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Godrej Consumer: All round performance! - Views on News from Equitymaster

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Godrej Consumer: All round performance!
Jan 20, 2007

Performance summary
Godrej Consumer Products Ltd (GCPL) yet again reported strong results for the third quarter ending December 2006. On a consolidated basis, the topline has grown by 29.3% YoY for 3QFY07 led by good performance of its soaps, hair care products and its international operations. The net profits have grown by 10.6% YoY. The management has also declared a third interim dividend of Rs 1 per share (dividend yield of 0.6%).

Consolidated picture
(Rs m) 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Gross sales 1,913 2,473 29.3% 5,351 7,395 38.2%
less: excise duty 71 93 29.7% 269 320 19.1%
Net sales 1,841 2,380 29.3% 5,082 7,075 39.2%
Expenditure 1,424 1,865 31.0% 4,051 5,742 41.7%
Operating profit (EBDITA) 417 515 23.5% 1,031 1,333 29.2%
EBDITA margin (%) 22.7% 21.6%   20.3% 18.8%  
Other income 30 17 -43.6% 81 54 -34.0%
Interest 26 33 28.9% 43 76 76.2%
Depreciation 29 36 22.5% 84 97 16.3%
Profit before tax 393 464 18.1% 986 1,213 23.1%
Tax 35 68 95.1% 79 166 111.3%
Profit after tax/(loss) 358 396 10.6% 907 1,047 15.4%
Net profit margin (%) 19.4% 16.6%   17.8% 14.8%  
No. of shares (m) 225.8 225.8   225.8 225.8  
Diluted earnings per share (Rs)*         5.95  
Price to earnings ratio (x)         26.2  
* 12months trailing earnings

What is the company’s business?
Godrej Consumer Products Ltd. (GCPL) is amongst the well known mid-cap companies in the Indian FMCG space with presence in personal care, hair care and fabric care categories and top-of-the-mind brands such as Cinthol, Fairglow, Godrej No.1 (soaps) and Ezee liquid detergent amongst others. The company bought over the ‘Snuggies’ brand in the child nappy segment in 2003. The company has state-of-the-art manufacturing facilities at Malanpur (MP) Baddi (Himachal Pradesh), Guwahati (Assam) and Silvassa. The company has acquired 100% ownership of Keyline Brands Limited, one of the admired FMCG companies in the United Kingdom, which also owns several international brands and trademarks in developed markets that include Europe, Jordan, Australia and Canada. In July 2006, GCPL entered into an agreement to acquire the South African hair color business of Rapidol, UK as well as its subsidiary Rapidol International, which had a combined turnover Rs 330 m in 2005.

What has driven performance in 3QFY07?
Topline picture: GCPL’s ability to drive growth and expand its presence in the FMCG segment by introducing new products and variants and entering new geographies led to a 29.3% YoY growth for 3QFY07. Growth was witnessed across all its product offerings.

Rs m 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Godrej Brands
Soaps 855 1,067 24.8% 2,942 3,572 21.4%
Hair Colour 411 617 50.1% 1,195 1,517 26.9%
Toiletries 226 368 63.1% 400 1,537 284.0%
Liquid Detergents 312 287 -8.3% 353 335 -4.9%
Total Godrej Brands 1,804 2,338 29.6% 4,890 6,961 42.3%
Contract Manufacturing 1 - - 78 - -
By-products 36 42 16.6% 114 114 0.4%
Total 1,841 2,380 29.3% 5,082 7,075 39.2%

Soaps: In value terms the sales of toilet soaps grew 25% YoY during the quarter under review led by good performance of both the popular and sub popular categories. While Cinthol continued to enjoy healthy demand, Godrej No1 mentioned its numero uno position as the largest selling soap in the Grade 1 category. The company once again outperformed the markets with a 25% YoY growth, whereas the industry grew at 22% YoY. GCPL continues to be the second largest toilet soaps player with a market share of 9.2% for the quarter.

Personal care: During the quarter, sales improved by 34% YoY on a consolidated and by 8% YoY on a stand-alone basis. Consolidated sales include sales of Rapidol and Keyline. Hair colorant business grew 50% YoY on a consolidated basis in value terms. In December 2006, the company had increased the price of its powder hair dye sachet by Re 1 in response to the strong demand. Growth across its talcum powder, shaving cream and diapers led to a 63% YoY growth on a consolidated basis in the toiletries segment.

Liquid detergents: Sales decreased by 8% YoY in value terms during the quarter mainly as a result of a mild and delayed winter season.

International operations: In the United Kingdom, led by the healthy performance across all major brands of Keyline, sales touched Rs 258 m, which is 10.8% of the consolidated sales. The net margins for Keyline were 3.9% during the quarter. The acquisition of Rapidol has given the company a strong position in a large and fast growing African hair color market. Rapidol contributed 5.9% to the consolidated sales with net margins of 13.1%.

Rs m 3QFY06 3QFY07 (%) Change 9mFY06 9mFY07 (%) Change
Soap 886 1103.9 24.6% 3,115 3671.2 17.8%
PBIT margins 7.7% 10.5%   12.2% 11.4%  
% of revenue 48.1% 46.4%   61.3% 51.9%  
Personal care 956 1,276 33.6% 1,967 3,404 73.1%
PBIT margins 39.4% 34.7%   40.1% 31.1%  
% of revenue 51.9% 53.6%   38.7% 48.1%  
Income from operations 1,841 2,380 29.3% 5,082 7,075 39.2%

Stable margins: Inspite of advertisement costs (as percentage of sales) falling by 320 basis points, the margins fell by 1.1% YoY due to higher raw material costs. Rise in oil prices, which is the main ingredient of soaps, led to the higher raw material costs. Going forward, the company expects the input prices to go up further.

Consolidated cost break-up
as a % of net sales 3QFY06 3QFY07 9mFY06 9mFY07
Total Cost of goods 43.4% 47.4% 47.3% 49.5%
Staff Cost 6.8% 6.3% 6.5% 5.9%
Advertising 9.5% 6.3% 7.9% 7.8%
Other Expenditure 17.6% 18.4% 18.1% 18.0%

Acquisitions boost bottomline: On standalone basis, the company’s profits rose by merely 1% YoY due to lower other income and higher interest cost. However, on a consolidated basis, the bottomline grew by 10.6% YoY led by strong performance of both Rapidol and Keyline.

What to expect?
At the current price of Rs 156, the stock is trading at a price to earnings multiple of 26.2 times its 12 months trailing earnings. The company has planned capacity expansion to the tune of Rs 1.1 bn. This will help the company increase its volumes and garner more market share. Also, its acquisitions are performing well and have given the company access to newer regions. Given the company's future growth prospects, consistent dividend payout and superior return ratios, GCPL is our preferred play amongst the smaller FMCG companies.

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