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Godrej Cons.: ‘Personal care’ leads the way - Views on News from Equitymaster
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Godrej Cons.: ‘Personal care’ leads the way
Apr 27, 2007

Performance summary
Godrej Consumer Products Ltd (GCPL) has announced a decent set of numbers for the fourth quarter and full year ended March 2007. For FY07, the company’s consolidated topline has recorded a growth of 35% YoY, mainly aided by strong performance from the personal care segment. Operating margins have, however, contracted by 130 basis points (1.3%) owing to higher raw material costs as percentage of sales. Due to this, as also lower other income and significantly higher tax expense, net profit growth has been depressed at 15% YoY for the fiscal. The board has declared a final dividend of Rs 1.25 per share (dividend yield of 0.9%) taking the total dividend for FY07 to Rs 3.75 per share.

Consolidated financial snapshot
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Gross sales 1,992 2,485 24.8% 7,343 9,914 35.0%
Less: excise duty 77 61 -20.7% 346 381 10.2%
Net sales 1,915 2,424 26.6% 6,997 9,532 36.2%
Expenditure 1,534 1,993 30.0% 5,585 7,735 38.5%
Operating profit (EBDITA) 381 431 13.0% 1,413 1,797 27.2%
EBDITA margin (%) 19.9% 17.8%   20.2% 18.9%  
Other income 7 6 -4.5% 88 27 -69.8%
Interest 21 20 -6.5% 65 96 48.8%
Depreciation 31 45 43.8% 115 142 23.8%
Profit before tax 335 372 11.0% 1,321 1,585 20.0%
Tax 34 64 87.2% 113 243 115.8%
Extraordinary income/(expense) - 51   - 51  
Profit after tax/(loss) 301 359 19.2% 1,208 1,392 15.3%
Net profit margin (%) 15.7% 14.8% 17.3% 14.6%
No. of shares (m)       225.8
Diluted earnings per share (Rs)         6.2  
P/E ratio (x)       23.0  

What is the company’s business?
GCPL is amongst a mid-size company in the Indian FMCG space with presence in personal care, hair care and fabric care categories and top-of-the-mind brands such as Cinthol, Fairglow, Godrej No.1 (soaps) and Ezee liquid detergent amongst others. The company has state-of-the-art manufacturing facilities at Malanpur (MP) Baddi (Himachal Pradesh), Guwahati (Assam) and Silvassa. The company has acquired 100% ownership of Keyline Brands Limited, one of the admired FMCG companies in the United Kingdom, which also owns several international brands and trademarks in developed markets that include Europe, Jordan, Australia and Canada. In July 2006, GCPL entered into an agreement to acquire the South African hair color business of Rapidol, UK as well as its subsidiary Rapidol International, which had a combined turnover Rs 330 m in 2005.

What has driven performance in FY07?
Personal care leads the way: The 35% YoY growth in GCPL’s consolidated topline during FY07 was led by strong performance from the company’s personal care division, which grew sales by 62% YoY. This segment contributed to 49% of the company’s consolidated sales during the fiscal (41% in FY06). Consolidated sales include sales of Rapidol and Keyline Brands. Growth in the personal care segment was led by the toiletries segment (around 46% of personal care segment revenues), which recorded a strong sales growth of 163% YoY during the fiscal. The other sub-segment of hair colour, where GCPL is among the market leaders, witnessed a sales growth of 29% YoY.

On a standalone basis, the company has underperformed the market growth in the hair colour segment during 4QFY07. Against the market growth of 21% YoY during the quarter, GCPL’s hair colour value sales recorded a growth of 14% YoY. Despite being the market leader in the hair colour segment, what is concerning is that GCPL is gradually losing its stronghold, which is seen from the declining market share. Against a share of 41.8% of the domestic hair colour market in 4QFY04, the share now stands contracted to marginally above 36%. GCPL commenced production at its new hair colour unit in Sikkim during March 2007.

