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Godrej Consumer: Signs of slowdown? - Views on News from Equitymaster
 
 
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  • Apr 29, 2003

    Godrej Consumer: Signs of slowdown?

    Godrej Consumer Products Limited's (GCPL) 4QFY03 numbers reflect the tough environment which the FMCG sector is facing. The company has reported a 3.2% dip in its operating income during the March quarter. The company has finished the quarter with a 22% bottomline growth, largely aided by a 70% dip in tax provisioning. The company's profit before tax was down 11% during the quarter.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net Sales 1,103 1,076 -2.4% 4,586 4,701 2.5%
    Processing Charges 12 3 -74.8% 63 59 -5.4%
    Total operating income 1,115 1,079 -3.2% 4,649 4,760 2.4%
    Other Income 10 7 -28.4% 16 14 -14.1%
    Expenditure 939 926 -1.4% 3,894 3,957 1.6%
    Operating Profit (EBDIT) 176 154 -12.5% 755 804 6.5%
    Operating Profit Margin (%) 15.9% 14.3%   16.5% 17.1%  
    Interest (net) 9 2 -72.4% 45 27 -39.9%
    Depreciation 24 22 -9.5% 94 90 -4.3%
    Profit before Tax 152 136 -10.6% 632 701 10.8%
    Tax (including deffered tax) 54 16 -69.8% 213 165 -22.4%
    Profit after Tax 99 120 21.7% 420 536 27.6%
    Net profit margin (%) 8.9% 11.1%   9.2% 11.4%  
    Effective tax rate (%) 35.3% 11.9%   33.6% 23.6%  
    No. of Shares (eoy) (m) 59.1 57.7   59.1 57.7  
    Diluted earnings per share* 6.8 8.3   7.3 9.3  
    P/E ratio   13.0     11.6  
    (* annualised)            

    Though Soaps (which contributes nearly 55% to sales) reported a healthy 8.5% growth, the growth in hair colour slowed down a bit. This segment grew by 14% during the quarter, compared to a 22% growth witnessed in the December quarter. However, all said and done, even a 14% growth in this environment is encouraging. The company was let down by a 33% dip in toiletries and a 17% dip in liquid detergent sales. There was no contract manufacturing revenue for the quarter.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Godrej Brands            
    Soaps 562 610 8.5% 2,325 2,535 9.0%
    Hair Colour 283 323 14.0% 1,010 1,174 16.2%
    Toiletries 90 60 -33.1% 358 284 -20.7%
    Liquid Detergents 57 47 -16.8% 311 344 10.8%
    Total Godrej Brands 992 1,040 4.9% 4,004 4,338 8.3%
    Contract Manufacturing 55 0 - 430 175 -59.3%
    By Products 57 37 -35.2% 152 188 23.6%
    Total 1,103 1,076 -2.4% 4,586 4,701 2.5%

    At the operational level, the company's operating margins slipped to 14.3%, as revenues could not keep pace with expenses. Staff costs were down 14% for the quarter (staff costs are now linked largely to performance) and raw material costs too dipped by 6%. The company's operating margins have not been stable throughout FY03. Infact, the company's operating profit growth and profit before tax growth trend has been steadily showing signs of decline (see chart).

    Cost break-up
    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Raw material 551 521 -5.6% 2,243 2,231 -0.6%
    Staff 65 56 -13.5% 222 255 15.1%
    Advertising & promotion 157 138 -12.6% 668 585 -12.4%
    Others 165 211 27.9% 762 886 16.3%
    Total expenditure 939 926 -1.4% 3,894 3,957 1.6%

    As per the figures released by the company, Godrej Consumer has gained some market share in soaps and liquid detergents. But the worrying aspect is that it has lost some share in the fast growing hair colour segment and also in shaving creams. Also, the company has not stated anything on the market share of fairness cream. But as per the December quarter numbers, the company had lost significant share in this emerging business.

    Market share
      Jan-Feb'02 Jan-Feb'03
    Toilet soaps 6.0% 6.4%
    Hair colour 44.6% 43.9%
    Liquid detergents 87.9% 88.7%
    Shaving cream 11.2% 10.6%
    Fairness cream 3.5%* 1.9%*
    Talcum powder 1.0% 1.1%
    Deodorants - 1.2%*
    Source: Godrej financial presentation, ORG Data
    * represents market share in December quarter 2001 and 2002 respectively

    GCPL continues to reward shareholder's through its stated policy of increased dividends and/or buyback. GCPL declared its fourth and final dividend (Rs 2 per share), making the total dividend payable in FY03 Rs 8 per share. As a result of the company's ongoing 4th buyback scheme at a maximum buyback price of Rs 175 per, the company has bought back 0.3 m shares during the quarter. In the last one year, the company's number of shares outstanding has come down by 2.1 m shares to the current 57.7 m shares.

    At Rs 108, the stock trades at 11.6x FY03 earnings, 1.3x market cap to sales. A buyback at Rs 175 signifies a P/E of nearly 19x FY03 earnings, 2.1x market cap to sales. Even previous buybacks have not been able to perk up GCPL valuations from the current levels. FY03 has been good so far for Godrej Consumer, but signs of decline in growth in different product segments is worrying.

     

     

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