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Godrej Cons: Margins stressed in FY14 - Views on News from Equitymaster

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Godrej Cons: Margins stressed in FY14
Apr 28, 2014

Godrej Consumer Products Ltd. has announced its fourth quarter results of financial year 2013-2014. The company has reported a 12% YoY growth in sales and 13% YoY rise in net profit. Here is our analysis of the results.

Performance summary
  • Godrej Consumer Products Ltd (GCPL) clocked a 12% rise in topline in 4QFY14 backed by 12% growth in each of the domestic and international businesses. For FY14, revenues were up by 18.5% with domestic and international operations registering growth of 14% and 24%, respectively.
  • Backed by lower ad-spends partially offset by higher raw material to sales ratio, the operating margin expanded by 1.5% YoY in FY14. However for FY14, the operating margin remained almost flat as savings in input costs and other expenses were offset by higher ad-spends and staff costs, all as a proportion of sales.
  • The net margin, excluding the impact of exceptional income, remained flat in 4QFY14 due to high tax outgo. For FY14, the net margin without exceptional income contracted by 0.5% on account of high interest and tax expenses.
  • The company has declared a fourth interim dividend of Re 2.25 per share on a face value of Re 1 per share.

Consolidated financials
(Rs m) 4QFY13 4QFY14 % Change FY13 FY14 % Change
Total Income 17,215 19,315 12.2% 64,163 76,024 18.5%
Expenditure 14,425 15,901 10.2% 54,011 64,253 19.0%
Operating profit (EBITDA) 2,791 3,414 22.4% 10,152 11,771 16.0%
EBITDA margin (%) 16.2% 17.7% 1.5% 15.8% 15.5% -0.3%
 Other income 242 194 -19.8% 678 627 -7.5%
Forex gain/loss (48) (20)   (328) (268)  
Interest 222 269 21.2% 775 1,074 38.6%
Depreciation 160 128 -20.0% 770 819 6.3%
Profit before tax 2,602 3,191 22.6% 8,957 10,238 14.3%
Exceptional Items 1,289 35   1,289 59  
Tax 531 737 39.0% 1,792 2,104 17.4%
Profit after tax/(loss) 3,360 2,488 -26.0% 8,454 8,193 -3.1%
Share of profit in associate firm   2     1  
Minority Interest 19 123 548.9% 493 595 20.7%
Net profit after minority interest 3,341 2,363 -29.3% 7,961 7,597 -4.6%
Net profit margin (%) 19.4% 12.2% -7.2% 12.4% 10.0% -2.4%
No. of shares (m)         340  
Diluted earnings per share (Rs)*          22.1  
Price to earnings ratio (x)*         35.8  
* On a trailing 12 months basis

What has driven growth in 4QFY14?
  • GCPL's revenues grew by 12% in 4QFY14. The Indian business reported growth of 12% with core categories growing going ahead of the market. The hair colour business registered growth of over 16% despite Expert Creme completing a year of launch. The company launched a twin use pack for Expert Creme and launched new packaging for Expert advanced gel based colours. The household insecticides (HI) business grew by 17% aided by good response to the Good Knight Fast Card and HIT anti Roach gel. The soap business grew by 1% on 4% lower offtake mainly due to extended winters in north India. The international business grew by 12% and a better 14%, excluding the impact of the food distribution business in Indonesia and aided by organic constant currency sales growth of 17%. Africa and Europe clocked double-digit sales during the quarter

      4QFY13 4QFY14 Change in basis points
    Total Cost of goods 45.9% 47.8% 192.66
    Staff Cost 9.9% 9.6% -35.41
    Advertising 9.9% 7.5% -238.56
    Other Expenditure 18.0% 17.4% -65.42

  • The company's operating margin has expanded by 1.5% due to lower ad-spends and rationalization in other expenses that have offset higher input costs during the quarter. With no new launches during the quarter, ad-spends to sales ratio was down by 2.4%. Even the other expenses as a proportion of sales were down by 0.7%. These cost savings were partially offset by a 1.9% increase in input costs to sales ratio mainly on account of the non-profitable food distribution business in Indonesia, costly imports due to weak currencies as well as higher proportion of sales from low-margin African operations.

  • However, the net profit margin excluding the impact of exceptional income remained flat due to sharp jump in tax outgo and a 20% drop in other income earned. The tax incidence has risen to 23% from 13.6% in the year-ago quarter. The company continued to resort to below-the-line adjustment for brand amortisation. Thus, the amount of Rs 130 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?
Despite slowdown in home and personal care demand in FY14, GCPL has been clocking growth ahead of the market in its core categories. Historically, the company's home insecticides and personal products business have grown 1.6-1.7 times the overall category but in FY14 the business has grown by three times, thanks to premium and innovative product offerings. Margins during the year have been hit slightly due to higher brand investments with around 75% of them targeted at new launches. Going ahead, the company expects to drive growth and better margins from cost savings and premiumization.

At a price of Rs 800, the stock is trading at 21 times its FY16 earnings. As the valuations do not provide adequate margin of safety, we continue to maintain a BUY at lower level on the stock at current levels.

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