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Godrej Consumer Products: Rural focus - Views on News from Equitymaster

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Godrej Consumer Products: Rural focus

May 28, 2009

Godrej Consumer Products (GCPL) recently held an analyst meet to discuss its growth prospects for the future. Here are the key takeaways. Sector view: Consumer demand, both in the rural and urban areas continued to remain strong. Infact, 4QFY09 was one of the best quarters for the FMCG sector in the last 3 to 4 years. Besides an increase in the share of wallet for FMCG products, the stimulus package announced by the government aided growth. While modern trade witnessed some pressure, the scenario is expected to improve going forward. The management expects the demand to continue.

Source: company
Domestic front: 2008 was a good year for the FMCG sector and Godrej Consumers benefitted on account of strong volume growth. It continued to outperform the soap segment reporting a growth of 25% against the industry growth rate of 18%. It has also managed to regain its market share in the soap segment. The company indicated that ‘No.1’ is a Rs 5 bn brand (45% of domestic sales) and ‘Cinthol’ is a Rs 2.2 bn brand (20% of domestic sales). The company is looking at introducing new variants and price points along with increasing regional presence. On the hair colour front, the company has not been doing well. While it continues to be the market leader in powder hair dye, the crème segment (top-end) is faster growing and the company needs to establish a presence in this segment. It is looking at launching products in the top end segment, which would then give it a complete range of products. Also, it is looking at increasing penetration, currently at under 20% and also upgrading the ‘heena’ users. chart

Rural focus: Currently contributing 38% to the revenues, GCPL plans to increase the contribution from rural areas to 50% in the coming years. It plans to expand its distribution reach in villages as well as small towns. It targets expanding the number of villages covered from 18,000 to about 50,000 in the next two years. Similarly, it aims to double its coverage of small towns from 3,300 to 6,500 in the next year. It is also focusing on increasing the number of sub-stockists to 6,000 from the current 3,000 in three years. It has stepped up focus on Rs 5 and Rs 10 price point packs to face the regional competition.

International operations: On the international front, the company has seen a CAGR revenue growth of 94% in the last four years. It now exports to 33 countries and has done 4 acquisitions over these years. Keyline saw a 22% growth in GBP terms and 19% in rupee terms. The company relaunched some products and is looking at increasing its relations with retail chains. Rapidol, its acquisition in South Africa, saw a growth of 11% YoY in Rand terms, while 4% YoY growth was reported in rupee terms. ‘Inecto’ continued to be a leader in 10 African countries. GCPL marketed ‘Renew’ brand there. In case of Kinky, the company opened 7 new stores to take the total to 22. GCPL is looking at expanding stores going forward. For the coming fiscal, the company is planning to focus on cost efficiencies and expanding product launches.

Input prices: Palm oil prices have risen in the last month. However, the company has taken a forward cover for the next 4 to 5 months. Consumption in India is expected to go up by 12% YoY during the current fiscal. While last year the company had not passed the full impact of input price hikes due to its focus on topline, it may look at the option of increasing soap prices in 2HFY10 in case the prices don’t soften.

Capex plans: The company has capex plans only to the tune of Rs 1 bn during the current fiscal. Commercial production started at the new chemical and soap noodle plant at Malanpur during the year. The company opened 7 new Kinky stores, taking the total to 22. It is looking at expanding the number of outlets. GCPL has cash to the tune of Rs 3 bn on its books, with a debt of Rs 2 bn. The company is also looking at more acquisitions.

Going forward: At the current price of Rs 160, the stock is trading at 19.8 times its 12 month trailing earnings. The company’s focus on rural areas and increasing its product portfolio would help growth. Lower commodity costs and its value for growth proposition would help it build on its core strength. However, in case of rising commodity costs (as prices are already going up) its margins would be affected.

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