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  • Jul 29, 2015 - Godrej Consumer: Lower input costs prop up profits

Godrej Consumer: Lower input costs prop up profits
Jul 29, 2015

Godrej Consumer Products (GCPL) declared results for the quarter ended June 2015. The company's consolidated revenues were up by 11% YoY during the quarter, while profits grew by 39% YoY. Here is our analysis of the results:

Performance summary
  • Consolidated revenues rise by 11% YoY led by a strong volume growth across markets. While the domestic business grew by 12% YoY, the international business expanded by 13% YoY (in constant currency terms).
  • Operating profits rise by 30% YoY as margins expand to 15% as compared to 12.8% in same period of last year. Margin expansion mainly due to lower input and advertisement costs (as a percentage of sales).
  • Profits rise by 39% YoY led by a strong operating performance. Adjusting for extraordinary expenses, the profit before tax is up by 27% YoY.
  • Company declared interim dividend of Rs 1 per share.

Consolidated financial performance
(Rs m) 1QFY15 1QFY16 Change
Net sales 18,885 20,977 11.1%
Expenditure 16,462 17,824 8.3%
Operating profit (EBDITA) 2,423 3,153 30.1%
EBDITA margin (%) 12.8% 15.0%  
Other income 274 168 -38.6%
Depreciation 221 236 6.6%
Interest 259 265 2.4%
Exceptional items (200) (134) -32.8%
Profit before tax 2,017 2,686 33.2%
Tax 444 563 26.9%
Effective tax rate 22% 21%  
Profit after tax/(loss) 1,573 2,123 35.0%
Minority interest/ Share of associate company (139) (131)  
Net profit after tax 1,435 1,992 38.9%
Net profit margin (%) 7.6% 9.5%  
No. of shares (m) 340.4 340.5  
Diluted earnings per share (Rs)*   28.1  
Price to earnings ratio (x)   45.0  
(*On a trailing 12-month basis)

What has driven performance in the quarter ended June 2015?
  • GCPL's consolidated revenues were up by 11% YoY during the quarter. Growth was witnessed all across the board, across most geographies. Net sales in the domestic business were up by 12% YoY, while the international business grew by 13% YoY in constant currency terms.

    Within India, growth was seen across segments with the large contributors being the household insecticides business (up 15% YoY), soaps (up 13% YoY) and hair colour business (up by 12% YoY). As per the company, the growth was led by a strong volume expansion of 13% YoY in this region. A bunch of factors such as deeper penetrations, coupled with new products launches are believed to be factors for this growth, especially at a time when the Indian FMCG sector is going through a sluggish phase, specifically in the rural parts of the country.

    As for the international business, which contributes to about half of the revenues, growth was seen across the board with its largest geographies - Indonesia and Africa showing strong growth. While Indonesia business' sales were up by 13% YoY (excluding the food business in the base quarter), sales in Africa were up by 32% YoY (constant currency growth for both). The company did witnesses some sluggishness in the Europen markets though.

  • At the operating level, the company reported a strong growth of 30% YoY as margins expanded to 15% from 12.8% in same period last year. Lower input and advertisement costs were the key heads that lead to this improvement. As per the company, margins of the international business expanded by about 3% YoY to levels of 13% led by a significant improvement in performance in the Indonesia and Latin America markets. While EBIDTA margins improved by 5.6% YoY in the former (including the food business), the same rose by 5.7% in the latter. The company did however see some pressure in Africa given the strong devalue of the local currencies, for which it has taken pricing actions. Its effect is likely to be seen over the next two quarters.

    Cost break up
    Particulars 1QFY15 1QFY16 Change
    Raw material costs 8,950 9,154 2.3%
    % of sales 47.4% 43.6%  
    Employee benefit  1,814 2,451 35.1%
    % of sales 9.6% 11.7%  
    Advertisement  2,502 2,511 0.4%
    % of sales 13.2% 12.0%  
    Other expenses  3,196 3,707 16.0%
    % of sales 16.9% 17.7%  
    Total  16,462 17,824 8.3%
    Data source: Company, Equitymaster Research

  • Barring extraordinary items (related to restructuring costs of subsidiary), profits before tax was up by about 27%YoY.
What to expect?

At the current price of Rs 1,265, the stock of GCPL trades at a multiple of about 45x its trailing twelve month earnings and at about 28x our estimated FY17 EPS.

The key takeaway from the management conference call is that the company is focusing on few aspects - such as cost rationalization, product innovations, brand building and strong distribution to drive growth and profitability. Within India, the key businesses such as household insecticides are likely to maintain their growth trajectory given that penetration levels are favourable both in the rural and urban markets. Also in the soaps category, rebranding and strong marketing efforts have helped the category move at a strong pace than the rest of the market; however it remains to be seen how long the company will be able to maintain this momentum, going ahead, considering that the rest of the sector players are showing way slower sales growth in volume terms.

As for the international business, certain pockets continue to chug along while markets such as Africa are expected to drive growth over the longer periods.

The stock of GCPL nevertheless continues to trade at premium valuations and thus we maintain our view that investors should not 'Buy' the stock at current levels.

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