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Godrej Consumer: India is gaining strength
Jul 31, 2007

Performance summary
  • On a consolidated basis, the topline grows by 20.5% YoY. This was led by strong growth in soaps and hair colour products both reporting double-digit growth.

  • GCPL’s core portfolio of soaps (69% of revenues) outperforms (29% YoY growth) the industry growth (8% YoY) once again.

  • Consolidated operating margins were stable at 18% in 1QFY08.

  • Net profits on a consolidated basis were up 18% YoY.

Consolidated picture
(Rs m) 1QFY07 1QFY08 (%) Change
Net sales 2,376 2,863 20.5%
Expenditure 1,955 2,352 20.3%
Operating profit (EBDITA) 421 511 21.5%
EBDITA margin (%) 17.7% 17.9%  
Other income 8 13 55.6%
Interest 18 35 98.3%
Depreciation 31 44 44.9%
Profit before tax 381 445 16.8%
Tax 53 59 10.8%
Profit after tax/(loss) 328 386 17.7%
Net profit margin (%) 13.8% 13.5%  
No. of shares (m) 225.8 225.8  
Diluted earnings per share (Rs)*   6.5  
Price to earnings ratio (x)   21.6  

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 2006, 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 1QFY08?
Consolidated sales: On a consolidated basis, the topline was up 20.5% YoY. This was led by strong growth in soaps and hair colour products both reporting double-digit growth. The toiletries, however was the under performer with sales falling by 7%YoY.

Consolidated sales breakup
Rs m 1QFY07 1QFY08 (%) Change
Godrej Brands      
Soaps 1,265 1,628 28.7%
Hair Colour 480 638 32.8%
Toiletries 586 547 -6.6%
Liquid Detergents 10 11 9.9%
Total Godrej Brands 2,341 2,824 20.6%
By-products 35 39 10.5%
Total 2,376 2,863 20.5%

Sales of Keyline Brands (down by 15% YoY) were subdued due to heavy rains witnessed in the UK, which led to lower sales for most categories in FMCG. The net profits of Keyline were also down by 49% YoY. Rapidol clocked revenues of Rs 119 m and net margins of 10.9% for 1QFY08.

Standalone picture
(Rs m) 1QFY07 1QFY08 (%) Change
Net sales 1,916 2,359 23.1%
Expenditure 1,561 1,905 22.1%
Operating profit (EBDITA) 355 454 27.6%
EBDITA margin (%) 18.6% 19.2%  
Other income 8 14 77.8%
Interest 8 26 228.8%
Depreciation 26 39 47.7%
Profit before tax 329 403 22.4%
Tax 24 45 85.1%
Profit after tax/(loss) 305 358 17.4%
Net profit margin (%) 15.9% 15.2%  
No. of shares (m) 225.8 225.8  

Standalone basis: The company reported sales growth of 23% YoY led by strong performances by all its segments. Its contribution to consolidated sales has gone up to 82% from 80.6% in 1QFY07.

Soap segment: GCPL’s core portfolio of soaps (69% of revenues) outperformed (29% YoY growth) the industry growth (8% YoY) once again. While there was 17% YoY growth in volumes, 29% YoY was the value growth. Brands like Cinthol, Godrej No.1 and Fairglow were the main drivers of growth in this segment, which enabled the company to increase its market share to 10%. During the quarter, the company had taken price hikes by 5% to 8% across its brands to offset the rising cost pressure.

Hair colour: In the hair colour segment, GCPL’s growth (up 11% YoY) yet again was way below the industry growth rate 20%. It lost its market share from 37.7 % in 1QFY07 to 35.9% in 1QFY08. The volumes grew by 7% YoY, while value growth was higher by 11% YoY. However, the company is constantly exploring opportunities to introduce new colours and innovative products in this category.

Toiletries: The division grew by 18% YoY backed by strong growth in shaving cream and talc products. During the quarter, the company launched its first Keyline brand in India – ‘Erasmic Shave Gel’. GCPL also entered the face wash and shampoo categories during the quarter with the launch of FairGlow Fairness Face Wash and Godrej No. 1 Almond shampoo.

Liquid Detergent: The division posted a 9.9% YoY growth during 1QFY08. The market share touched 80.7% from 68.1% in 1QFY07.

Consolidated cost break-up
as a % of net sales 1QFY07 1QFY08
Total Cost of goods 49.3% 51.2%
Staff Cost 5.6% 7.2%
Advertising 10.4% 7.4%
Other Expenditure 17.0% 16.3%

Stable margins: Despite lower advertising and other costs, the operating margins remained stable at 18% for 1QFY08. This was owing to higher raw material and labour costs (as percentage of sales). Higher raw material costs was on account of rise in vegetable oil prices. Labour costs (as percentage of sales) increased from 5.6% in 1QFY07 to 7.2% in 1QFY08. On the standalone basis too, the margins improved merely by 70 basis points (0.7%) due to higher raw material and labour costs. During the next 2 to 3 quarters, the ad spends are likely to increase as the company is introducing newer products and variants.

Bottomline picture: Net profits on a consolidated basis were up 18% YoY. Stable margins, higher other income and lower tax rates led to the rise. However, higher interest costs and depreciation restricted the growth. On the standalone basis, the profits were up 17% YoY for the current period and contributed 93% to the consolidated profits.

What to expect?
At the current price of Rs 141, the stock is trading at a price to earnings multiple of 13.9 times our estimated FY10 earnings. The company is gaining market share in soaps but losing out in the hair colour market. However, management expects to improve the performance of this segment with its new products. GCPL is consistently enhancing its capacities and operational efficiency in its efforts to expand margins and strengthen its competitive position.The company is also raising Rs 4 bn to fund its acquisitions in the developing markets. Taking into consideration the high growth rates achieved by GCPL in the recent past, buoyant economic conditions and expansion of business through inorganic growth, we expect GCPL to perform better going ahead.

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