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Godrej Cons: Raw material affects bottomline - Views on News from Equitymaster

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Godrej Cons: Raw material affects bottomline
Jul 24, 2010

Godrej Consumer Products Ltd. has announced its 1QFY11 results. The company has reported a 46.5% YoY and 67% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for Godrej grew by 46.5% during 1QFY11. This comes on the back of strong growth of domestic and overseas business as well as from the inclusion of the financials of Godrej Sara Lee Ltd.
  • Operating (EBITDA) margin fell by 1.2%% YoY during the quarter. This comes on the higher raw material costs and increased in advertisement (both as a percentage of sales) partly offset by lower staff costs and lower other expenditure as a percentage of sales.
  • Net profits grew by 67% YoY during the quarter, aided by higher operating profit and one time exceptional income partially offset by higher interest costs and higher effective tax rate. When adjusted for one time exceptional income, net profit is seen to increase by 9% YoY


Consolidated financials
(Rs m) 1QFY10 1QFY11 % Change
Net sales 4,405 6,453 46.5%
Expenditure 3,524 5,240 48.7%
Operating profit (EBDITA) 880 1,213 37.8%
EBDITA margin (%) 20.0% 18.8%  
Other income 85 84 -1.4%
Interest 38 105 178.0%
Depreciation 52 84 61.8%
Profit before tax 876 1,108 26.5%
Exceptional Items   403  
Tax 179 348 94.0%
Profit after tax/(loss) 697 1,164 67.0%
Net profit margin (%) 15.8% 18.0%  
No. of shares (m) 257 308  
Diluted earnings per share (Rs)*   12.5  
Price to earnings ratio (x)*   28.6  
* On a trailing 12 months basis

What has driven performance in 1QFY11?
  • Growth in sales was aided by strong performance by the company’s international business and by Godrej Household Products Limited (GHPL). Domestic soap segment fell by 9% as a result of price cuts and lower wholesale offtake. Hair colorant segment grew at 4% YoY during the quarter on the back of strong performance by Nupur mehendi. International business which contributes 29% to the total sales, grew by 84% YoY. This growth was a result of robust all-round performance in all geographies.

    Cost break-up
    Cost break-up 1QFY10 1QFY11
    Total Cost of goods 45.9% 49.1%
    Staff Cost 8.5% 6.8%
    Advertising 9.8% 10.1%
    Other Expenditure 15.8% 15.2%

  • Fall in the company’s margins was due to higher raw material costs as a percentage of sales. Raw material costs increased from 45.9% in 1QFY10 to 49.1% in 1QFY11. This was largely due to rise in palm oil prices. The company’s margins were also affected by an increased in advertisement spending. Advertisement costs increased by 0.3% to stand at 10.1% as a percentage of sales for the quarter. However, staff costs and other expenditure fell (as a percentage of sales) supporting the falling margins of the company. While staff costs fell by 1.7% to 6.8%, other expenditure fell by 0.6% (both as a percentage of sales).

  • Net profit of the company grew by 67% YoY during FY10. This was mainly due to an exceptional income received by the company from Sara Lee Household & Body Care International B.V. on termination of contract for manufacturing and distribution of Ambi Pur. When this income is discounted for, then the net profits are seen to increased by only 9% YoY

What to expect?
At the current price of Rs 359, the stock is trading at a 30 times our estimated FY12 earnings (RPro subscribers can click here). While the company disappointed on its bottom line, we believe that this is only a temporary phenomena. While the company is not expected to earn the high margins seen in FY10 going forward, the company is expected to benefit from its new acquisitions which are already EPS accretive. We remain positive on the company’s long term prospects.

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