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Godrej Cons: Input costs depress margins
Feb 7, 2014

Godrej Consumer Products Ltd. has announced its third quarter results of financial year 2013-2014. The company has reported a 16.8% YoY growth in sales and 13.7% YoY rise in net profit. Here is our analysis of the results.

Performance summary
  • Godrej Consumer Products Ltd (GCPL) reported a 17% growth in consolidated sales backed by 13% growth in the domestic business and 22% rise in international operations for 3QFY14. For 9mFY14, consolidated sales grew by 21% with domestic and international operations registering growth of 15% and 28%, respectively.
  • The operating margin contracted by 1.1% in 3QFY14due to steep rise in raw material expenses and ad-spends. For 9mFY14, the operating margin reduced by 0.9% on higher ad-spends and staff costs.
  • At the net level, margins fell by a mere 0.3% in 3QFY14 due to a 17% cut in tax charges. The net margin for 9mFY14 declined by 0.6%.
  • The company has declared a third interim dividend of Re 1 per share on a face value of Re 1 per share.

Consolidated financials
(Rs m) 3QFY13 3QFY14 % Change 9mFY13 9mFY14 % Change
Total Income 16,982 19,823 16.7% 46,948 56,709 20.8%
Expenditure 14,133 16,717 18.3% 39,587 48,352 22.1%
Operating profit (EBITDA) 2,849 3,105 9.0% 7,361 8,357 13.5%
EBITDA margin (%) 16.8% 15.7% -1.1% 15.7% 14.7% -0.9%
 Other income 145 173 19.3% 436 433 -0.6%
Forex gain/loss (27) (30)   (279) (248)  
Interest 189 307 63.1% 553 805 45.6%
Depreciation 205 225 10.0% 610 690 13.2%
Profit before tax 2,574 2,716 5.5% 6,355 7,047 10.9%
Exceptional Items - 2   - 24  
Tax 674 558 -17.1% 1,261 1,367 8.3%
Profit after tax/(loss) 1,900 2,160 13.6% 5,094 5,705 12.0%
Share of profit in associate firm   (2)     (2)  
Minority Interest 178 204 14.2% 474 472 -0.5%
Net profit after minority interest 1,722 1,958 13.7% 4,620 5,235 13.3%
Net profit margin (%) 10.1% 9.9% -0.3% 9.8% 9.2% -0.6%
No. of shares (m)         340  
Diluted earnings per share (Rs)*         25.2  
Price to earnings ratio (x)*         28.9  
* On a trailing 12 months basis

What has driven performance in 3QFY14?
  • GCPL posted a 17% topline growth. Excluding the impact of discontinued third party contract manufacturing sales, branded sales in India grew by 14% with 33% of incremental growth was from new launches. The hair colour business registered the fastest growth of 37% driven by Godrej Expert Rich Hair Creme. Liquid detergents reported a strong growth of 37% during the quarter. The household insecticides business grew by a sluggish 8%, though ahead of the category, due to weak monsoon in South and East India. The soap business remained the slow mover posting a volume and value growth of 6% as compared to de-growth in overall category. The international business with the divested food business in Indonesia grew by 25% backed by organic constant currency growth of 13%. Africa, LATAM and Europe clocked double-digit sales growth during the quarter.

      3QFY13 3QFY14 Change in basis points
    Total Cost of goods 45.2% 46.7% 146.76
    Staff Cost 9.3% 9.2% -6.67
    Advertising 10.8% 11.5% 66.71
    Other Expenditure 18.0% 17.0% -95.87

  • The company's operating margins were hit by firm input prices and higher ad-spends. As a proportion of sales, cost of goods sold increased by 1.5% and ad-spends grew by 0.7%. This was partially offset by a savings of 0.9% in other expense to sales ratio. In domestic markets, promotional activities in household insecticides and inflationary pressures due to rupee depreciation impacted operating performance. Among geographies, the margins in Indonesia were adversely impacted by steep rise in wage & fuel costs as well as currency depreciation.

  • Net profits grew by a faster 13.7% on a 9% rise in operating profits. The robust growth was aided by a 17% cut in the tax outgo during the quarter. The interest cost shot up by 63%. 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 for the quarter.
What to expect?
GCPL has been growing at a robust pace, thanks to strong growth in the hair colour business coupled with a host of innovative product launches in the home & personal care. However, the company's profitability has been under pressure due to higher brand investments with around 75% of them targeted at new launches. Even its international operations have been adversely impacted by regulatory factors, high competition and political pressures due to FED taper as well as rupee depreciation.

At a price of Rs 728, the stock is trading at 29 times its trailing twelve months earnings. We are in the process of reviewing the company's forecast and will apprise our subscribers of our view on the stock once we update the financials.

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