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Godrej Consumer: Colour in numbers
Jan 21, 2006

Introduction to results
Godrej Consumer Products Ltd (GCPL) reported enthusing results for the December 2005 quarter. The company reported a decent topline growth and a much better bottomline growth due to margin expansion of 270 basis points. The topline growth was primarily influenced by the hair colour segment, which grew by 24% YoY in 3QFY06 while the soaps segment grew by 12% YoY. Bottomline outpacing topline was also aided by higher other income and lower tax outgo.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 1,531 1,691 10.5% 4,242 4,932 16.3%
Expenditure 1,207 1,287 6.7% 3,478 3,914 12.5%
Operating profit (EBDITA) 324 404 24.8% 764 1,018 33.3%
EBDITA margin (%) 21.1% 23.9%   18.0% 20.6%  
Other income 3 29 784.8% 14 80 475.5%
Interest (net) 9 11 22.5% 24 29 19.7%
Depreciation 28 27 -2.5% 80 82 2.3%
Profit before tax 290 395 36.2% 674 988 46.6%
Tax 30 34 13.1% 66 78 17.2%
Profit after tax 260 361 38.8% 608 910 49.8%
Net profit margin (%) 17.0% 21.4%   14.3% 18.5%  
Effective tax rate 10.3% 8.5%   9.8% 7.8%  
No. of Shares (m) 56.6 56.5   56.6 56.5  
Diluted earnings per share* (x)         20.4  
Price to earnings ratio (x)         27.9  
*(Trailing 12 months)            

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 the 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 being a few amongst them. The company bought over the ‘Snuggies’ brand in the child nappy segment in 2003. Soaps and hair colours formed about 83% of the company's revenues in FY05. The Company has state-of-the-art manufacturing facilities at Malanpur (M.P.) Baddi (Himachal Pradesh), Guwahati (Assam) and Silvassa. With the acquisition of 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.

What has driven performance in 3QFY06?
Core portfolio continues to score: The company’s core portfolio of soaps (51% of revenues) continued to outperform (12% YoY growth) the industry growth of 3% YoY. Cinthol, Godrej No.1 and Fairglow were the main drivers of growth in this segment, which enabled the company to expand its market share to 9.5% during the quarter (from 8.3% in 3QFY06). It must be noted that with this, the company now stands at the second position in the overall soap market behind HLL. However, margins for soaps declined by 20 basis points in the quarter under review, mainly due to a different product mix.

Hair colour: It must be recollected that at the end of FY05, the company had introduced new variants in the segment and had also re-launched its flagship brand ‘ColorSoft’ with a different mix, which has helped the company reaped the benefits of the same as it notched a 24% YoY growth in this segment in 3QFY06. One must note that this segment has been on an upswing for some time now. Further, the company had increased prices of hair dye sachets, despite no increase in input costs. The company’s market share in this segment improved to over 40% during the quarter. Going forward, in light of the increasing competition, both from local and international products, Godrej’s efforts at restructuring this business in response to market needs are encouraging.

Sales mix
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Godrej Brands
Soaps 764 855 11.9% 2,506 2,942 17.4%
Hair Colour 331 411 24.2% 956 1,195 25.0%
Toiletries 48 76 57.4% 172 250 45.7%
Liquid Detergents 278 312 12.4% 318 353 11.1%
Total Godrej Brands 1,421 1,654 16.4% 3,951 4,740 20.0%
Contract Manufacturing 76 1 -98.4% 189 78 -58.7%
By Products 33 36 8.7% 101 114 12.4%
Total 1,531 1,691 10.5% 4,242 4,932 16.3%

Stellar performance from toiletries: Revenues from this segment grew by over 57% YoY albeit from a low base, backed by growth in the companies recently launched products like Godrej Shaving Cream Lather Delux, promotions for Cinthol Talcum Powder and Godrej Snuggy diapers. Also, severe winters benefited the company’s liquid detergent (used for woolen clothes) business, which grew by over 12% YoY.

