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Godrej Cons: Insecticide biz gains momentum - Views on News from Equitymaster
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Godrej Cons: Insecticide biz gains momentum
Feb 27, 2015

Godrej Consumer Products Ltd. has announced its third quarter results of financial year 2014-2015. The company has reported a 12.5% YoY growth in sales and 34.6% YoY rise in net profit (excluding exceptional item). Here is our analysis of the results.

Performance summary
  • Revenues for 3QFY15 grew by 12.8% led by 12% growth in the domestic business and 13% rise in international business. For 9mFY15, revenues were up by 9%.
  • Backed by lower ad-spends, the operating margin expanded by 2.1% and 1% respectively in 3QFY15 and 9mFY15.
  • Net profits grew by 34.6% in 3QFY15 aided by lower interest charges. The net profits for 9mFY15 have grown by 22.6%.
  • The company has declared a third interim interim dividend of Re 1 per share on a face value of Re 1 per share for the financial year 2014-15.

Consolidated financials
(Rs m) 3QFY14 3QFY15 % Change 9mFY14 9mFY15 % Change
Total Income 19,823 22,357 12.8% 56,709 61,843 9.1%
Expenditure 16,697 18,373 10.0% 48,291 52,026 7.7%
Operating profit (EBITDA) 3,126 3,984 27.5% 8,418 9,817 16.6%
EBITDA margin (%) 15.8% 17.8% 2.1% 14.8% 15.9% 1.0%
 Other income 173 121 -30.4% 433 741 70.9%
Forex gain/loss (30) 15   (248) (52)  
Interest 307 253 -17.8% 805 761 -5.5%
Depreciation 225 230 2.4% 690 679 -1.7%
Profit before tax 2,737 3,636 32.9% 7,109 9,066 27.5%
Exceptional Items (19) (1)   (38) (173)  
Tax 558 738 32.2% 1,367 1,900 39.0%
Profit after tax/(loss) 2,160 2,897 34.1% 5,705 6,994 22.6%
Share of profit in associate firm 2 (0)   2 (1)  
Minority Interest 204 261 28.2% 472 577 22.3%
Net profit after minority interest 1,958 2,636 34.6% 5,234 6,416 22.6%
Net profit margin (%) 9.9% 11.8% 1.9% 9.2% 10.4% 1.1%
No. of shares (m)         340  
Diluted earnings per share (Rs)*         25.8  
Price to earnings ratio (x)*         43.4  
* On a trailing 12 months basis

What has driven performance in 3QFY15?
  • GCPL posted a topline growth of 12.8%. Domestic business grew by 12% led by a string revival in household insecticides (HI) business. The HI business clocked a growth of 16% in 3QFY15 after uneven rainfall distribution had resulted in a paltry rise of 2% in the preceding quarter. The HI business recorded the highest ever market share in December 2014. Its GoodKnight Fast card that has become a Rs 100 crore brand, continued to witness strong demand. GCPL has launched Neem low smoke coil to premiumize the coil franchise. Hair colours clocked a volume led growth of 10% on a high base of 27%. Godrej Expert Rich crème continued to outperform the category driven by distribution and market share gains. In soaps, GCPL posted 11% value growth well ahead of the category that has grown in low single digits during the quarter. The company is test marketing winter soaps in select markets in North India. The company's domestic business growth was nearly 1.6 times the growth in the overall home & personal care category.

  • The international business posted a growth of 13% with a constant currency sales growth of 20%. Indonesia reported constant currency sales growth of 19%. Africa posted strong constant currency growth of 36% led by Darling business that grew by 42%. In January 2015, the company has acquired 100% stake in Frika Hair, hair extensions business in South Africa. Even the LaTAM region saw a sharp rise of 25% in business at constant currency. However the European region posted a 13% decline as counterfeit issues continued to impact growth in a one of the lead brands.

      3QFY14 3QFY15 Change in basis points
    Total Cost of goods 46.7% 46.2% -49.16
    Staff Cost 9.1% 9.5% 41.61
    Advertising 11.5% 9.7% -173.24
    Other Expenditure 17.0% 16.8% -24.30

  • GCPL's operating margin expanded by 2% aided by lower ad-spends. The ad-spends in the international business has been lower on account of currency fluctuations. The ad-spends to sales ratio was down by 1.7% for the quarter. Even cost of goods sold to sales ratio was down by 0.5% on softening price of inputs. In the domestic business, operating margin expanded by 100 basis points due to favourable mix, cost saving initiatives and benign input costs. In the international operations, organic operating margin expanded by 260 basis points. All the regions reported incremental margins during the quarter, barring Africa where investments in systems and infrastructure kept margins flat.

  • The net margin increased by 1.9% aided by 18% fall in interest charges. The other income earned was down by 30% during the quarter.
What to expect?

GCPL witnessed a strong recovery in revenue growth in 3QFY15 on the back of pick-up in the HI business. The company's strong focus on innovations and driving growth through penetration and distribution are expected to benefit it on the uptick in demand and growth in future.

At a price of Rs 1119, the stock is trading at 26 times its FY17 earnings. As the stock is overvalued, we would recommend investors not to Buy the stock at current price levels.

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