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Godrej Cons: Acquisition boost

Nov 1, 2010

Godrej Consumer Products Ltd. has announced its 1QFY11 results. The company has reported a 66.9% YoY and 40.9% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line for Godrej grew by 66.9% during 2QFY11. This comes on the back of strong growth of overseas business as well as from the inclusion of the financials of Godrej Sara Lee Ltd. (now Godrej Household Products Limited)
  • Operating (EBITDA) margin fell by 1%% YoY during the quarter. This comes on the back of higher raw material costs, increase in advertisement and other expenditure (all as a percentage of sales) partly offset by lower staff costs as a percentage of sales.
  • Net profits grew by 40.9% YoY during the quarter. This was slower than operating profit growth as a result of pressure from a sharp increase in interest costs, higher depreciation, rise in effective tax rate and lower other income.

Consolidated financials
(Rs m) 2QFY10 2QFY11 % Change 1HFY10 1HFY11 % Change
Net sales          5,779          9,647 66.9%       10,184       16,100 58.1%
Expenditure          4,637          7,838 69.0%          8,161       13,077 60.2%
Operating profit (EBDITA)          1,143          1,810 58.4%          2,023          3,023 49.4%
EBDITA margin (%) 19.8% 18.8%   19.9% 18.8%  
Other income             116                74 -35.7%             201             158 -21.1%
Interest                26                89 240.6%                64             194 203.6%
Depreciation                68             155 128.6%             120             239 99.6%
Profit before tax          1,164          1,641 40.9%          2,041          2,749 34.7%
Exceptional Items                    8                 411  
Tax             234             338 44.2%             414             686 65.8%
Profit after tax/(loss)             930          1,311 40.9%          1,627          2,475 52.1%
Net profit margin (%) 16.1% 13.6%   16.0% 15.4%  
No. of shares (m)             308             324               308             324  
Diluted earnings per share (Rs)*         13.1  
Price to earnings ratio (x)*         32.2  

What has driven growth in 2QFY11?
  • Growth in sales was aided by strong performance by the company's international business and by Godrej Household Products Limited (GHPL). Domestic soap segment maintained its market share at 10.4%. Hair colorant segment grew at 21% YoY during the quarter on the back of several marketing initiatives. International business which contributes 35% to the total sales, grew by 205% YoY. This growth was a result of robust all-round performance in all geographies except UK. Sales of the UK business fell by 8% YoY due to weak GBP.

    Cost break-up
    2QFY10 2QFY11 1HFY10 1HFY11
    Total Cost of goods 47.0% 47.9% 46.5% 48.4%
    Staff Cost 10.0% 8.3% 9.3% 7.7%
    Advertising 8.8% 10.2% 9.3% 10.1%
    Other Expenditure 14.5% 14.9% 15.0% 15.0%

  • Fall in the company's margins was due to higher raw material costs as a percentage of sales. Raw material costs increased from 47.0% in 2QFY10 to 47.9% in 2QFY11. This was largely due to rise in oil prices. The company's margins were also affected by an increased in advertisement spending. Advertisement costs increased by 1.4% to stand at 10.2% for the quarter. Other expenditure also contributed to the fall in margins as it rose from 14.5% to 14.9% (all as a percentage of sales). However, lower staff costs supported the falling margins of the company. As a result of lower provision for variable remuneration, staff costs fell by 1.7% to 8.3% as a percentage of sales.
  • Net profit of the company grew by 41% YoY during 2QFY11. This performance came on the back of higher operating income partially offset by increase in interest costs, higher depreciation, rise in effective tax rate and lower other income. While interest costs and depreciation costs increased by 240% YoY and 129% YoY respectively, effective tax rate increase by 0.5% to 20.6%. Other income on the other hand fell by 36% YoY.

What we expect?
At the current price of Rs 422, the stock is trading at a 35.3 times our estimated FY13 earnings (RPro subscribers can click here). The company has benefited from its new acquisitions for the quarter. However, going forward, once the base effect of the acquisitions gets adjusted, we expect the company's growth rate to moderate. Moreover the company is not expected to earn the high margins seen in FY10 going forward. Nevertheless we remain positive on the company's long term prospects. However, we believe that growth from 2-3 years prospective has been priced in the stock. For this reason we advise our subscribers to be cautious on this stock.

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