Segment-wise analysis
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Soap 1,016 1,213 19.3% 4,132 4,884 18.2%
PBIT margins 12.9% 11.1%   12.4% 11.3%  
% of revenue 53.1% 50.0%   59.0% 51.2%  
Personal care 899 1,211 34.8% 2,865 4,648 62.2%
PBIT margins 32.1% 25.3%   37.2% 29.4%  
% of revenue 46.9% 50.0%   41.0% 48.8%  
Income from operations 1,915 2,424 26.6% 6,997 9,532 36.2%
PBIT margins 22.0% 18.2%   22.6% 20.1%  
Sub-segments
GCPL Brands            
Soaps 985 1,179 19.7% 3,927 4,751 21.0%
Hair colour 430 541 25.8% 1,625 2,091 28.7%
Toiletries 418 612 46.5% 818 2,149 162.7%
Liquid detergents 44 53 19.4% 397 388 -2.2%
Total - GCPL Brands 1,878 2,386 27.0% 6,768 9,380 38.6%
Contract manufacturing - - - 78 - -
By-products 37 39 3.5% 151 153 1.2%
Income from operations 1,915 2,424 26.6% 6,997 9,532 36.2%

In the toilet soaps segment, against the market growth of 8% YoY, GCPL’s value sales have grown at a much faster pace of 18% YoY. What is more heartening to note is that the company continues to ramp up its market share in this segment, despite facing stiff competition from established players like HLL. The company has increased its toilet soap manufacturing capacity at Malanpur and has also set up a new facility at Katha (Himachal Pradesh), which commenced production during December 2006. This segment also saw a 5% to 8% increase in price during April 2007, the effect of which will be seen in the current quarter (1QFY08).

International operations: GCPL’s export sales grew by 11% YoY during FY07 (10% YoY in FY06). This was aided by a 5% to 8% increase in prices of soaps and toiletries. Also, the company dispatched the first shipment of its products to Keyline Brands (which GCPL had acquired in October 2005) for distribution in the UK market. As a matter of fact, Keyline reported sales of Rs 1.7 bn during FY07 (17% of GCPL’s consolidated FY07 topline) and earned net profit margins of 8.3%. Rapidol, which GCPL had acquired in July 2006 has also grown at a strong rate during the fiscal.

During 4QFY07, GCPL formed a 50:50 joint venture with SCA Hygiene Products AB, Sweden (JV named as Godrej SCA Hygiene Ltd.) to manufacture & market paper based absorbent hygiene products, specifically sanitary napkins and baby diapers in India. The profit on sale of the Snuggy Brand to Godrej SCA Hygiene Ltd. has been disclosed as an extraordinary item in the first table above.

Input pressure on profitability: Despite the strong revenue growth across all business segments, GCPL recorded 130 basis points (1.3%) decline in its consolidated operating margins during FY07. This was owing to higher raw material costs (as percentage of sales), which increased from 48% of sales in FY06 to 51% in FY07. Higher raw material costs was on account of rise in vegetable oil prices. Among other major cost heads, both staff costs and advertising expenses declined as percentage of sales during FY07 (see table below), thus taking off some pressure from operating margins.

Consolidated cost break-up
(As % of net sales) 4QFY06 4QFY07 FY06 FY07
Total Cost of goods 44.9% 46.2% 46.6% 48.5%
Staff Cost 7.6% 5.3% 6.8% 5.7%
Advertising 9.7% 8.9% 8.2% 8.1%
Other Expenditure 17.9% 21.8% 18.2% 18.9%

Lower other income, higher taxes impact bottomline: Despite the strong growth in topline, GCPL could not carry the entire benefit to its bottomline during FY07. This was owing to contraction in operating margins (as explained above) as also lower other income (down 70% YoY). Also, the company’s tax expenses increased by a substantial 116% YoY (effective tax rate increased from 8.5% in FY06 to 15.4% in FY07), thereby paring the bottomline growth during the fiscal.

What to expect?
At the current price of Rs 142, the stock is trading at a multiple of 23 times its FY07 consolidated earnings. Additional investments in existing plants and setting up of new facilities, intensive rural penetration as also thrust on organised retailing has aided the company’s overall topline performance during FY07. Significant traction in its international business is also enthusing. However, rising input costs and reducing share of the hair colour market remains our key concerns for the company.

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