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Godrej Cons: Exceptional income boost
May 6, 2013

Godrej Consumer Products Ltd. has announced its fourth quarter results of financial year 2012-2013. The company has reported a 30% YoY growth in sales and 74% YoY rise in net profit. Here is our analysis of the results.

Performance summary
  • Backed by 18% growth in the domestic business and strong growth across international markets, Godrej Consumer Products (GCPL) posted a 30% rise in topline. For FY13, revenues were up by 32%.
  • The operating margin contracted by 2.6% due to a steep rise in ad-spends and other expenditure. For FY13, operating margin was down by 2.2%.
  • Net profit surged by 74% aided by exceptional income of Rs 1289 m from divesture of non-core foods business and associated brands by overseas subsidiaries. For the full year FY13, net profits were up by 9.5%.

Consolidated financials
(Rs m) 4QFY12 4QFY13 % Change FY12 FY13 % Change
Total Income 13,249 17,194 29.8%  48,662 64,074 31.7%
Expenditure 10,763 14,403 33.8%  39,903 53,923 35.1%
Operating profit (EBITDA)  2,486 2,791 12.2% 8,759 10,152 15.9%
EBITDA margin (%) 18.8% 16.2%   18.0% 15.8%  
Other income 181 242 33.9%  520 678 30.3%
Forex gain/loss  3 (48)    (205) (328) 59.9%
Interest 186 222 19.1%  658 775 17.6%
Depreciation 155 160 3.1%  644 770 19.5%
Profit before tax  2,328 2,602 11.8% 7,771  8,957 15.3%
Exceptional Items 250 1,289   2,002  1,289 55.3%
Tax 601 531 -11.7% 2,261  1,792 -20.7%
Profit after tax/(loss)  1,977 3,360 70.0% 7,512  8,454 12.5%
Minority Interest  50 19    245 493  
Net profit after minority interest  1,926 3,341 73.5% 7,267  7,961 9.5%
Net profit margin (%) 14.5% 19.4%   14.9% 12.4%  
No. of shares (m)         340  
Diluted earnings per share (Rs)*          23.4  
Price to earnings ratio (x)*         35.9  
* On a trailing 12 months basis

What has driven growth in 4QFY13?
  • Led by 19% growth in the organic business, GCPL posted a 30% jump in its consolidated sales in 4QFY13. The domestic business, which forms 56% of overall sales, grew by 18% backed by strong growth across categories. The household insecticides business grew by 26%, two times faster than the category and received good response to its 'HIT Anti Roach Gel'. Even the hair colour business registered a smart turnaround recording two times higher growth than the category, at 27%. All formats of the business clocked good growth with the newly launched rich crème hair colour getting a good initial response. Even offtake of soaps was four times higher than overall category resulting in a 17% value growth during the quarter. The international business grew 23% organically with all geographies recorded strong growth during the quarter. The European business posted the fastest growth of 109% on the back of innovation and brand investments. This was followed by the business in Latin America that grew by 72% aided by new product launches and the Chile business consolidation. The Indonesia and African markets forming 68% of overseas business, each reported growth of over 30% for the quarter.
    Total Cost of goods 4QFY12 4QFY13 Change in basis points
    Total Cost of goods 46.3% 44.8% -155.38
    Staff Cost 9.8% 10.0% 17.16
    Advertising 8.3% 9.5% 118.26
    Other Expenditure 16.9% 19.6% 273.62

  • Aggressive brand investments and promotions behind existing and new product launches continued to compress operating profitability. As a proportion of sales, ad-spends and other expenses rose by 1.2% and 2.7%, respectively. The impact was partially offset by savings of 1.6% in raw material to sales ratio. In the international business, the African business margins were depressed by closure of business for around 4 weeks in Kenya, liquidation of stocks for closure of non-profitable stores and investments in new product launches. The overall operating margin contracted by 2.6% during the quarter.

  • Net profits for the quarter surged by 74% on account of exceptional income of Rs 1289 m as compared to Rs 250 m earned in the year-ago quarter. Excluding exceptional income, the net profit grew by 19%. The tax incidence fell to 20% from 23% in the year-ago quarter. The interest expense was up by 19% for the quarter. The company has maintained a healthy debt-to-equity ratio of 0.46. The company continued to resort to below-the-line adjustment for brand amortisation. Thus, the amount of Rs 133 m pertaining to amortisation of the acquired Good Knight and Hit brands was directly debited to the General Reserves for the quarter.

What we expect?

GCPL's revenues continued to grow at a scorching pace in FY13 due to strong growth in its existing brands as well as acquisitions made in the overseas markets. Even its rural sales have been growing two times faster than its urban sales. The company has been very aggressive in strengthening its core brands through innovative product launches and extension in adjacent product categories. As a result, the share of its five core brands comprising of Good Knight, HIT, Godrej No 1, Godrej Expert and Cinthol has risen from 84% in FY11 to 88% in FY13.

However, steep rise in ad-spends and promotional expenses have clipped the profit margin of the company. Going forward, input cost benefits from softening price of palm oil as well as better synergies from the Sara Lee merger and Darling acquisitions are expected to improve profitability in future.

At a price of Rs 840, the company is trading at 21 times its FY15 estimated earnings. At these valuations the stock is overpriced and we re-iterate a 'SELL' on the stock.

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