY09: Rs. 673.1 mn]. OPM improved by 155 bps from 19.6% in Q4FY09 to 21.1% in Q4FY10. This was mainly due to decline in the total expenditure as a % to net sales from 80.4% in Q4FY09 to 78.9% in Q4FY10. Raw Materials consumed increased by 14.2%, while the employee expenses increased by 34.9%, lower than the sales growth. However, higher finished goods purchased (up 116.5%), advertisement & publicity (up 125.2%) & other expenses (up 71.6%) restricted further margin expansion. Decline in the interest cost (down 43.8%) & rise in other income (up 18.3%) was offset by higher depreciation & tax expense (up 50% & 103.8% respectively). PAT increased by 54.6% to Rs. 917.6 mn [Q4FY09: Rs. 593.6 mn]. PAT margins improved by 76 bps to 18%. Q-o-Q: Sequentially the results were dull. While the net sales declined by 1.6%, operating profit grew marginally by 6%, mainly on account of decline in raw materials consumed (down 10.6%), employee cost (down 45.7%) & A&P spends (down 20.2%). The OPM improved by 152 bps from 19.6% in Q3FY10. The increase in the interest & depreciation cost (up 33.7% & 8.4% respectively) was offset by higher other income (up 19%) & decline in the tax expense (down 2.7%), leading to 7.8% growth in PAT over Q3FY10. PAT margins improved by 152 bps from 16.5% in Q3FY10. Annual Y-o-Y The net sales rose 46.5% to Rs. 20412 mn [FY09: Rs. 13929.7 mn]. The domestic business grew by 16.9%, driven by growth across all its segments. Soaps segment grew by 16.8%, accounting for 65% of the standalone net sales. Cinthol & Godrej No 1 grew 25% in FY10. Hair Colour business grew by 19.1%, accounting for 22%, while liquid detergents and toiletries segment rose 18.2% & 43.1% respectively, contributing 4% & 7% respectively to the total net sales. The international business grew by 20.7%, contributing 18.5% to the total consolidated turnover. The sales of Keyline Brands stood at Rs. 2186 mn (grew by 9%) with Cuticura registering 83% growth in FY10. Rapidol’s sales stood at Rs. 694 mn (up by 42%), Godrej Global Mideast stood at Rs. 177 mn and Kinky Groups stood at Rs 723 mn (up by 41%). Kinky's good growth came on back of expansion in distribution and selling of high margin products through own stores & low margin products through retails. Further, GCPL's share in Godrej Sara Lee's sales for the year (June to March) under review stood at Rs 4089 mn. 85% of Godrej Sara Lee sales come from insecticides. Exports increased by 63% over FY09 to Rs. 316 mn. The rural sales contribute 25% of the total net sales. Despite a sharp rise in employee expenses & A&P cost (up 114.4% & 72.5% respectively), GCPL’s operating profit grew significantly by 99.9% to Rs. 4073.1 mn [FY09: Rs. 2037.2 mn]. This was mainly due to decline in Materials Consumed & Finished Goods purchased as a % to net sales from 55.3% in FY09 to 46.4% in FY10. GCPL seems to have got the benefit of low cost inventory. Further the interest cost declined by 44.7%, while the depreciation grew by 22.7%, lower than the sales growth. However, the effective tax rate on PBT increased from 17.2% in FY09 to 19.1% in FY10 due to increase in the MAT rate from 15% to 18%. PAT grew by 96% to Rs. 3395.9 mn [FY09: Rs. 1732.5 mn]. International business reported 81.4% growth in PAT over FY09, which stood at Rs. 332.2 mn. Further, GCPL's share in Godrej Sara Lee's PAT for the year (June 2009 to

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March 2010) under review stood at Rs. 639.4 mn. Overall consolidated PAT margins improved by 420 bps to 16.6%.

