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Godrej Consumer: Performs yet again… - Views on News from Equitymaster
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  • Jul 25, 2002

    Godrej Consumer: Performs yet again…

    Godrej Consumer Products Limited (GCPL) growth story continues. The company declared a 39% growth in 1QFY03 net profit. However, due to a shrinkage in contract manufacturing during the quarter (down 84% YoY), GCPL recorded a 7% decline in operating income.

    (Rs m) 1QFY02 1QFY03 Change
    Net Sales 1,269 1,179 -7.0%
    Other Income 1 2 240.0%
    Expenditure 1,093 969 -11.3%
    Operating Profit (EBDIT) 175 210 19.7%
    Operating Profit Margin (%) 13.8% 17.8%  
    Interest (net) 15 7 -53.4%
    Depreciation 23 23 -0.9%
    Profit before Tax 138 182 31.8%
    Tax (including deffered tax) 46 54 17.0%
    Profit after Tax 92 128 39.3%
    Net profit margin (%) 7.2% 10.8%  
    Effective tax rate (%) 33.6% 29.8%  
    No. of Shares (eoy) (m) 59.8 58.4  
    Diluted earnings per share* 6.3 8.8  
    P/E ratio   12.5  
    (* annualised)      

    However, sales of Godrej brand portfolio saw a 9% topline growth, with both toilet soap and hair colour categories registering over 11% growth YoY. The growth in toilet soaps was largely led by 'Godrej No.1', which grew by 69% YoY. But one must remember that this growth came on a low base. 'Godrej Fairglow' soap also aided this growth. This is in contrast to the overall toilet soap industry that witnessed a negative growth during the quarter.

    (Rs m) 1QFY02 1QFY03 Change
    Godrej Brands      
    Soaps 591 657 11.2%
    Hair Colour 257 285 11.2%
    Toiletries 103 94 -8.9%
    Liquid Detergents 3 6 75.0%
    Total Godrej Brands 954 1,042 9.2%
    Contract Mfg. 292 45 -84.4%
    By Products 23 62 167.5%
    Total 1,269 1,149 -9.5%

    Godrej's topline was also aided by Rs 31 m earned as processing charges. This is a new area of operations for GCPL wherein it will make FMCG products for other companies thus optimally utilising its capacity. Excluding this, the topline would have fallen by nearly 10% YoY during June quarter. GCPL's strict control on expenses saw the company exapnding operating margins. Its raw material costs fell by 16% and advertising & sales promotion costs declined by a significant 32% YoY. It seems that Godrej's advertising costs were lower on account of a general downtrend in advertising rates. The way Godrej is going about entering new product categories it will not be easy for it to repeat this dip in advertising expenses.

    GCPL's efforts to prune its debt (it repaid almost 70% of its debt in FY02) have had a positive effect on its interest outgo. Ever since the management has focused on its FMCG business by hiving off erstwhile Godrej Soaps into 2 companies (Godrej Industries and GCPL), the company has introduced new brands in skin segment and toilet soaps, and also emerged as the largest hair colour company in India. On the financial side, it has repaid a significant portion of its debt, rationalised costs and concluded a buyback that saw GCPL's share capital reduce by Rs 5.8 m thereby improving its EPS.

    Cost break-up
    (Rs m) 1QFY02 1QFY03 Change
    Raw material 651 546 -16.1%
    Staff 45 61 36.8%
    Advertising & promotion 204 140 -31.7%
    Others 194 223 14.9%
    Total expenditure 1,093 969 -11.3%

    Continuing its trend of improving return to shareholders, the company has announced another buyback at a maximum price of Rs 175 per share, with maximum outlay of Rs 46 m. It is worth noting that ever since GCPL announced its first buyback offer at a maximum price of Rs 100, the stock steadily climbed from Rs 45-50 levels to over Rs 100 levels currently.

    Market share

      FY01 FY02
    Toilet soaps 5.6% 5.8%
    Hair colour 42.1% 44.6%
    Liquid detergent 75.9% 81.9%
    Shaving cream 10.3% 10.5%
    Fairness cream 2.1% 3.4%
    Talcum powder 1.7% 1.3%
    Source: Godrej financial presentation, ORG Data

    The management has made no secret of the fact that it wants valuations of the company to strengthen further. But the concern is that the Godrej family already owns a sizeable 72.8% in the company. Going forward, more buyback schemes are likely to squeeze the liquidity on the counter. This may prompt a complete delisting move by the management. Or worse, the valuations of GCPL may continue to depend on the 'crutches' of the management buyback offers and as such may not be able to find its own bearing in the market.

    At Rs 109 the stock trades at 12.5x annualised 1QFY03 earnings. A buyback at Rs 175 signifies a P/E of over 20x 1QFY03 annualised earnings. Though the stock may continue its move up led by the buyback offer, going forward a 20x valuation may not be sustainable.



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