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Godrej Consumer: Input pressure - Views on News from Equitymaster
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Godrej Consumer: Input pressure
Jul 25, 2008

Performance summary
  • The consolidated net sales for 1QFY09 up 26% YoY. On a standalone basis, it is up 18% YoY.
  • While the soap segment (consolidated) grew by 13.8% YoY, hair colour witnessed a 15% YoY rise in 1QFY09.

  • Operating margins on consolidated basis decline by 410 basis points for 1QFY09.

  • Bottomline grows by 1.2% YoY on the consolidated basis.

  • The board has declared a dividend of Rs 0.75 per share (dividend yield 0.6%)



Consolidated picture
(Rs m) 1QFY08 1QFY09 (%) Change
Net sales 2,863 3,616 26.3%
Expenditure 2,352 3,121 32.7%
Operating profit (EBDITA) 511 495 -3.1%
EBDITA margin (%) 17.8% 13.7%
Other income 13 35 166.2%
Interest 35 (12) -
Depreciation 44 55 25.0%
Profit before tax 445 486 9.3%
Tax 59 96 62.5%
Profit after tax/(loss) 386 390 1.2%
Net profit margin (%) 13.5% 10.8%
No. of shares (m) 225.8 225.8
Diluted earnings per share (Rs)* 7.1
Price to earnings ratio (x) 17.3

What has driven performance in 1QFY09?
  • On standalone basis, GCPL witnessed a topline growth of 18% YoY. The soaps division grew at 13% YoY (standalone) as compared to the industry growth of 13.6% YoY in 1QFY09. This is the first time in the last few quarters that the company has grown at a lower rate, albeit marginally than the industry. The management has indicated that it is witnessing volume pressure on account of price hikes. In soaps, while Cinthol did well, Godrej No 1 witnessed pressure on account of price hikes. The hair colour segment grew by 19% YoY (standalone) as compared to 12% YoY growth for the industry. The growth witnessed in hair colour segment was mainly on account of volume growth in Godrej Expert Powder Hair Dye, Godrej Kesh Kala and Renew. The company is expected to undertake price hikes in hair colours in the coming quarters. Toiletries grew at 28% YoY.

  • The consolidated sales were up 26% YoY led by a 67% YoY growth in the international ventures. They now contribute 23% to the total sales, up from 18% in 1QFY09. Sales of Keyline brands were up 55% YoY while Rapidol reported a 13% YoY growth. Sales for the quarter under review for Godrej Global Mideast FZE were UAE Dirham (AED) 2.5 m. Godrej SCA Hygiene is also performing well. On a segmental basis, toiletries were the key drivers, with 66% YoY growth.

    Consolidated sales breakup
    Rs m 1QFY08 1QFY09 (%) Change
    Godrej Brands
    Soaps 1,628 1,853 13.8%
    Hair Colour 638 733 15.0%
    Toiletries 547 909 66.1%
    Liquid Detergents 11 16 40.5%
    Total Godrej Brands 2,824 3,511 24.3%
    By-products 39 106 170.6%
    Total 2,863 3,616 26.3%

  • Operating margins on consolidated basis fell by 410 basis points, while they were down 600 basis points on a standalone basis. Raw material prices jumped by 35% YoY. The company had faced pressure on account of higher vegetable oil prices. Advertisement cost was also on the higher side on account of extensive relaunch of flagship brand, Cinthol. The company had taken price hikes in soaps recently to offset the costs. However, it faced pressure on the volumes front.

  • The consolidated bottomline grew by just 1.2% YoY. Lower margin and higher tax outgo were the main culprits. The tax rate increased from 13% to nearly 20% in 1QFY09. The higher tax rate was mainly due to the larger share of the international profits, which have higher effective tax rate. The bottomline on the standalone front declined 4.2%YoY, inspite of higher other income. The international operations witnessed a 69% YoY jump in profits on account of lower base.

What to expect?
At the current price of Rs 122, the stock is trading at a price to earnings multiple of 14.2 times our estimated FY11 earnings. Though soaps have witnessed accelerated growth in recent quarters, the price hikes taken in the last quarter has resulted in slowdown in volumes as the consumers for mass brands remain price-sensitive, making it difficult to put through price increases. Further, it is also planning to invest more in ad spends and brand building, indicating the competitive pressures. On the positive side, better volume numbers for the hair colour segment and international operations bought some relief.

However, with the commodity prices not relenting, pressure on margins is likely to sustain. Going forward we think that GCPLs earnings prospects over the medium term will largely depend on its recent organic and inorganic growth initiatives.

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