Premium“A leader is a dealer in hope," said Napolean Bonaparte. Investors and traders dealing in the shares of Godrej Consumer Products Ltd have been infused with much hope, thanks to a change in leadership.
The company said it has appointed Sudhir Sitapati as managing director and chief executive officer for five years effective 18 October. Investors are thrilled about Sitapati’s rich experience of more than two decades at industry leader Hindustan Unilever Ltd, where his latest role was of an executive director and vice president for the foods and refreshment business.
Premium Premium Godrej Consumer shares have risen over 20% since the announcement. This is in sharp contrast to a leadership change announced by the firm in June 2020, when Nisaba Godrej, part of the promoter group, took over the office of the managing director. Godrej Consumer shares had fallen 8% in just three trading sessions at the time. When the promoter group also occupies the CEO’s office, investors worry about too much concentration of power.
Sitapati’s appointment, therefore, comes as a relief. What’s more, there have been a number of instances in the FMCG industry where management changes have reversed the fortunes of some firms. “While there are a lot of unknowns, the history of CEO changes at Britannia Industries, Jubilant Foodworks, Hindustan Unilever and Dabur India suggest that a new leader could bring about a paradigm shift, driving significant shareholder value. Godrej Consumer has underperformed most peers in the past few years, which may change as the new leader brings-in a new strategy that may entail some hard decisions," Analysts from Jefferies India Pvt. Ltd said in a report on 11 May.
Analysts at Motilal Oswal Financial Services Ltd went so far as to upgrade the stock to a ‘buy’ rating, after having a ‘neutral’ rating for over a decade. “If Mr Sitapati is able to strongly grow the domestic business and usher better capital allocation, the impact on Godrej Consumer’s prospects can be immense," analysts at Motilal Oswal said in a 12 May note to clients.
As pointed earlier, the new development marks a separation from Godrej Consumer being run as a promoter led company, to being led by a professional. Studies show that a separation of ownership and management helps firms in improving capital allocation and hence attract better valuations.
The company said that Nisaba Godrej, the company’s current chairperson and managing director, will continue to serve as executive chairperson. Nisaba is the daughter of Adi Godrej, chairman emeritus of Godrej Consumer. Note that excluding today’s appreciation, the company’s stock had increased by 8.6% since 9 June 2020 when the company had announced management changes last year. During the same time, the Nifty FMCG index has risen nearly 16%.
Meanwhile, the firm’s March quarter results announced on Tuesday have broadly met expectations. Consolidated revenues increased by 27% year-on-year, helped by a favourable base of last year’s quarter.
Wednesday's jump in the company’s shares have naturally boosted valuations. Currently, the stock trades at 47 times estimated earnings for FY22, based on data from Bloomberg. Ahead of the announcement, the company’s valuations trailed those of domestic FMCG firms such as Tata Consumer, Britannia, Marico, and Dabur.
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