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Godrej Cons: Margin contraction continues
Feb 4, 2013

Godrej Consumer Products Ltd. has announced its third quarter results of financial year 2012-2013. The company has reported a 26% YoY growth in sales and 3% YoY rise in net profit. Here is our analysis of the results.

Performance summary
  • Riding on 20% growth in the domestic business and 16% increase in the organic international business, overall topline grew by 26% in 3QFY13. For 9mFY13, revenues were up by 32%.
  • The company eroded its operating margin by 3.2% on account of a huge jump in ad-spends and higher staff costs and other expenditure. During 9mFY13, operating margin contracted by 2%.
  • Earnings grew by a muted 3% on a 6% rise in operating profit coupled with steep rise in depreciation expense and tax outgo. However, net profit for 9mFY13 fell by 9% due to higher exceptional income earned in the year-ago quarter.

Consolidated financials
(Rs m) 3QFY12 3QFY13 % Change 9mFY12 9mFY13 % Change
Total Income 13,487 16,956 25.7% 35,412 46,881 32.4%
Expenditure 10,794 14,108 30.7% 29,140 39,519 35.6%
Operating profit (EBITDA) 2,693 2,849 5.8% 6,273 7,361 17.4%
EBITDA margin (%) 20.0% 16.8%   17.7% 15.7%  
 Other income 135 145 7.9% 339 436 28.5%
Forex gain/loss (59) (27)   (208) (279) 34.7%
Interest 210 189 -10.4% 472 553 17.0%
Depreciation 171 205 19.9% 489 610 24.7%
Profit before tax 2,388 2,574 7.8% 5,443 6,355 16.8%
Exceptional Items - -   1,752 - -100.0%
Tax 555 674 21.4% 1,660 1,261 -24.0%
Profit after tax/(loss) 1,833 1,900 3.7% 5,536 5,094 -8.0%
Minority Interest 162 178   195 245  
Net profit after minority interest 1,671 1,722 3.1% 5,341 4,849 -9.2%
Net profit margin (%) 12.4% 10.2%   15.1% 10.3%  
No. of shares (m)         340  
Diluted earnings per share (Rs)*         19.9  
Price to earnings ratio (x)*         37.1  
* On a trailing 12 months basis

What has driven growth in 3QFY13?
  • GCPL reported a 26% rise in its consolidated sales driven by 19% organic growth in business. The domestic business which forms more than 50% of consolidated sales clocked the strongest growth of 20% backed by robust growth in all its product categories. The largest segment household insecticides benefited by high incidence of dengue and malaria and grew by 28%, 1.3 times faster than the overall category. The soap segment posted a 20% rise on an underlying volume growth of 2% that was adversely impacted by the New Packaging norms. Backed by strong growth across all formats and good response to newly launched Expert Rich Creme hair colour, the hair colour segment reverted to a strong growth of 17%. In international business, topline in all geographies grew in double-digits. Latin America grew the fastest at 83% whereas Indonesia saw its sales grow by 30% led by market share gains and new product launches. The Africa business revenues were up by 21% backed by launch of insecticides in Nigeria and integration of Darling Group companies with phase II geographies. Sales in the European market were relatively slower at 15%.

    Cost break-up
    Total Cost of goods 3QFY12 3QFY13 Change in basis points
    Total Cost of goods 46.8% 44.3% -244.02
    Staff Cost 8.2% 9.3% 107.98
    Advertising 8.3% 10.7% 236.44
    Other Expenditure 16.7% 18.9% 216.13

  • Despite robust topline growth, operating profitability continued to shrink on higher brand investments and other expenses. As a proportion of sales, ad-spends and other expenses rose by more than 2%, each during the quarter. Even staff costs jumped up by 42%. The impact of escalating costs was partially offset by a 2.4% drop in raw material to sales ratio. Overall operating margin reduced by 3.2% for the quarter.

  • Earnings grew by a subdued 3% on a 5.8% rise in operating income and a 20%-21% increase in each of the depreciation and tax outgo for the quarter. The tax incidence rose to 26% from 23% in the year-ago quarter. However, interest cost was down by 10.4% during the quarter. Other income grew by a relatively slower 8%. The company continued to resort to below-the-line adjustment for brand amortisation. Thus, the amount of Rs 133 m pertaining to amortisation of the acquired Good Knight and Hit brands was directly debited to the General Reserves. Excluding this impact, net profits would have declined by 5% during the quarter.

What to expect?
GCPL's margins have been sliding despite easing price of vegetable oil. This is because input cost savings have been more than offset by rising employee costs, other expenditure and ad-spends. Several new product launches such AER air-freshener and Expert crème hair colour as well Cinthol re-launch have kept ad-spends high whereas higher trade promotions in case of the largest product segment household insecticides has led to escalation in other expenses. To add to this, the phase II consolidation of Darling Group in Kenya has translated into increased employee costs for the company. Going forward, the company expects pick-in momentum for hair colours backed by innovative offerings aimed at consumer's uptrading from powder to crème format. Even the Darling group consolidation and cross-pollination of products are likely to provide better synergies in future and translate into better margins in the long run.

The company has recently acquired a female deodorant brand "Soft and Gentle" from Colgate-Palmolive through its Keyline subsidiary. As part of re-structuring initiatives, certain overseas subsidiaries will divest their non-core foods business along with associated brands.

At a price of Rs 739, the company is trading at 21 times its FY15 estimated earnings. At these valuations the stock is overpriced and we re-iterate a 'SELL' on the stock.

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