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Godrej Cons: Acquisitions pay dividends

Jan 24, 2011

Godrej Consumer Products Ltd. has announced its 3QFY11 results. The company has reported a 90.2% YoY and 39.6% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for Godrej grew by 90% during 3QFY11. This comes on the back of strong growth of overseas business as well as from the inclusion of 100% financials of Godrej Household Products Limited (49% same quarter previous year)
  • Operating (EBITDA) margin fell by 2.1% YoY during the quarter. This comes on the back of higher raw material costs, increase in advertisement and other expenditure (all as a percentage of sales) partly offset by lower staff costs as a percentage of sales.
  • Net profits grew by 39.6% YoY during the quarter. This was lower than operating profit growth as a result of pressure from a sharp increase in interest costs, higher depreciation, rise in effective tax rate and lower other income.

Consolidated financials
(Rs m) 3QFY10 3QFY11 % Change 9mFY10 9mFY11 % Change
Net sales 5,184 9,858 90.2% 15,345 25,897 68.8%
Expenditure 4,162 8,126 95.3% 12,322 21,217 72.2%
Operating profit (EBDITA) 1,022 1,732 69.4% 3,023 4,679 54.8%
EBDITA margin (%) 19.7% 17.6%   19.7% 18.1%  
Other income    103         9 -91.4%    326    228 -29.9%
Interest       20    133 557.9%       84    327 288.8%
Depreciation       56    135 141.7%    175    359 104.8%
Profit before tax 1,049 1,473 40.4% 3,090 4,222 36.7%
Exceptional Items           0      411  
Tax    198    285 44.2%    611    971 58.8%
Profit after tax/(loss)    851 1,188 39.6% 2,478 3,663 47.8%
Net profit margin (%) 16.4% 12.1%   16.2% 14.1%  
No. of shares (m)    308    324      308    324  
Diluted earnings per share (Rs)*           14.2  
Price to earnings ratio (x)*         28.2  
*On a trailing 12 months basis

What has driven growth in 3QFY11?
  • Growth in sales was aided by strong performance by the company’s international business and by Godrej Household Products Limited (GHPL). Domestic soap segment grew by 6% YoY and ended the quarter with a market share of 10%. Hair colorant segment ended the quarter with a market share of 29.4%. International business, which contributes 34% to the total sales, grew by 296% YoY. This growth was a result of robust all-round performance in all geographies except UK. Sales of the UK business fell by 4% YoY due to weak GBP.

    Cost break-up
      3QFY10 3QFY11 9mFY10 9mFY11
    Total Cost of goods 47.4% 48.1% 46.9% 48.4%
    Staff Cost 11.6% 8.4% 10.1% 8.0%
    Advertising 8.4% 10.7% 9.0% 10.4%
    Other Expenditure 12.9% 15.2% 14.3% 15.2%

  • Fall in the company’s margins was due to higher raw material costs as a percentage of sales. Raw material costs increased from 47.4% in 3QFY10 to 48.1% in 3QFY11. This was largely due to rise in oil prices. The company’s margins were also affected by an increase in advertisement spending. Advertisement costs increased by 2.4% to stand at 10.7% for the quarter. Other expenditure also contributed to the fall in margins as it rose from 12.9% to 15.2% (all as a percentage of sales). Other expenditure was higher due to increase in sales promotion expense. However, lower staff costs supported the falling margins of the company. As a result of lower provision for variable remuneration, staff costs fell by 3.2% to 8.4% as a percentage of sales.

  • Net profit of the company grew by 39.6% YoY during 3QFY11. This performance came on the back of higher operating income partially offset by increase in interest costs, higher depreciation, rise in effective tax rate and lower other income. While interest costs and depreciation costs increased by 558% YoY and 142% YoY respectively, effective tax rate increase by 0.5% to 19.3%. Other income on the other hand fell by 91% YoY.

What we expect?
At the current price of Rs 399, the stock is trading at a 34.8 times our estimated FY13 earnings (RPro subscribers can click here). The company has benefited from its new acquisitions for the quarter. However, going forward, once the base effect of the acquisitions gets adjusted, we expect the company’s growth rate to moderate. Moreover the company is not expected to earn the high margins seen in FY10 going forward. Nevertheless we remain positive on the company’s long term prospects. However, we believe that growth from 2-3 years prospective has been priced in the stock. For this reason, we advise our subscribers to be cautious on this stock.

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