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Godrej Consumer: On a roll…

Oct 23, 2002

Godrej Consumer Products Limited (GCPL) continues to have a good FY03. The company has reported a 15% topline growth (including processing charges) during September quarter. The company finished the quarter with a 32% bottomline growth.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net Sales 1,019 1,186 16.5% 2,287 2,335 2.1%
Processing Charges 36 23 -36.2% 36 53 49.7%
Total operating income 1,054 1,209 14.7% 2,323 2,388 2.8%
Other Income 4 3 -5.7% 4 5 25.0%
Expenditure 866 994 14.7% 1,960 1,963 0.2%
Operating Profit (EBDIT) 188 215 14.6% 363 425 17.1%
Operating Profit Margin (%) 18.4% 18.1%   15.9% 18.2%  
Interest (net) 11 8 -29.2% 25 14 -43.3%
Depreciation 23 22 -4.3% 46 45 -2.6%
Profit before Tax 157 189 19.9% 296 371 25.5%
Tax (including deffered tax) 51 49 -4.3% 97 103 5.9%
Profit after Tax 107 140 31.5% 198 268 35.1%
Net profit margin (%) 10.5% 11.8%   8.7% 11.5%  
Effective tax rate (%) 32.3% 25.7%   32.9% 27.8%  
No. of Shares (eoy) (m) 59.8 58.1   59.8 58.1  
Diluted earnings per share* 7.3 9.7   6.8 9.2  
P/E ratio   11.5     12.0  
(* annualised)            

GCPL's topline growth was aided by strong showing in soaps, hair colour and liquid detergents. Infact, in soaps, its brand 'Godrej No. 1' logged in a huge 96% growth YoY during the the first half of FY03 (1HFY03). Hair colours too, continued to display healthy double digit growth rates. It must be noted that GCPL dominates the Indian hair colour market with a 44.5% share. An increase in contrct manufacturing during the quarter too aided topline growth.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Godrej Brands            
Soaps 567 657 16.0% 1,158 1,314 13.5%
Hair Colour 233 275 18.0% 489 560 14.4%
Toiletries 87 77 -10.6% 189 171 -9.7%
Liquid Detergents 23 35 50.6% 26 40 53.6%
Total Godrej Brands 909 1,044 14.8% 1,863 2,086 12.0%
Contract Manufacturing 79 84 5.9% 371 130 -65.1%
By Products 30 58 93.7% 53 120 125.8%
Total 1,019 1,186 16.5% 2,287 2,335 2.1%

At the operational level, the company was able to maintain healthy margins despite a spurt in staff costs (which is not linked largely to performance) and raw material costs. This was because the company got excise benefits from its plant located in Assam. Currently, the plant accounts for 10% of the company's turnover, but contributed around 25% to the company's profits during the quarter.

Cost break-up
(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Raw material 461 534 15.8% 1,112 1,080 -2.9%
Staff 48 63 31.1% 93 124 33.8%
Advertising & promotion 159 147 -7.4% 363 287 -21.0%
Others 198 249 26.0% 391 472 20.5%
Total expenditure 866 994 14.7% 1,960 1,963 0.2%

The management explained the loss of market share in the fairness cream segment (Fairglow) as a result of planned phasing out of old stock, to introduce new version of the 'Fairglow' cream. Infact, fairness cream shipment declined by 54% YoY during 1HFY03. The company continues to look for growth in all its branded categories. GCPL is also focusssing on exports to aid topline growth. Its exports to South Africa have commenced and it has tied-up with a third party manufacturer in Bangladesh for exporting its powder hair dye. The company is also boosting its 'Cinthol' presence in the Middle East.

Market share
  2QFY02 2QFY03
Toilet soaps 5.7% 5.6%
Hair colour 44.3% 44.5%
Liquid detergents 69.7% 80.8%
Shaving cream 10.5% 11.7%
Fairness cream 3.7% 2.2%
Talcum powder 1.4% 1.5%
Deodorants - 1.6%
Source: Godrej financial presentation, ORG Data

The company continues to reward shareholder's through its stated policy of increased dividends and/or buyback. GCPL declared its second interim dividend (Rs 2 per share) and also proposed a 3rd buyback scheme at a maximum buyback price of Rs 175 per share not exceeding Rs 100 m outlay.

The management has made no secret of the fact that it wants valuations of the company to strengthen further. But the concern is that the Godrej family already owns over 73% in the company. Going forward, more buyback schemes are likely to squeeze the liquidity on the counter. This may prompt a complete delisting move by the management. Or worse, the valuations of GCPL may continue to depend on the 'crutches' of the management buyback offers and as such may not be able to find its own bearing in the market.

At Rs 111 the stock trades at 12x annualised 1HFY03 earnings, 1.3x market cap to sales. A buyback at Rs 175 signifies a P/E of 19x 1HFY03 annualised earnings, 2.1x market cap to sales. Though the stock may continue its move up led by the buyback offer, going forward a 19x valuation may not be sustainable. Also, 'Godrej No. 1', which has spearheaded the topline growth accounts for 25% of the company's turnover. Such dependence on one brand has to be viewed with caution.

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