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Godrej Cons: Strong start to FY13

Aug 7, 2012

Godrej Consumer Products Ltd. has announced its first quarter results of financial year 2012-2013. The company has reported a 39% YoY growth in sales and 46% YoY fall in net profit. Here is our analysis of the results.

Performance summary
  • Godrej Consumer Products (GCPL) clocked a 39% YoY rise in topline led by 23% growth in domestic operations and 68% growth in international business.
  • On the back of controlled raw material costs and adspends, the company has been able to maintain operating margin at around 14.5%.
  • Earnings declined by 46% mainly on account of exceptional income of Rs 1.7 bn booked in the year-ago quarter.

(Rs m) 1QFY12 1QFY13 % Change
Total Income 10,015 13,921 39.0%
Expenditure 8,551 11,898 39.1%
Operating profit (EBITDA) 1,464 2,023 38.2%
EBITDA margin (%) 14.6% 14.5%  
Other income 96 147 53.2%
Forex gain/loss 24 (176)  
Interest 111 164 48.3%
Depreciation 159 199 24.9%
Profit before tax 1,314 1,630 24.0%
Exceptional Items 1,752 -  
Tax 673 112 -83.3%
Profit after tax/(loss) 2,393 1,518 -36.6%
Minority Interest - 213  
Net profit after minority interest 2,393 1,305 -45.5%
Net profit margin (%) 23.9% 9.4%  
No. of shares (m)   340  
Diluted earnings per share (Rs)*   18.8  
Price to earnings ratio (x)*   32.2  
* On a trailing 12 months basis

What has driven growth in 1QFY13?
  • GCPL's sales surged by 39% during the quarter driven by 23% growth in domestic business and 68% jump in international operations. In the domestic market household care, the largest category, registered volume-led growth of over 27% on the back of brand investments and distribution synergies. Soaps clocked the fastest growth in excess of 42% riding on strong volume growth of 24%. Brand investments, variant launches, distribution synergies and market share gain from unorganised players contributed to the robust growth in soap off take for the sixth consecutive quarter. However, hair colours saw a muted growth of 5% as the Expert range and advanced range of powder hair colours were re-launched in the year-ago quarter. In the overseas market, business in all geographies grew in double-digits with the South African market registering growth of over 236% backed by distribution expansion and Darling acquisition. International operations grew organically by 31% during the quarter.

    Cost break-up
      1QFY12 1QFY13 Change in basis points
    Total Cost of goods 48.3% 47.7% -58.38
    Staff Cost 8.0% 9.3% 128.67
    Advertising 11.7% 11.0% -70.63
    Other Expenditure 17.4% 17.5% 8.96

  • GCPL has managed to keep operating margin in-tact aided by easing raw material costs and moderation in adspends. While cost of goods sold was down by 0.6%, adspends reduced by 0.7% (both as a percentage of sales). These cost reduction measures offset the 1.2% jump in staff costs to sales ratio during the quarter.

  • Despite a 38% surge in operating profit, earnings slumped by 46% as the year-ago quarter included extraordinary income of Rs1.7 bn. Additionally, the company booked a forex loss of Rs 176 m in 1QFY13 as compared to a gain of Rs 24 m in the year-ago quarter. The company's tax incidence has reduced from 22% to 6.9% on account of reversal in tax provision after Nigeria business has been exempted from taxes. Apart from that, even the Mozambique unit has been declared as Free Trade Zone which will translate into lower tax liability in future. The company continued to resort to below-the-line adjustment for brand amortisation. Thus, the amount of Rs 131.5 m pertaining to amortisation of the acquired Good Knight and Hit brands was directly debited to the General Reserves.

What to expect?
GCPL has been reaping the benefits of robust growth in home care & personal wash in the domestic market and brisk rise in overseas business backed by consolidation in South African and Latin America markets. Going forward, the company's topline in the domestic market is expected to benefit from distribution synergies, product re-launches in its rapidly growing soap segment as well as introduction of brands from its overseas portfolio. In June 2012 quarter, the company has launched home and car air freshners from its Indonesian product basket. Additionally, revenue accretion from further integration of the Darling Group is also expected to drive growth.

At a price of Rs 605, the company is trading at 16 times its FY15 estimated earnings. At these valuations the stock appears overpriced and we advice a SELL.

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