Contract manufacturing: The company undertakes contract manufacturing for big players like HLL, mainly for the manufacture of soaps. Although revenues from this segment have fallen by over 98% YoY, it must be noted that in the long-term this is a positive for the company considering that contract manufacturing had displayed volatile trends in the past. Also, as Godrej’s own soap brands are showing encouraging signs of growth, the excess capacity currently with the company can be utilised internally over a period of time and as such, this would compensate for the loss of contract manufacturing. Moreover, contract manufacturing does not contribute significantly to the overall profits of the company, as margins are slim.

as a % of net sales 3QFY05 3QFY06 9mFY05 9mFY06
Total Cost of goods 47.1% 42.8% 49.8% 47.2%
Staff Cost 5.3% 6.3% 5.5% 6.3%
Advertisement & Promotion 8.0% 8.9% 7.3% 7.6%
Other Expenditure 18.5% 18.1% 19.4% 18.3%
Total Expenditure 78.9% 76.1% 82.0% 79.4%

Margin scenario: As can be seen from the above table, the total cost of goods as a percentage of sales reduced drastically by 430 basis points, which is reflected in margin expansion. This was possible due to sourcing of certain raw materials from manufacturers who have plants in excise free zones. The company has also stepped up its advertising expenditure in order to combat competition. Staff costs have also gone up owing to the rise in variable salaries of managers.

Over the past few quarters…
  3QFY05 4QFY05 1QFY06 2QFY06 3QFY06
Sales growth (YoY) 19.7% 14.1% 23.1% 16.4% 10.5%
Advertising as % of sales 11.4% 11.8% 7.3% 6.6% 8.9%
OPM (%) 21.1% 17.1% 19.7% 17.2% 23.9%
Net profit growth (YoY) 45.0% 54.5% 56.6% 59.6% 38.8%
Soap growth (YoY) 22.9% 9.2% 20.5% 19.2% 11.9%
Hair colour growth (YoY) 10.3% 35.9% 22.4% 31.5% 24.2%

What to expect?

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Soaps 867 886 2.1% 2,777 3,115 12.2%
PBIT 68 69 0.3% 265 368 38.9%
Margins (%) 7.9% 7.7%   9.5% 11.8%  
Personal care 663 806 21.5% 1,465 1,817 24.0%
PBIT 274 364 33.0% 566 776 37.1%
Margins (%) 41.3% 45.2%   38.6% 42.7%  
Total 1,531 1,691 10.5% 4,242 4,932 16.3%
PBIT 342 433 26.5% 831 1,144 37.7%
Margins (%) 22.4% 25.6%   19.6% 23.2%  

As can be seen from the table above, soaps account for a major chunk of revenues. But it is a low margin business (7.7%). Higher input costs and intense competition prevails in this segment resulting in pressure on margins. On the other hand, margins in the hair colour segment and other personal products are quite high (over 45%) and increasing revenue contribution from this segment is a positive for GCPL.

At the current price of Rs 571, the stock is trading at a price to earnings multiple of 27.9 times its trailing 12 month earnings and a market cap to sales of 4.5x. The company's new plant at Baddi in Himachal Pradesh will give it a 10-year excise and a 5-year income tax benefit. This will therefore, continue to help it to keep costs under control and sustain margins in the medium term.

Going forward, Keyline, the companys recent acquisition will contribute around 15% to the company’s topline and around 10% to its bottomline. For the two months ending December 2005, Keyline’s performance was nothing to write home about. However, part of this could be attributed to the ongoing winter season and as such, the real test for the company’s products, the usage for which increases in the non-winter season, would begin only from 1QFY07.

The company has announced a third interim dividend of Rs 3 per share (yield 0.5%), taking the total dividend for 9mFY06 to Rs 9, which is an indication of management shareholder friendliness.

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