Conclusion We expect GCPL’s Net Sales & PAT to grow by 70.8% & 45.2% in FY11. The growth would largely be driven through inorganic route. GCPL’s domestic portfolio could continue to do well on the back of company’s strategy to launch smaller SKUs, launch products in sub-segments, gain market share state-wise and expansion of the rural distribution. This would enable GCPL to drive its volumes going forward. We expect the domestic portfolio (standalone) to grow by 15.2% over FY10. Soaps & Hair Colour segments would continue to remain major growth catalyst. Though there could be some pricing pressure on the soaps portfolio due to increasing competition, we expect GCPL to continue to improve the segment’s market share with the launch of new variants, promotional offers & increase in the distribution networks. Further with the expansion of rural distribution & aggressive advertising, the hair color segment’s market share is also expected to stabilize / improve. Even the toiletries & Liquid detergents are expected to grow at a decent rate. However, the pace of growth of domestic business is expected to be lower due to its high base. GCPL’s international business is expected to grow significantly by 163.9% in FY11 (mainly on account of consolidation of Megasari) & its contribution to the total sales is expected to increase from 18.5% in FY10 to 28.6% in FY11. While Keyline’s growth could be subdued due to current slowdown in Europe, the other overseas subsidiaries viz; Rapidol, Kinky, Godrej Global Mid East are expected to perform well. The consolidation of Megasari is expected to drive the international revenues further. The subsidiary is likely to add ~Rs. 5.7 bn to GCPL’s total revenues. Further, the domestic acquisition of 51% stake in GSLL is expected to add ~Rs. 4.8 bn to the total consolidated revenues. The acquisitions would also contribute significantly to GCPL’s profits. GCPL’s profit growth is expected to be lower than in line with sales growth and the margins could come under pressure on the back of pricing pressure expected in soaps segment, increasing cost pressures & expected rise in the interest cost (due to incremental borrowings to fund the recent acquisitions) & depreciation expenses. We expect the Palm Oil prices to increase in FY11. Further A&P spends could continue to remain high on the back of investments in new product / variant launches. We have not factored in the acquisition of Tura, Issue Group & Argencos in our financial projections due to limited information available about the acquisition. However, the management has indicated that these acquisitions would be EPS accretive in the very first year of consolidation. This could lead to GCPL reporting EPS better than our estimates in FY11 & could improve the company’s valuations. Further, the introduction of GST is expected to be key positive for GCPL going forward as it would lower the company’s indirect tax outflows. Also the rationalization of tax could put the unorganized players at a disadvantage and could lead to volume expansion for the company. The timing of GST implementation is uncertain but is likely to happen in the next 12-18 months. GCPL, like other FMGC players, has a good track record of paying dividends consistently since 2002. At CMP of Rs. 349.4, GCPL trades at 23xFY11E EPS, which is at a premium to Bayer Crop Science but at a discount to HUL & Marico. The discount to HUL is not justified considering GCPL’s consistent improvement in the market share of its soaps business compared to HUL, which has witnessed consistent decline in market share of its soaps portfolio; its increasing global presence, which has helped the company not only to expand its existing product portfolio but also de-risk its business profile by entering into new categories like household, and its constant focus on value creation for its shareholders. Larger exposure to the fast growing emerging markets (through acquisitions) like Asia, Africa & Latin America could improve the revenue visibility over medium term. Further, the reducing dependence on low margin & highly volatile soaps segment and increasing proportion of high margin hair colour & insecticides business could improve the visibility of bottomline & company’s valuation going forward. The fact that post the series of high cost acquisitions, the debt equity ratio of the company (though higher than in the past and higher compared to its FMCG peers) does not go out of control is another positive. We recommend investors to buy this scrip at current levels and average it on dips in the price band of Rs. 314-329 for sequential price targets of Rs. 395 (26xFY11E EPS) and Rs. 425 (28xFY11E EPS) over the next 6 months.

