Are Marico & GCPL wealth creators?

In our previous article, we showcased how two mid-sized FMCG companies, Marico and GCPL have been growing at a robust pace clocking average sales growth of 22% and 38%, respectively during the past five years. They owe their growth to the acquisition overdrive, and what is remarkable is that they are still managing to stay afloat. Both of them have recently diluted equity to fund their inorganic growth.

In this article, we test the efficacy of their brown-field "brand-wagon" expansion strategy for generating shareholder's return.

Godrej Consumer Products Limited (GCPL) made its first acquisition of 'Keyline Brands' in 2005, whereas Marico acquired its first domestic brand 'Nihar' from HUL in 2006. So let us study the most recent five-year time-frame (FY06-FY11) to find out if, and how much shareholders have benefitted. The best way to test it is to determine the returns earned by shareholders on every additional rupee invested by them. In other words, these stocks should have earned at least a rupee for every one rupee invested 'One-rupee test' to qualify as an investment candidate as per Value Investment guru, Warren Buffet.

The numbers testify that the brand acquisition strategy has enabled both Marico and GCPL in increasing shareholder's wealth. In fact, for every rupee of equity investment during the period FY06-FY11, Marico and GCPL have created market values of Rs 8.3 and Rs 4.7, respectively and have multiplied shareholder's wealth at least five fold.

Interestingly however, the table below shows that this performance pales when compared to the magnitude of wealth created in the period prior to the acquisition spree (FY02-FY06). During this period, each rupee of shareholder's funds generated phenomenal returns of Rs 43 and Rs 146 for Marico and GCPL respectively.

Marico and GCPL pass the 'One Rupee' test

	Increase in networth in Rs m (A)		Increase in Market Cap in Rs m (B)		Value created for every Re 1 invested (B/A)
(Rs m)	FY02-FY06	FY06-FY11	FY02-FY06	FY06-FY11	FY02-FY06	FY06-FY11
Marico	640	6542	27449	53942	42.9	8.3
Godrej Consumer	255	16465	37211	77261	145.9	4.7

Source: Ace Equity
A look at the trends clearly shows that shareholders reaped stellar returns on their investments during the initial organic growth phase. These spectacular returns fell considerably in the more recent inorganic growth phase, when the two companies acquired a large number of brands in the domestic and international markets.

This relative underperformance, also, reflects shareholder's concerns about the future prospects of the acquired overseas brands in a global recession.

Marico and GCPL have managed to finance their acquisitions without piling on excessive debt. However, they now need to focus on making their acquisitions successful, and on generating much higher returns on additional equity investments made by the shareholders.

Going forward, it remains to be seen, if these two companies are able to derive greater mileage from the acquired brands, and regain their original status of being high wealth creators.


source: equity master