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Godrej Consumer: Conference call extracts

Feb 18, 2010

We recently attended the 3QFY10 analyst conference call of Godrej Consumer Products Ltd. (GCPL). The company is the second largest soap company in India after Hindustan Unilever Ltd. (HUL). Major brands of the company include Cinthol, Godrej No. 1, Godrej Expert and Ezee. About 78% of the company's consolidated top line in FY09 was derived from the domestic business while the remaining sales were contributed by the company's international subsidiaries.

GCPL had a strong December quarter with soaps and hair colour category growing ahead of industry. In the domestic market, soaps grew by 13% YoY while hair colour category grew by 17% YoY. The growth seen during the quarter was primarily volume driven. However, the results of this quarter include the results of Godrej Sara Lee which contributed 23.3% of the top line and 23% of the bottom line.

As per the management, the company gained traction in the soaps market by increasing its distribution network. During the quarter, it added 6,200 villages to its network with the addition of 95 super stockists and 1,570 stockists to the company. The growth of hair colour category was aided by increase in availability at salons and barber shops. This improved visibility at touch points helped build the franchisee. Moreover the company increased its advertisement spending during the quarter for brand support.

The reason why the company was able to achieve a strong bottom line growth was due to the softening of raw material prices. Going forward, the company believes that it is covered as far as raw material is concerned. GCPL uses palm oil derivatives for manufacturing soap. Edible palm oil now importable in India duty free makes the palm oil derivatives available at much lower prices domestically than in international markets. Due to this reason, GCPL believes that raw material prices will continue to remain benign for the next two quarters.

On the international side, sales of the company grew by 26% YoY. The growth was aided by strong performance seen in the Kinky and Rapidol business. The reason for growth seen here was the increase in footprint of both businesses on the back of increased distribution and geographical reach. The bottomline improved as a result of better economies of scale in both the businesses.

Among new launches during the quarter, the company has launched Godrej No. 1 moisturising soap and Godrej Protekt range of hand sanitizers, hand wash and wipes. The company's market share in the soaps category typically tends to dip during third quarter from the second quarter. The reason behind this is that the company does not have glycerine/moisturising soap for the winter months. With the launch of Godrej No. 1 moisturising soap, this gap is expected to be plugged in the future.

GCPL is continuing to look for acquisition and has taken the approval of its board for raising upto Rs 30 bn. The company is looking for acquisition in categories in which it has inherent strength like hair care and household insecticide. Moreover, the company is looking at prospective acquisitions in India and in countries where it is already present. Only in case of unsuitable options will the company target other developing markets.

Going forward, the company believes that growth rate will not be as sharp as seen the last few quarters. This is due to the fact that the value growth as a component of growth is falling and in a benign raw material pricing scenario the company does not see itself increasing prices. Moreover, the food inflation is leading to lower spends on FMCG category. However, this is expected to correct once the Rabi crop comes in.

What we expect
At the current price of Rs 260, the stock is trading at a multiple of 19 times our FY12 estimated earnings. Going forward we expect GCPL's growth to be slower than that in the recent quarters. However, the growth from the international business will continue offer an upside. The company plans to acquire Sara Lee's 51% stake in Godrej Sara Lee. This will happen once Sara Lee completes the sale of its household and body care business. Once complete, the company is expected to add to GCPL's bottom line.

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