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Quarterly Financial Performance: Standalone:

(Rs. In Million)

Particulars Q4FY10 Q4FY09 VAR [%] Q3FY10 VAR [%]

(Q-o-Q) Q3FY09 VAR [%] (Y-o-Y) Q2FY10 Q1FY10

Net Sales 2824 2765.5 2.1 3159.5 -10.6 2718.4 16.2 3297 3398.3Other Income 98.4 128.3 -23.3 103.4 -4.8 127.3 -18.8 199.1 105Total Income 2922.4 2893.8 1.0 3262.9 -10.4 2845.7 14.7 3496.1 3503.3Total Expenditure 2124 2210.2 -3.9 2537.9 -16.3 2334.1 8.7 2640.2 2717.1Raw Material Consumed 1231.5 1257 -2.0 1296.7 -5.0 1535 -15.5 1520 1363.1Stock Adjustment -190.2 113.3 -267.9 15.5 -1327.1 71.5 -78.3 -57.9 81.3Purchase of Finished Goods 104.8 77 36.1 81.8 28.1 35.2 132.4 92.7 82.5Employee Expenses 103.2 169.2 -39.0 409.2 -74.8 107.5 280.7 391.8 305.2Advertising & Publicity 281.7 114.7 145.6 224.4 25.5 189 18.7 223.4 287.2Other Expenses 593 479 23.8 510.3 16.2 395.9 28.9 470.2 597.8PBIDT 798.4 683.6 16.8 725 10.1 511.6 41.7 855.9 786.2Interest 6.1 14.6 -58.2 6.5 -6.2 28.2 -77.0 6.8 17.2PBDT 792.3 669 18.4 718.5 10.3 483.4 48.6 849.1 769Depreciation 26.6 28.7 -7.3 33 -19.4 34.4 -4.1 38.8 39.1PBT 765.7 640.3 19.6 685.5 11.7 449 52.7 810.3 729.9Tax (including DT & FBT) 134.5 79.4 69.4 123.8 8.6 59.8 107.0 124.9 127PAT 631.2 560.9 12.5 561.7 12.4 389.2 44.3 685.4 602.9EPS (Rs.) 2.0 2.2 -6.2 1.8 12.4 1.5 20.8 2.7 2.3Equity 308.2 257 19.9 308.2 0.0 258 19.5 257 257Face Value 1 1 0.0 1 0.0 1 0.0 1 1OPM (%) 24.8 20.1 23.4 19.7 26.0 14.1 39.2 19.9 20.0PATM (%) 22.4 20.3 10.2 17.8 25.7 14.3 24.2 20.8 17.7 (Source: Company, HDFC Sec) Consolidated:

