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Godrej Consumer: Cost pressure continues - Views on News from Equitymaster

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Godrej Consumer: Cost pressure continues
Oct 24, 2008

Performance summary
  • Consolidated topline grows by 27% YoY for 2QFY09 and 1HFY09 each.
  • Except the hair colour segment, all the other segments witness strong growth.
  • Operating margins witness pressure on account of higher raw material and staff costs.
  • Consolidated bottomline declines by 6% YoY during 2QFY09 and 2% YoY during 1HFY09 mainly due to lower margins and higher tax expenses.


Consolidated picture
(Rs m) 2QFY08 2QFY09 (%) Change 1HFY08 1HFY09 (%) Change
Gross sales 2,804 3,553 26.7% 5,782 7,306 26.3%
less: excise duty 64 89 38.9% 179 225 25.3%
Net sales 2,740 3,481 27.0% 5,603 7,118 27.0%
Expenditure 2,239 3,068 37.0% 4,593 6,188 34.7%
Operating profit (EBDITA) 501 413 -17.6% 1,010 930 -8.0%
EBDITA margin (%) 18.3% 11.9% 18.0% 13.1%
Other income 14 14 4.4% 26 28 8.4%
Interest 32 (47) -250.0% 67 (59) -188.4%
Depreciation 46 46 0.4% 90 101 12.2%
Profit before tax 437 428 -2.0% 879 915 4.1%
Tax 67 81 21.8% 125 177 41.5%
Profit after tax/(loss) 371 347 -6.3% 754 738 -2.1%
Net profit margin (%) 13.5% 10.0% 13.5% 10.4%
No. of shares (m) 225.8 258.1 225.8 258.1
Diluted earnings per share (Rs)* 6.1
Price to earnings ratio (x)* 15.7
* 12 month trailing

What has driven performance in 2QFY09?
  • GCPL reported a consolidated topline growth of 26% YoY each for 2QFY09 and 1HFY09. While the domestic operation sales jumped 24% YoY during the quarter, international operations witnessed a 37% YoY growth. The company continued outperforming the soap segment in the domestic markets with a 26% YoY growth as compared to 17% YoY for the industry. It managed to gain some market share improving from 9.1% in 1QFY09 to 9.5% in 2QFY09. GCPL’s domestic hair color revenues declined 6% YoY during the quarter. This is the first time the company has witnessed a decline. The pipeline correction due to the launch of four variants of Godrej Expert Powder Hair dye affected the company’s hair color business. It continues to lose its market share in this segment, which now stands at 33.7% as compared to 34.2% in 1QFY09. The company gained further market share in the liquid detergent segment and reported a sales growth of 58% YoY during the quarter. All its offerings in the toiletries segment continued to deliver strong growth.

    Standalone sales breakup
    Rs m 2QFY07 2QFY08 (%) Change 1HFY07 1HFY08 (%) Change
    Godrej Brands
    Soaps 1,453 1,834 26.2% 3,081 3,596 16.7%
    Hair Colour 445 419 -5.8% 968 1,041 7.5%
    Toiletries 137 147 7.9% 293 347 18.5%
    Liquid Detergents 28 44 57.9% 39 60 52.9%
    Contract Mfg. - 11 - 82
    Total Godrej Brands 2,062 2,456 19.1% 4,382 5,126 17.0%
    By-products 40 135 234.7% 80 241 202.8%
    Total 2,103 2,590 23.2% 4,461 5,367 20.3%

  • On the international front, while Keyline witnessed an 11.5% YoY growth in topline mainly on account of re-launches, the earnings declined by 11% YoY. The Rapidol business witnessed strong growth of 114% YoY on the earnings front. Godrej Global Mideast FZE (GGME) earned sales of AED 2.4 m. GCPL increased the prices of products sold by Kinky (company acquired in South Africa), which includes hairbraids, hair pieces and wigs along with hair accessories like styling gels, hair sprays and oil free shampoo. This was to match up with sharp increase in input costs and depreciation of the Rand against the dollar. Kinky reported sales of Rand 22.5 m.

  • The consolidated margins during 2QFY09 declined by 6.4% mainly on account of higher raw material prices which increased by 47% YoY. The staff costs also increased from 5.6% to 6.6% (as a percent of sales). However, lower advertisement and other expenses brought some relief. For 1HFY09, the margins were down 5%. The raw material costs increased from 50% to 56% (as a percent of sales) during 1HFY09. On a standalone basis, the margins were down 8.3% and 6.8% for 2QFY09 and 1HFY09 respectively. The company had taken weighted average price hikes of 10% QoQ during 2QFY08 in the soap segment. Expert powder hair dye had seen a price hike of around 11% YoY.

  • The consolidated profits for 2QFY09 declined by 6% YoY, while they were down 2% YoY during the half year period. Lower margins and higher tax expenses were the culprits. On a standalone basis, the profits for both the periods under consideration were down 4% YoY. The standalone profits contributed 90% to the consolidated revenues. During the quarter, while the profits of the company’s international operations were down 27% YoY, they were up 23% YoY during 1HFY09.

What to expect?
At the current price of Rs 96, the stock is trading at a price to earnings multiple of 11.2 times our estimated FY11 earnings. Though the company has done well on the topline front, its performance on the margins is lower than our FY09 estimates. The subdued performance of the hair colour segment and international ventures is a cause for concern going forward. The management has indicated that the input cost would be the determinant factor for operating margins going forward, as price hikes would be difficult. With vegetable oil prices have been declining in recent times, the margins are expected to improve in the coming quarters. The company will continue to grow and expand its business both on the domestic and the overseas front. We remain positive on the stock.

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