Godrej Consumer: 'Colourful'FY05 - Views on News from Equitymaster

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Godrej Consumer: 'Colourful'FY05

May 5, 2005

Introduction to results
Godrej Consumer Products recently announced its 4QFY05 and full year numbers. The company reported a decent 14% topline growth and an enthusing 50% (mainly due to higher other income and rollover of higher tax provision) bottomline growth YoY for the quarter. The company closed it books for the year with a 15% topline and 38% bottomline growth Y-o-Y.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net sales 1,214 1,385 14.1% 4,897 5,627 14.9%
Expenditure 974 1,148 17.9% 4,043 4,622 14.3%
EBDITA 240 237 -1.5% 854 1,005 17.7%
Operating margins (%) 19.8% 17.1%   17.4% 17.9%  
Other Income 3 55 1720% 31 64 104.8%
Interest (net) 6 1 -88.1% 24 25 1.2%
Depreciation 24 27 9.8% 94 107 13.4%
Profit before Tax 213 264 23.9% 767 937 22.3%
Tax 26 (25) -192.8% 118 42 -64.6%
Profit after Tax/(Loss) 187 288 54.5% 649 896 38.0%
Net profit margin (%) 15.4% 20.8%   13.3% 15.9%  
No. of Shares (m) 56.9 56.6   56.9 56.6  
Diluted Earnings per share (Rs)* 13.1 20.4   11.4 15.8  
Current P/e ratio         17.7  
*(annualised)            

What is the company's business?
Godrej Consumer Products Ltd. (GCPL) is one of the most well known mid-cap companies in the Indian FMCG space with presence in the personal care, hair care and fabric care categories with top-of-the-mind brands such as Cinthol, Fairglow, and Godrej No.1 (soaps), Fairglow fairness cream, Godrej Shaving Cream & Round, Godrej hair dyes, Colour Soft hair colour and Ezee liquid detergent. The company bought over the ‘Snuggies' brand in the child nappy segment in 2003. Soaps and hair colours formed about 83% of the company's revenues in FY05.

What has driven performance in 4QFY05?
Soaps:  In 4QFY05, GCPL's soap folio grew by over 9% as against the industry average of 7% and its market share increased to 8.3% as against 7% in 4QFY04. In doing so, the company surpassed its target on increasing market share by 1% in FY05. Soaps account for a major chunk of the company's revenues and stood at around 60% for FY05.

Sales mix
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Godrej Brands            
Soaps 765 835 9.2% 2,871 3,341 16.4%
Hair Colour 279 380 35.9% 1,148 1,336 16.4%
Toiletries 66 74 11.9% 261 245 -6.0%
Liquid Detergents 44 48 7.4% 356 365 2.6%
Total Godrej Brands 1,154 1,336 15.7% 4,635 5,287 14.1%
Contract Manufacturing 28 10 -62.9% 114 200 74.6%
By Products 32 39 22.0% 147 140 -4.7%
Total 1,214 1,385 14.1% 4,897 5,627 14.9%

Hair colour:  The company introduced new variants in the segment and also relaunched its flagship band ‘ColorSoft' with a different mix. All this led the business to grow at 36% as against the industry average of 28% in the quarter. However, one must note that this segment is on an upswing from some time now. GCPL's market share was down from close to 42% in 4QFY04 to around 39% in the recent quarter. In all, the business has been a very volatile contributor to the company's growth going by past record. However, in light of the increasing competition both from local and international products, Godrej's restructuring of this business continuously in response to market needs is encouraging.

Contract manufacturing:  The company undertook contract manufacturing for bigger players like HLL for manufacturing soaps. However, with companies setting up their own manufacturing activities, this activity is likely to decline in time to come. However, as Godrej's own soap brands are growing encouragingly, this excess capacity can be utilised internally over a period of time, so it's not a big concern going forward. It is a positive because contract-manufacturing activity is very volatile in nature and the company has been able to grow in the quarter without much aid from contract manufacturing.

Operating snapshot:  The table below highlights firmness across major expense heads, be it raw material, advertising or staff costs. Vegetable oil prices have remained firm, resulting in higher input costs for the full year. All this has trickled down to the company seeing some pressure on operating margins during 4QFY05.

Cost break up
as a % of net sales 4QFY04 4QFY05 FY04 FY05
Total Cost of goods 46.9% 46.5% 48.0% 49.5%
Staff Cost 5.8% 6.9% 5.2% 5.8%
Advertisement & Promotion 9.0% 11.8% 10.3% 10.9%
Other Expenditure 18.9% 17.7% 19.2% 15.9%
Total Expenditure 80.7% 82.9% 82.8% 82.1%

Other income plus tax fillip:  The company's bottomline was greatly aided by the increase in other income during 4QFY05. This was due to the company availing the discount scheme offered by the Madhya Pradesh Government for pre-payment of loan, which resulted in an income of Rs 31 m. This is a one-time thing and will not occur in the quarters to come. Excluding this extraordinary income of Rs 31 m, the company's profit before tax has grown at a steady 9.3% YoY during the quarter.

Also, rollover over or higher taxes paid earlier has aided bottomline growth. Though the company will continue to see tax benefits owing to the Baddi and Guwahati plants, a bulk of this savings has already been seen in FY05.

Over the last few quarters
The table below gives us an insight that advertising expenditure has been on the rise over the years. This clearly indicates that the company is pushing its brands and can be seen in the topline growth the company has been witnessing.

  1QFY05 2QFY05 3QFY05 4QFY05
Sales growth (YoY) 15.2% 10.5% 19.7% 14.1%
Advertising as % of sales 10.2% 10.2% 11.4% 11.8%
OPM (%) 16.4% 16.1% 21.1% 17.1%
Net profit growth (%) 25.3% 25.8% 45.0% 54.5%
Soap Growth (%) 24.0% 12.4% 22.9% 9.2%
Hair Colour growth (%) 19.4% -0.8% 10.3% 35.9%

What to expect?
As can be seen from the table below, soaps that account for a major chunk of revenues, is a low margin business (10%-13%). Higher input costs and intense competition prevails in the segment resulting in margin squeeze. On the other hand, margins of Hair colour and other personal products are quite high and increasing revenue contribution from this segment owing to the current upswing is a positive for GCPL.

Revenues break-up
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Soaps 818 878 7.3% 3,127 3,655 16.9%
PBIT 110 103 -6.4% 306 368 20.3%
Margins (%) 13.4% 11.7%   9.8% 10.1%  
Personal care 396 507 28.0% 1790 1971 10.1%
PBIT 157 186 18.5% 649 752 15.9%
Margins (%) 39.6% 36.7%   36.3% 38.2%  
Total 1,214 1,385 14.1% 4,917 5,626 14.4%
PBIT 267 289 8.2% 955 1,120 17.3%
Margins (%) 22.0% 20.9%   19.4% 19.9%  

At the current price of Rs 280, the stock is trading at 17.7 times FY05 earnings and market cap to sales of 2.9x. The management announced a 4th Interim dividend of Rs 5 per share, taking the total dividend for the year to Rs 12/- (dividend yield – 4.3%). The company's new plant at Baddi in Himachal Pradesh will give it a 10-year excise and a 5-year income tax benefit. This will therefore, continue to help it cut costs and keep up healthy margins in the medium term. The management is shareholder friendly on account of its continuous dividend payouts and buyback programme.

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