(Rs. In Million) Particulars Q4FY10 Q4FY09 VAR

[%] Q3FY10 VAR [%](Q-o-Q) Q3FY09 VAR %

(Y-o-Y) Q2FY10 Q1FY10

Net Sales 5091.9 3438.9 48.1 5175.7 -1.6 3380.5 53.1 5755.9 4388.5Other Operating Income 0.0 34.2 -100.0 8.0 -100.0 0 - 9.4 7.7Other Income 122.2 69.0 77.1 102.7 19.0 158.7 -35.3 129.4 93.7Total Income 5214.1 3542.1 47.2 5286.4 -1.4 3539.2 49.4 5894.7 4489.9Total Expenditure 4016.7 2765.8 45.2 4161.5 -3.5 2938.4 41.6 4636.6 3524.3Raw Material Consumed 1834.2 1525.0 20.3 2043.7 -10.3 1699.3 20.3 2138.4 1474.0Stock Adjustment -154.4 -53.8 187.0 -164.8 -6.3 83.4 -297.6 -197.9 112.6Purchase of Finished Goods 587.9 271.6 116.5 580.5 1.3 215.7 169.1 773.9 435.3Employee Expenses 326.5 242.0 34.9 600.8 -45.7 181.1 231.8 576.2 373.3Advertisement & Publicity 345.3 153.3 125.2 432.9 -20.2 256.9 68.5 509.4 433.1Other Expenses 1077.2 627.7 71.6 668.4 61.2 502.0 33.1 836.6 696.0PBIDT 1197.4 776.3 54.2 1124.9 6.4 600.8 87.2 1258.1 965.6Interest 27.0 48.0 -43.8 20.2 33.7 61.3 -67.0 26.1 37.7PBDT 1170.4 728.3 60.7 1104.7 5.9 539.5 104.8 1232.0 927.9Depreciation 60.6 40.4 50.0 55.9 8.4 50.6 10.5 67.6 51.9PBT 1109.8 687.9 61.3 1048.8 5.8 488.9 114.5 1164.4 876.0Tax (incl. DT & FBT) 192.2 94.3 103.8 197.6 -2.7 88.3 123.8 234.4 179.2PAT 917.6 593.6 54.6 851.2 7.8 400.6 112.5 930.0 696.8EPS 3.0 2.3 28.9 2.8 7.8 1.6 77.9 3.6 2.7Equity 308.2 257.0 19.9 308.2 0.0 258.0 19.5 257.0 257.0FV 1.0 1.0 0.0 1.0 0.0 1.0 0.0 1.0 1.0OPM (%) 21.1 19.6 7.9 19.6 7.8 13.1 49.8 19.4 19.7PATM (%) 18.0 17.3 4.4 16.4 9.6 11.9 38.8 16.2 15.9 (Source: Company, HDFC Sec)

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Yearly Financial Performance: (Standalone) (Rs. In Million)

Particulars FY07 FY08 VAR [%] FY09 VAR [%] FY10 VAR [%] Net Sales 7585.2 8866.8 16.9 10843.4 22.3 12678.8 16.9Other Income 154.3 95.1 -38.4 488.1 413.2 506.0 3.7Total Income 7739.5 8961.9 15.8 11331.5 26.4 13184.8 16.4Total Expenditure 6110.9 7024.6 15.0 9240.3 31.5 10019.3 8.4Material Consumed 3682.0 4180.1 13.5 6220.9 48.8 5621.8 -9.6Employee Expenses 405.0 546.0 34.8 584.3 7.0 1209.4 107.0Advertisement & Publicity 537.7 614.0 14.2 631.4 2.8 1016.7 61.0Other Expenses 1486.2 1684.5 13.3 1803.7 7.1 2171.4 20.4PBIDT 1628.6 1937.3 19.0 2091.2 7.9 3165.5 51.4Interest 58.4 88.2 51.0 88.3 0.1 36.6 -58.6Depreciation 124.9 157.0 25.7 143.7 -8.5 137.5 -4.3PBT 1445.3 1692.1 17.1 1859.2 9.9 2991.4 60.9Tax (incl. DT & FBT) 123.7 211.2 70.7 243.7 15.4 510.2 109.4Reported PAT 1321.6 1480.9 12.1 1615.5 9.1 2481.2 53.6Extra-ordinary Items 101.3 0.0 - 0.0 - 0.0 -Adjusted PAT 1220.3 1480.9 21.4 1615.5 9.1 2481.2 53.6 (Source: Company, HDFC Sec) Financial Estimations: (Consolidated) Profit & Loss A/c

(Rs. In Million) YE March FY07 FY08 FY09 FY10 FY11E

Net Sales 9515 11026 13930 20412 34859Other Income 77 40 448 473 568Total Income 9592 11066 14378 20885 35427Raw Materials Consumed (Net of Inc / Dec in stock in trade) 4622 5180 7695 9463 16820Employee Cost 544 725 876 1877 3242Advertising & Publicity 771 915 997 1721 2963Other Expenses 1782 2061 2324 3278 5055Total Operating Expenses 7718 8881 11893 16339 28079EBITDA (incl. other inc) 1874 2185 2485 4546 7348EBITDA (excl. other inc) 1797 2145 2037 4073 6780Interest 96 129 201 111 695Depreciation 142 182 192 236 490Profit Before Tax 1636 1875 2092 4199 6163Tax (including FBT & DT) 195 283 360 803 1233Reported PAT 1440 1592 1733 3396 4930Extra Ord. Items 51 0 0 0 0Adj. PAT 1390 1592 1733 3396 4930 (Source: Company, HDFC Sec Estimates) Balance Sheet

