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Godrej Cons: Domestic margins remain weak
Aug 26, 2014

Godrej Consumer Products Ltd. has announced its first quarter results of financial year 2013-2014. The company has reported a 9.5% YoY growth in sales and 8% YoY rise in net profit (excluding exceptional item). Here is our analysis of the results.

Performance summary
  • Godrej Consumer Products Ltd (GCPL) posted a 9.4% increase in topline driven by 6% growth in the domestic business and 17% jump in international business.
  • On account of sharp rise in input costs and other expenses, the operating margin contracted by 0.5% during the quarter.
  • However a 108% jump in other income earned coupled with lower forex loss has led to led to almost flat net margin for the quarter.
  • The company has declared a first interim interim dividend of Re 1 per share on a face value of Re 1 per share for the financial year 2014-15.

Consolidated financials
(Rs m) 1QFY14 1QFY15 % Change
Total Income 17,269 18,885 9.4%
Expenditure 14,978 16,468 9.9%
Operating profit (EBITDA) 2,291 2,417 5.5%
EBITDA margin (%) 13.3% 12.8% -0.5%
 Other income 132 274 107.9%
Forex gain/loss (154) (35)  
Interest 240 254 5.6%
Depreciation 221 221 0.0%
Profit before tax 1,807 2,182 20.7%
Exceptional Items (16) (165)  
Tax 338 444 31.1%
Profit after tax/(loss) 1,454 1,573 8.2%
Share of profit in associate firm   0  
Minority Interest 126 138 9.3%
Net profit after minority interest 1,327 1,435 8.1%
Net profit margin (%) 7.7% 7.6% -0.1%
No. of shares (m)   340  
Diluted earnings per share (Rs)*   22.6  
Price to earnings ratio (x)*   40.8  
* On a trailing 12 months basis

What has driven growth in 1QFY15?
  • GCPL's revenues grew by 9.4% in 1QFY15. Domestic business grew by 6% on account of sluggish growth in household insecticides business and soap businesses. The household insecticides business was impacted by delayed monsoons, capacity constraints as well as high base effect. However the business grew by 9%, ahead of the category. A drop in the consumption in the mass soap segment saw the company's soap business recording value growth of mere 2%. The hair colour business continued its strong momentum and recorded a growth of 14% during the quarter. The company launched a portfolio of hand washes, hand sanitiser and anti-mosquito spray under the Protekt brand in modern trade. The overseas business recorded growth of 17% on a constant currency basis led by double-digit growth across geographical segments. Each of Indonesia, Latin America and Europe posted growth of over 20% during the quarter.

      1QFY14 1QFY15 Change in basis points
    Total Cost of goods 46.4% 47.4% 102.31
    Staff Cost 10.2% 9.6% -55.10
    Advertising 13.8% 13.2% -59.48
    Other Expenditure 16.4% 17.0% 59.04

  • However, the company's operating margin eroded by 0.5% due to a jump in input costs and other expenses. As a proportion of sales, cost of goods sold and other expenses were up by 1% and 0.6%, respectively. The impact was partly neutralized by cost savings in staff costs and ad-spends (both as a proportion of sales). The operating margin in the domestic business was lower by 0.9% at 15% due to high trade marketing investments on a low sales base. The operating margin for the international business stood at 10.5% on account of lower profitability in Europe and Latin America operations.

  • At the net level, the company has managed to maintain margin at 7.6% backed by steep rise in other income earned and fall in forex losses booked during the quarter. The tax incidence rose to 22% in 1QFY15 from 18.9% in the year-ago quarter.
What to expect?
Backed by strength of innovative offerings, GCPL has consistently been able to grow ahead of the product categories despite a general slowdown. Its domestic margins have been hit on account of high trade marketing investments. In the overseas markets, margins in Europe and Latin America Markets have been adversely impacted. Among international acquisitions, only Kinky is yet to achieve break-even and is expected later in FY15. However, Kinky contributes less than 1% of overall sales. In case of the Darling, 65% consolidation has been reached while the remaining 35% will be consolidated over the next 2-3 years. Going ahead, the company wants to launch household insecticides business in Africa in a big way and bring Africa profit margins to domestic margin levels in two years. The company has embarked on a restructuring exercise in Argentina to rationalize costs in a volatile economic climate.

At a price of Rs 923, the stock is trading at 20 times its FY17 earnings. As the valuations do not provide adequate margin of safety, we continue to maintain a BUY at lower level on the stock at current levels. Investors can consider buying the stock when the price corrects by around 12% from present levels.

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