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Godrej Consumer: Impressive numbers
Jun 1, 2006

Performance summary
Godrej Consumer Products Ltd (GCPL) ended FY06 on a strong note. For the full year, bottomline has outpaced the topline by a significant margin, which was on account of significant margin expansion in its personal care division. As compared to our bottomline estimates, the company’s actual net profit was significantly higher (almost 20%), as we were conservative in our margin estimate (especially with respect to the personal care division).

Financial information
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 1,385 1,641 18.5% 5,627 6,573 16.8%
Expenditure 1,148 1,285 11.9% 4,622 5,199 12.5%
Operating profit (EBDITA) 237 356 50.6% 1,005 1,374 36.8%
EBDITA margin (%) 17.1% 21.7%   17.9% 20.9%  
Other income 55 7 -88.0% 64 87 35.0%
Interest (net) 1 12 1585.7% 25 40 64.2%
Depreciation 27 26 -1.9% 107 108 1.2%
Profit before tax 264 325 23.1% 937 1313 40.0%
Tax 11 28 161.1% 77 106 37.5%
Profit after tax 253 297 17.2% 861 1,207 40.2%
Net profit margin (%) 18.3% 18.1%   15.3% 18.4%  
No. of shares (m) 56.5 56.5   56.5 56.5  
Diluted earnings per share (Rs)         21.4  
Price to earnings ratio (x)         32.3  

What is the company’s business?
GCPL is amongst the well known mid-cap companies in the Indian FMCG space with presence in the personal care, hair care and fabric care categories and top-of-the-mind brands such as Cinthol, Fairglow, Godrej No.1 (soaps) and Ezee liquid detergent being a few amongst them. 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. The Company has state-of-the-art manufacturing facilities at Malanpur (M.P.) Baddi (Himachal Pradesh), Guwahati (Assam) and Silvassa. With the acquisition of 100% ownership of Keyline Brands Limited, one of the admired FMCG Companies in the United Kingdom, which also owns several international brands and trademarks in developed markets that include Europe, Jordan, Australia and Canada.

What has driven performance in FY06?
Strong brands’ performance: As one can see from the table above, the 17% YoY growth in the topline was driven by the strong performance of all the Godrej brands. During FY06, in value terms, its soaps brands grew by 18% YoY. This is further strengthened by the fact that despite competition, as per its strategy, GCPL gained market share in the soap segment by 1.1% to 9.1% in FY06 (5.8% in FY03). On the ‘Hair Colour’ front, the sector has been growing at 25% in the last two years. GCPL, with a 22% revenue growth in this segment, was able to expand market share in hair colours by 20 basis points (0.2%). This is commendable, as many new players have entered the Indian market (including MNCs). The ‘Toiletries’ segment also grew at a faster pace (61% YoY).

Categorywise - Sales Mix
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Toilet Soaps 835 985 18.0% 3,341 3,927 17.5%
Hair Colour 380 430 13.2% 1,336 1,625 21.6%
Liquid Detergents 48 44 -8.3% 365 397 8.8%
Toiletries 74 144 94.6% 245 394 60.8%
Total Godrej Brands 1,337 1,603 19.9% 5,287 6,343 20.0%
Contract Manufacturing 10 0 - 200 78 -61.0%
By Products 39 37 -5.1% 140 151 7.9%
Total Sales 1,386 1,640 18.3% 5,627 6,572 16.8%

Due to its aggressive advertising campaigns, ‘Godrej No. 1’ is now the top selling toilet soap brand in the Northern region. Apart from that during the year it launched ‘Evita’ and Lavender variant of its Godrej No. 1 brand, which will enable the company to consolidate its standing in the sector.

There has been no contribution from contract manufacturing in 4QFY06, as many new manufacturing facilities have cropped up in Baddi. The contract manufacturing initiative, though not a focus area, is largely driven by opportunities as and when they arise. While it was revenue neutral during the quarter, it is a positive for the company, as margins are lower.

Personal care – The profit driver:Despite advertising and publicity costs increasing as a percentage of sales in FY06, the company was able to expand margins. This was led by the margin expansion in the personal care division. As is evident from the segmental performance table, while this division contributed to only 35% of revenues in FY06, at the PBIT level, the contribution was substantially higher at 67%. In the personal care business, we believe that hair colour is the key profit driver. As we go forward, since we expect pressure on the company’s market share in the hair colour segment, margins may also decline.

Over the last few quarters
  3QFY05 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06
Sales growth 19.7% 14.1% 23.1% 16.4% 10.5% 18.5%
Advertising as a % of sales 11.4% 9.3% 7.3% 6.6% 8.9% 9.7%
OPM 21.1% 17.1% 19.7% 17.2% 23.9% 21.7%
Net Profit growth 45.0% 54.5% 56.6% 59.6% 38.8% 17.2%
Soap growth 22.9% 9.2% 20.5% 19.2% 11.9% 18.0%
Hair colour growth 10.3% 35.9% 22.4% 31.5% 24.2% 13.2%

Over the last few quarters: As is evident from the table above, the company has been growing topline at double digits. Though this could be attributed to the company’s smaller size as compared to industry leaders, consistent market share expansion in the soap segment reflects the strong brand portfolio of the company. We expect the company’s topline to grow at a healthy 15% over the next three years.

What to expect?
At Rs 705, the stock trades at a price to earnings multiple of 17.1 times our estimated FY09 earnings and market capitalisation to sales of 3.8 times. We have a positive outlook on the company from a long-term standpoint. The company declared Rs 5 as dividend for FY06 (Rs 12 in FY05) and the board has also proposed a stock split (4:1), which has to be approved at the forthcoming AGM.

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