(Rs. In Million) YE March FY07 FY08 FY09 FY10E FY11E

Share Capital 226 226 257 308 324Reserves & Surplus 994 1490 5412 7335 16062Shareholders Funds 1220 1716 5669 7644 16386Secured Loans 1086 921 2296 631 13573Unsecured Loans 650 950 480 504 605Loan Funds 1736 1871 2776 1135 14178Deferred Tax Liability 80 89 42 42 42Capital Employed 3036 3676 8486 8821 30607Gross Block 2699 2937 3370 3955 8162Less: Depreciation 1105 1254 1098 1334 1823Net Block 1594 1683 2272 2622 6339CWIP 398 716 25 25 25Goodwill 886 956 2086 2086 17857

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Investments 0 0 75 75 75Inventories 1352 1916 1675 2684 4775Sundry Debtors 483 510 602 923 1576Cash & Bank 475 426 3783 3642 5696Loans & Adv. & other current assets 465 668 1268 1957 3534Total Current Assets 2775 3519 7327 9206 15581Current Liabilities & Provisions 2617 3227 3299 5193 9270Working Capital 158 292 4029 4013 6311Misc. Exp not w/off 0 29 0 0 0Capital Deployed 3036 3676 8486 8821 30607

(Source: Company, HDFC Sec Estimates) Note: Goodwill arising out of Acquisition of Megasari & Sara Lee (51% stake) has been calculated at 70% of their acquisition cost looking at the past creation of Goodwill arising out of Keyline & Kinky group acquisition. Ratio Analysis

YE March FY07 FY08 FY09 FY10E FY11E FD EPS (Rs.) (Adjusted) 4.3 4.9 5.3 10.5 15.2PE (x) 81.6 71.2 65.4 33.4 23.0Book Value (Rs.) 5.4 7.6 22.1 24.8 50.5P/BV (x) 64.7 46.0 15.8 14.1 6.9OPM (%) 18.9 19.5 14.6 20.0 19.5PBT (%) 17.2 17.0 15.0 20.6 17.7NPM (%) (Adjusted) 14.6 14.4 12.4 16.6 14.1ROCE (%) 58.6 55.9 27.2 49.1 22.4RONW (%) 113.9 92.8 30.6 44.4 30.1Debt-Equity 1.4 1.1 0.5 0.1 0.9Current Ratio 1.1 1.1 2.2 1.8 1.7Mkt. Cap/Sales (x) 8.3 7.2 6.4 5.3 3.3EV/EBITDA 44.2 37.0 43.3 25.7 17.9 (Source: Company, HDFC Sec Estimates) Cash Flow Statement (Rs. In Million)

YE March FY07 FY08 FY09 FY10E FY11E Profit Before Tax 1636 1875 2092 4199 6163Net Opt Cash Flow 1204 1622 1433 3616 5872Net Cash from Investing Activities -943 -638 -1415 -586 -19978Net Cash from Financing Activities -50 -1034 3340 -3172 16160Cash & Cash Equivalents 475 426 3783 3642 5696Net Inc/(Dec) in Cash 212 -49 3358 -141 2055 (Source: Company, HDFC Sec Estimates)

Analyst: Mehernosh K. Panthaki (mehernosh.panthaki@hdfcsec.com) RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office HDFC Securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com

Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. Thisdocument is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buyany security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not berelied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to timesolicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients onlyand not for any other category of clients, including, but not limited to, Institutional Clients