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Godrej Consumer: Mixed quarter - Views on News from Equitymaster

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Godrej Consumer: Mixed quarter
Jan 17, 2008

Performance summary
  • Topline grows 14.6% YoY in 3QFY08 with domestic sales growing by 15.9% YoY and international operations reporting 8.3% YoY growth.

  • Operating margins on consolidated basis fall by 0.8% YoY led by higher labour, advertising and others expanses.

  • GCPL acquires Godrej Global Mideast FZE (a 100% subsidiary of Godrej International Limited in Sharjah) during the quarter for distributing Godrej FMCG products in the Middle East for value of Rs.58 m.

  • The net profit on consolidated and standalone basis are up 8.7% YoY and 13.2% YoY respectively for 3QFY08.

  • The board has declared an interim dividend of Rs 1 per share (dividend yield of 0.8%).

Consolidated picture
(Rs m) 3QFY07 3QFY08 (%) Change 9mFY07 9mFY08 (%) Change
Gross sales 2,473 2,756 11.5% 7,395 8,539 15.5%
less: excise duty 93 29 -68.9% 320 208 -35.1%
Net sales 2,380 2,728 14.6% 7,075 8,331 17.8%
Expenditure 1,865 2,159 15.8% 5,742 6,753 17.6%
Operating profit (EBDITA) 515 568 10.3% 1,333 1,578 18.4%
EBDITA margin (%) 21.6% 20.8% 18.8% 18.9%
Other income 17 15 -14.0% 54 41 -23.7%
Interest 33 29 -13.3% 76 95 24.6%
Depreciation 36 48 33.7% 97 138 42.4%
Profit before tax 464 506 9.3% 1,213 1,386 14.2%
Tax 68 76 12.2% 179 201 12.3%
Profit after tax/(loss) 396 430 8.7% 1,034 1,184 14.6%
Net profit margin (%) 16.6% 15.8% 14.6% 14.2%
No. of shares (m) 225.8 225.8 225.8 225.8
Diluted earnings per share (Rs)* 7.0
Price to earnings ratio (x)* 18.3
* 12 month trailing

What has driven performance in 3QFY08?
  • On consolidated basis, GCPL witnessed a topline growth of 15% YoY led by 26% YoY growth in its soap segment. GCPL continued to outperform the industry (7.1%) is the second largest toilet soaps player with a market share of 9.7%. Inspite of launching new variants, GCPL under performed the hair colour segment with a growth of 6% YoY in 3QFY08 against the industry growth rate of 9.5%. However, its market share stood at 34.9% in 3QFY08 (same as 2QFY08, lower than 38% in 3QFY07). Toiletries grew by 6% YoY, while liquid detergents revenues fell by 3% YoY. The standalone revenues contributed 84% to the total revenues in 3QFY08. The topline is marginally lower than our estimates.

    Consolidated sales breakup
    Rs m 3QFY07 3QFY08 (%) Change 9mFY07 9mFY08 (%) Change
    Soaps 1,066 1,348 26.4% 3,572 4,430 24.0%
    Hair Colour 617 656 6.4% 1,517 1,844 21.6%
    Toiletries 368 390 6.0% 1,537 1,606 4.5%
    Liquid Detergents 287 279 -2.7% 335 318 -5.2%
    Total Godrej Brands 2,338 2,673 14.4% 6,961 8,197 17.8%
    By-products 42 54 27.7% 114 133 16.8%
    Total 2,380 2,727 14.6% 7,075 8,331 17.8%

  • Sales of Keyline grew by 6.6% YoY, while that of Rapidol witnessed an increase of 0.7% YoY. The Godrej SCA Hygiene JV formed earlier launched the Libero baby diapers launched in 50 cities across India. Also, 10 acres of land at Sinnar for construction of its factory was sanctioned. It also acquired Godrej Global Mideast FZE (100% subsidiary of Godrej International Limited) in Sharjah to distribute Godrej FMCG products in the Middle East for Rs 58 m. GGME has a strong network of distributors in countries such as Oman, Saudi Arabia, Kuwait and Bahrain. It earned revenues of Rs 20 m in the quarter. Synergies in GCPLs domestic business model and international operations will be the key driving forces for growth going forward.

  • Operating margins on consolidated basis stood at 20.8% in 3QFY08 (21.6% in 3QFY07). This was mainly due to higher labour, advertising and other expenses (as a percentage of sales). The company had introduced new variants of its products and hence the advertisement expenses increased by 43% YoY. Price increases of up to 6% YoY in soap brands was effected during the quarter to offset the higher raw material prices. The margins are in line with our estimates.

  • GCPLs net profit on the consolidated basis grew by 8.7% YoY for 3QFY08. Lower operating and other income, higher depreciation costs led to the slow growth. It must be noted that the depreciation costs were higher on account of Katha factory (in Punjab) being operational in 3QFY08. The share of the standalone net profits increased from 93% in 3QFY07 to 96% in this quarter. Rapidol and Keyline contributed 4.4% and 2.8% respectively to the consolidated bottomline.

What to expect?
At the current price of Rs 128, the stock is trading at a price to earnings multiple of 12.7 times our estimated FY10 earnings. While GCPL continues to follow the strategy of gaining market share in the soap category, new product launches and improving market reach and customer focus is used for personal care segment. Inspite of the price hike undertaken, the company continued to beat the industry growth rate indicating the product portfolio and demand strength. Though the hair colour and liquid detergent segments continue to disappoint, the company has maintained its market share. Further, on the international front, the company is doing well and is investing in brands and newer regions. Also, the joint venture would help it to access SCAs world leading technology and brands.

GCPL is consistently enhancing its capacities and operational efficiency in its efforts to expand margins and strengthen its competitive position. The company is also raising Rs 4 bn to fund its acquisitions in the developing markets. Since the company has a low debt t o equity ratio, the ability to leverage the balance sheet is high and therefore, we do not see any major concerns with respect to funding of inorganic opportunities, as and when they arise. Taking into consideration the buoyant economic conditions and expansion of business through inorganic growth, we maintain our positive view on the stock.

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