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Godrej Consumer: Analyst meet extracts
May 23, 2005

Soaps and hair colour major Godrej Consumer Products Ltd, recently announced its 4QFY05 and full year numbers. Here are some key excerpts of the management analyst meet that we attended post the results.

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.

Management view on FY05 performance:
Soaps:  The total industry registered a growth of 5% in FY05. Accounting for 59% of GCPL’s total revenues, soaps outperformed industry growth (16% in FY05), with all brands contributing. Operating margins also improved in tandem with market share, which now stands at over 8%. Godrej No.1 continues to be the largest selling Grade 1 soap due to increased penetration and supply chain corrections. The company’s other soap power brands like Cinthol and Godrej Fair Glow also performed satisfactorily in the quarter. In the year, the company launched new variants like Cinthol Deo Soap and Godrej No 1 Jasmine variant. Both seem to be doing well. The company again plans to launch a new variant of Cinthol by May end.

Hair Colour:  The industry grew by 20% in FY05, with GCPL recording a 16% growth. The company has a 39% share of the pie currently and with new launches, and greater awareness, it plans to capture a higher market share in this segment. Hair colours are used across the country without concentration in any particular region. The company has a formulation edge, which will keep it competitive vis-à-vis other players. For this business, there has been no input costs pressure so far and yet, the company raised prices of its products in the last quarter, resulting in direct addition to bottomline. This indicated its bargaining power, which is a positive. Its ‘mehendi’ brand ‘Nupur’ is also performing satisfactorily.

Snuggies:  The company had acquired the ‘Snuggies’ brand of children diapers’ a couple of years back. This venture has seen a de-growth since its acquisition because when it was acquired, the product was imported from Israel and within months of acquisition, the plant manufacturing it shut down forcing the company to source from China whose quality was inferior, as compared to the Israeli company. When the company acquired the brand, its revenues were Rs 500 m, but today this figure has drastically gone down.

Exports:  The company plans to foray into international markets like Bangladesh, Pakistan and Latin America by FY06, through wholly owned subsidiaries or a local partnership. Currently, GCPL exports its hair colour range to Sri Lanka, where it has a higher market share than India.

Buyback programme:  The company has announced a buyback of equity shares (up to Rs 48 m) through the open market at a maximum price of Rs 400 per share, which will start on 23rd May ’05. Also, with shareholders approval, it plans to buyback another Rs 105 m worth of shares through the open market, which is a big positive for shareholders. Post buyback, the company’s paid up equity capital will reduce by 1%.

VAT:  Implementation of the same is a positive for the company like all FMCG companies. Transparency will increase and hence tax evasion at one stage, will result in getting caught at the other. However, due to VAT related confusion, the offtake has gone down by 2%-3% in 4QFY05, but sales are reviving slowly.

What to expect?
At the current price of Rs 340, the stock is trading at 21.5 times FY05 earnings and market cap to sales of 3.2x. The company's new plant at Baddi in Himachal Pradesh gives it a 10-year excise and a 5-year income tax benefit, resulting in the company paying taxes at the MAT level. This will therefore, continue to help it cut costs and keep up healthy margins in the medium term.

Buyback, as well as the company’s focused approach to growth are likely to keep the earnings momentum going. However, the upside is capped at the company sponsored buyback levels in the medium term.

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