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Godrej Consumer: ‘Key’ to growth! - Views on News from Equitymaster

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Godrej Consumer: ‘Key’ to growth!
Jul 20, 2006

Performance summary
Godrej Consumer Products Ltd (GCPL) has reported decent performance for the quarter ended June 2006. The 14% YoY growth in topline has been primarily influenced by the toiletries segment, which has grown by 41% YoY during 1QFY07, while the soaps segment has reported a 21% YoY growth. Operating margins have, however, contracted by 120 basis points. The board has declared an interim dividend of Rs 3 per share (dividend yield of 0.5%)

Standalone picture
(Rs m) 1QFY06 1QFY07 (%) Change
Net sales 1,677 1,916 14.3%
Expenditure 1,346 1,561 16.0%
Operating profit (EBDITA) 331 355 7.3%
EBDITA margin (%) 19.7% 18.5%  
Other income 3 8 170.0%
Interest 9 8 -12.1%
Depreciation 27 26 -1.9%
Profit before tax 298 329 10.3%
Extraordinary Item - 13  
Tax 27 37 39.2%
Profit after tax/(loss) 271 305 12.3%
Net profit margin (%) 16.2% 15.9%  
No. of shares (m) 56.5 56.5  
Diluted earnings per share (Rs)*   22.4  
Price to earnings ratio (x)   29.6  

What is the company’s business?
Godrej Consumer Products Ltd. (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. The company has state-of-the-art manufacturing facilities at Malanpur (MP) 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. In July’06, GCPL entered into an agreement to acquire the South African hair color business of Rapidol, UK as well as its subsidiary Rapidol International which had a combined turnover Rs 330 m in 2005.

What has driven performance in 1QFY07?
Soap outperforms industry, again: GCPL’s core portfolio of soaps (66% of revenues) outperformed (21% YoY growth) the industry growth (8% YoY) once again. Brands like Cinthol, Godrej No.1 and Fairglow were the main drivers of growth in this segment, which enabled the company to retain its market share at 9.5% and the second position in the overall soap market behind HLL during the quarter. However, margins for the division declined by 50 basis points, mainly due to increased advertisement expenses.

Hair colour: The company’s hair colour business grew by 10% YoY. However, this performance is way below the industry growth of around 29% YoY. The company’s market share in this segment declined to 39.3% during the quarter (39.8% in 1QFY06). However, since the company is constantly exploring opportunities to introduce new colours and innovative products in this category and with the recent acquisition of Rapidol, we believe that this segment is likely to do well going forward.

Toiletries: Revenues from this segment grew by 41% YoY backed by growth across all categories (talcum powder, shaving cream and diapers). The liquid detergent division also posted a 10% YoY growth during 1QFY07.

Rs m 1QFY06 1QFY07 Change (%)
Godrej Brands      
Soaps 1,042 1,265 21.4%
Hair Colour 430 473 10.0%
Toiletries 94 132 40.4%
Liquid Detergents 9 10 10.0%
Total Godrej Brands 1,575 1,880 19.4%
Contract Manufacturing 67 - -
By-products 35 36 2.9%
Total 1,677 1,916 14.3%

Higher ad spends dent margins: In order to combat competition, GCPL upped its advertising expenditure during the quarter, from 7.3% of sales in 1QFY06 to 9.4% in 1QFY07. And this has affected the company’s operating margins. The contraction would have been higher but for the decline in direct costs and staff expenses.

Consolidated cost break-up
as a % of net sales 1QFY06 1QFY07
Total Cost of goods 49.7% 49.3%
Staff Cost 5.8% 5.4%
Advertising 7.3% 9.4%
Other Expenditure 17.4% 17.3%

Keyline: GCPL had acquired Keyline in November 2006 The company has recorded sales of Rs 460 m and net margins of 8% during 1QFY07. This has helped the consolidated revenues grow by 42% YoY. Going forward, we expect Keyline to contribute around 15% to the company’s topline and around 10% to its bottomline.

What to expect?
At the current price of Rs 662, the stock is trading at a price to earnings multiple of 29.6 times its trailing 12 month earnings. With the recent acquisition of Rapidol, GCPL gets ownership of strong ethnic hair colour brands like ‘INECTO’ and ‘SOFLENE’ along with a presence in the large South African hair care market. Given the company's future growth prospects, consistent dividend payout and superior return ratios, amongst the smaller FMCG companies, GCPL is our preferred play.

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