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Godrej Consumer: Margin pressure - Views on News from Equitymaster

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Godrej Consumer: Margin pressure
Jan 24, 2009

Performance summary
  • Consolidated topline grows by 26% YoY for 3QFY09 and 27% YoY during 9mFY09.
  • Operating margins decline by 6.7% YoY and 5.6% YoY respectively for both the period under consideration on account of higher raw material costs.
  • Consolidated bottomline declines by 7% YoY during 3QFY09 and 4% YoY during 9mFY09 mainly due to lower margins and higher tax expense.


Consolidated picture
(Rs m) 3QFY08 3QFY09 (%) Change 9mFY08 9mFY09 (%) Change
Gross sales 2,756 3,555 29.0% 8,539 10,860 27.2%
less: excise duty 29 133 358.6% 208 358 71.9%
Net sales 2,727 3,422 25.5% 8,331 10,541 26.5%
Expenditure 2,158 2,938 36.2% 6,752 9,129 35.2%
Operating profit (EBDITA) 569 4843 -14.9% 1,579 1,413 -10.5%
EBDITA margin (%) 20.9% 14.1% 19.0% 13.4%
Other income 15 15 -0.7% 41 43 5.4%
Interest 29 (42) -243.4% 95 (100) -205.6%
Depreciation 48 51 5.8% 138 152 10.1%
Profit before tax 507 490 -3.4% 1,387 1,404 1.2%
Tax 76 88 16.2% 201 265 31.8%
Profit after tax/(loss) 431 401 -6.9% 1,186 1,139 -3.9%
Net profit margin (%) 15.8% 11.7% 14.2% 10.8%
No. of shares (m) 225.8 258.1 225.8 258.1
Diluted earnings per share (Rs)* 6.0
Price to earnings ratio (x)* 21.9
* 12 month trailing

What has driven performance in 3QFY09?
  • GCPL witnessed a 29% YoY jump in the consolidated topline during 3QFY09 and 27% YoY growth during 9mFY09. The domestic sales jumped 19% YoY, while international business saw a 61% YoY increase. Soaps (up 23% YoY) and toiletries (up 70% YoY) aided the strong performance during the quarter. In comparison to the industry (21% YoY) GCPL saw a growth of 22% YoY in the soap segment in the domestic market. Market share stood at 9.7%.While the volume growth was 19% YoY, value growth stood at 23% YoY during the quarter. The proportion of sales of value for money products was on the higher side, hence company’s ‘Godrej No 1’ brand performed extremely well as per the management. Hair colour segment reported a 9% YoY growth despite an 11% price hike implemented in the previous quarter.

    Consolidated sales breakup
    Rs m 3QFY08 3QFY09 (%) Change 9mFY08 9mFY09 (%) Change
    Soaps 1,348 1,656 22.8% 4,430 5,296 19.6%
    Hair Colour 656 714 8.9% 1,844 1,976 7.2%
    Toiletries 390 664 70.0% 1,606 2,463 53.4%
    Liquid Detergents 279 314 12.5% 318 374 17.5%
    Contract Mfg. - -   - 82  
    Total Godrej Brands 2,674 3,348 25.2% 8,198 10,190 24.3%
    By-products 54 74 36.8% 133 312 134.8%
    Total 2,728 3,422 25.4% 8,331 10,503 26.1%

  • On the international front, during the quarter, Godrej Netherlands B.V. saw a sales growth of 11% YoY, while sales of Rapidol declined marginally due to unfavorable currency movement. In terms of South African Rand, the sales were higher by 10% YoY. Godrej Global Mideast FZE (GGME) saw a robust growth. The international business now contributes 21% to the total revenues (16% in 3QFY08).

  • During the quarter, the consolidated margins declined by 6.7% YoY, mainly on account of higher raw material costs, which increased by 64% YoY. Soap margins were impacted due to high cost vegetable oil inventories. However, lower staff, ad and other costs (as a percent of sales) bought some relief. During 9mFY09, the margins dropped 5.6% YoY. On standalone basis, the margins for both the period dropped 8% YoY. The margins are lower than our estimates. The company is likely to see a benefit from the decline in input cost in next quarter. Palm oil prices have declined by 50% from its highs in recent times. The management expects good times ahead for the soap business.

  • The consolidated profits for 3QFY09 declined by 7% YoY, while they were down 4% YoY during the 9 month period. Lower margins and higher tax expenses caused the fall. On a standalone basis, the profits for both the periods declined by 6% YoY and 5% YoY respectively. The standalone profits contribution remained more or less stable, indicating sluggish performance by its international business.

  • GCPL has announced the buyback of its fully paid up equity shares of Re.1 up to 17,203,533 equity shares (minimum number 250,000 equity shares) at a price not exceeding Rs.150 per equity share.

What to expect?
At the current price of Rs 131, the stock is trading at a price to earnings multiple of 15.2 times our estimated FY11 earnings. GCPL has no major capex plans in the coming 2 years. It is looking at acquisition in the range of US$ 200 to US$ 300 m. On the international front, Kinky would perform better than other acquisitions. The management is very positive on strong growth going forward. While value growth would be lower, volume would continue to grow. The company also expects the margins in the coming fiscal to be in higher range than witnessed earlier. It does not see companies lowering the prices.

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