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Godrej Cons: Margins hit despite good start - Views on News from Equitymaster

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Godrej Cons: Margins hit despite good start
Aug 12, 2013

Godrej Consumer Products Ltd. has announced its first quarter results of financial year 2013-2014. The company has reported a 24% YoY growth in sales and 2% YoY rise in net profit. Here is our analysis of the results.

Performance summary
  • Riding on 19% growth in each of the domestic and overseas markets (constant currency terms), GCPL posted a 24% rise in consolidated sales.
  • However, the operating margin reduced by 1.4% due to a steep rise in ad-spends and staff costs.
  • Net profit grew by a mere 1.7% on account of a steep rise in interest costs and tax outgo arising from one-time tax reversal of Rs 165 m in the year-ago quarter.
Consolidated financials
(Rs m) 1QFY13 1QFY14 % Change
Total Income 13,921 17,249 23.9%
Expenditure 11,898 14,996 26.0%
Operating profit (EBITDA) 2,023 2,254 11.4%
EBITDA margin (%) 14.5% 13.1%  
Other income 147 132 -10.2%
Forex gain/loss (176) (154)  
Interest 164 240 46.4%
Depreciation 199 221 11.3%
Profit before tax 1,630 1,769 8.5%
Exceptional Items - 22  
Tax 112 338 201.2%
Profit after tax/(loss) 1,518 1,454 -4.2%
Minority Interest 213 126  
Net profit after minority interest 1,305 1,327 1.7%
Net profit margin (%) 9.4% 7.7%  
No. of shares (m)   340  
Diluted earnings per share (Rs)*   23.5  
Price to earnings ratio (x)*   36.6  
* On a trailing 12 months basis

What has driven performance in 1QFY14?
  • GCPL continued to grow at a robust pace, clocking a growth of 24% during the quarter. Its domestic business operations grew by 19% led by double-digit growth across product segments each of which outperformed the overall category growth. Its hair-colour business posted growth of 32% aided by good sales growth in rich crème hair colour and expert advanced powder hair colour. The household insecticides business grew by 24% as its key brands HIT and Goodknight continued to strengthen leadership position. Even soaps business recorded growth of 13% driven by volume growth of 7% backed by the success of its variants. The international business grew by 19% led by strong sales growth across geographies.

    Total Cost of goods 1QFY13 1QFY14 Change in basis points
    Total Cost of goods 48.6% 46.4% -219.44
    Staff Cost 9.3% 10.4% 112.82
    Advertising 11.1% 13.9% 270.93
    Other Expenditure 16.4% 16.3% -17.56

  • Operating margins continued to be hit by strong brand investments supporting new launches. Ad spends-to-sales jumped to 13.9% from 11.1% in the year-ago quarter. Even staff costs-to-sales ratio rose by 1.1% during the quarter. Rising expenses were partially offset by lower palm oil pricing resulting in input cost savings of 2% in raw material costs as a proportion of sales. In the overseas operations, only the LATAM business registered incremental margins. The operating margins in Indonesia contracted by 2.6% due to higher wages from hike in minimum wages as well as no margin contribution from contract manufacturing for divested foods business. The African business saw an erosion of 5.6% in operating margin due to down trading in the South African market, consolidation in Kinky brand as well as depreciation of Rand against USD. Even margins in the UK business were down by 3.4% on higher media and trade investments for brand promotion.

  • Net profits grew by a measly 1.7% YoY on account of a higher interest costs as well steep rise in tax rates. The relatively higher tax incidence has been on account of a one-off tax reversal impact of Rs 165 m taken in the year-ago quarter. During the June 2013 quarter, the company booked an exceptional gain of Rs 22 m arising from profit on the sale of the Simba brand (Indonesia food business). Excluding the impact of exceptional income and onetime tax reversal, the net profit grew by 7% during the quarter. 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 for the quarter.
What to expect?

Although GCPL has been witnessing robust topline growth, its margins have contracted due to marketing investments on new launches and wage-hikes in the international operations. Going ahead, ad-spends in the domestic markets are expected to remain high due to ads being regulated per hour of broadcast by the government. Even margins in the Indonesian and African markets are likely to remain depressed in the near term.

At a price of Rs 859, the company is trading at 21 times its FY15 estimated earnings. At these valuations the stock continues to remain overpriced and we re-iterate a 'SELL' on the stock.

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