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Godrej Cons: Profit growth eludes

Oct 24, 2011

Godrej Consumer Products Ltd. has announced its second quarter results of financial year 2011-2012. The company has reported a 23% YoY growth in sales and 2.6% YoY drop in net profit. Here is our analysis of the results.

Godrej Cons: Profit growth eludes
  • Top line for Godrej Consumer Products (GCPL) grew by 23% YoY during 2QFY12. The sales for H1FY12 were higher by 30% YoY.
  • Operating (EBITDA) profitability was maintained during the quarter backed by controlled expenditure. As a percentage of sales, cost of goods sold increased whereas staff costs and advertisement expenses were reined in. The operating margin for H1FY12 contracted by 160 basis points due to steep rise in cost of goods sold and advertisement expenditure.
  • Net profits fell by 2.6% during the quarter due to a sharp 171% jump in interest outgo on a year-on-year basis. The net profit for H1FY12 surged by 44.3% YoY riding on a 326% rise in exceptional income. The company earned a one-time compensation of Rs 1561.9 m for surrendering the Kiwi manufacturing and distribution license.

Consolidated financials
(Rs m) 2QFY11 2QFY12 % Change H1FY11 H1FY12 % Change
Total Income 9,672 11,919 23.2% 16,847 21,949 30.3%
Expenditure 7,946 9,772 23.0% 13,784 18,314 32.9%
Operating profit (EBITDA) 1,726 2,147 24.4% 3,063 3,635 18.7%
EBITDA margin (%) 17.8% 18.0%   18.2% 16.6%  
# Other income 154 (5) -103.2% 209 173 -17.3%
Interest 89 241 171.2% 195 433 122.4%
Depreciation 151 159 5.9% 246 319 29.6%
Profit before tax 1,641 1,742 6.2% 2,832 3,056 7.9%
Exceptional Items >8 -   411 1,752 326.0%
Tax 338 432 27.7% 700 1,105 57.8%
Profit after tax/(loss) 1,311 1,277 -2.6% 2,542 3,670 44.3%
Net profit margin (%) 13.6% 10.7%   15.1% 16.7%  
No. of shares (m)       - 324  
Diluted earnings per share (Rs)*         11.3  
Price to earnings ratio (x)*         36.2  
*On a trailing 12 months basis; adjusted for exceptional items
# includes forex gain/loss

What has driven performance in 2QFY12?
  • GCPL recorded a robust 23% YoY rise in sales driven by 24% growth in the domestic business. Its international business grew by 19% led by brisk growth registered in Indonesian and Latin American markets. In terms of product segments, the largest segment household insecticide which contributes 50% to overall revenues grew by 29% during the quarter. The second largest soap segment having a 24% revenue share grew by stellar 32%. The hair care segment grew by 15% led by strong performance of the newly launched expert care and advanced hair colours. The company completed the acquisition of 51% stake in Darling Group operations at South Africa and Nigeria during the quarter.

    Cost break-up 2QFY11 2QFY12 H1FY11 H1FY12
    Total Cost of goods 46.8% 47.6% 47.1% 48.2%
    Staff Cost 8.3% 6.9% 7.7% 7.4%
    Advertising 9.6% 9.3% 9.9% 10.4%
    Other Expenditure 17.4% 18.2% 17.2% 17.5%

  • During the quarter, cost of goods sold increased by 23% YoY. Even other expenses shot up by 28%. Notwithstanding, the company has held on to its operating profitability by limiting other operating expenses. Advertisement expense and staff costs as a proportion of sales declined during the quarter. The company's operating margin during the quarter stood at 18%.

  • At the net level, GCPL's profits fell marginally despite a 24.4% rise in operating income. A steep 171% jump in interest outgo led to the poor performance. The company raised debt by Rs 5.3 bn to finance the goodwill consideration of the acquired Darling Group. With around 90% of the outstanding loans of Rs 24.9 bn being foreign currency denominated, the weakening rupee has further inflated the financial charges during the quarter. The company incurred a marked-to-market forex loss of Rs 165.7 m on palm oil imports compared to a gain of Rs 90.4 m in the year-ago quarter. Even tax incidence was higher at 24.8% compared to 20.6% in the year-ago quarter. The company has resorted to below-the-line adjustment for brand amortisation. Thus the amount of Rs 132.3 m pertaining to amortisation of the acquired Good Knight and Hit brands was directly debited to the General Reserves. Had the amount been debited to the P & L account, the company's profits would have been lower by 13% at Rs 1145 m during the quarter.

What to expect?
At the current price of Rs 410, the stock is trading at a 26 times our estimated FY14 earnings. Although GCPL is the second largest soap player and enjoys leadership position in hair colours and insecticides, its profitability has come under a cloud. The company's sales have been growing at a brisk pace but high palm oil prices and weakening rupee have taken a toll on its profits. The earnings were also impacted by the steep jump in interest expense on account of higher borrowings to acquire goodwill from the Darling Group so much so that the company has directly credited amortisation of the Good Knight and Hit brands to the General Reserves. GCPL plans to raise soap prices by 10% in a calibrated manner over the remaining months of FY12 to tide over the rising palm oil price. Going forward, the company is expected to benefit from distribution synergies arising from the merger of Godrej Household Products and greater focus on rural penetration. However, at current levels, the stock appears overpriced and we advise investors to exercise caution.

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