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Godrej Consumer: Acquisitions drive growth
Nov 6, 2006

Performance summary
Godrej Consumer Products Ltd (GCPL) has reported yet another quarter of strong performance, with revenues and net profits growing by 44.8% YoY and 11.5% YoY respectively for 2QFY07. 2QFY07 and 1HFY07 financial results include the performance of Keyline Brands (U.K.) which Godrej Consumer Products acquired on October 31, 2005 and the performance and the cost of acquisition of the business acquired through Rapidol, South Africa, with effect from September 1, 2006. The management has also declared the second interim dividend of Rs 0.75 per share. (dividend yield of 0.5%).

Consolidated picture
(Rs m) 2QFY06 2QFY07 (%) Change 1HFY06 1HFY07 (%) Change
Gross sales 1,676 2,427 44.8% 3,439 4,923 43.2%
less: excise duty 104 108 3.7% 198 228 15.2%
Net sales 1,571 2,318 47.6% 3,241 4,695 44.9%
Expenditure 1,300 1,922 47.8% 2,639 3,877 46.9%
Operating profit (EBDITA) 271 397 46.5% 602 818 35.9%
EBDITA margin (%) 17.2% 17.1%   18.6% 17.4%  
Other income 60 28 -53.0% 63 36 -42.4%
Interest 9 26 202.4% 18 43 144.6%
Depreciation 27 31 12.5% 54 61 12.9%
Profit before tax 295 369 24.9% 593 750 26.4%
Tax 17 59 244.1% 44 98 124.2%
Profit after tax/(loss) 278 310 11.5% 549 651 18.6%
Net profit margin (%) 17.7% 13.4%   16.9% 13.9%  
No. of shares (m) 225.8 225.8   225.8 225.8  
Diluted earnings per share (Rs)*         5.82  
Price to earnings ratio (x)         26.9  

What is the company’s business?
Godrej Consumer Products Ltd. (GCPL) is amongst the well known mid-cap companies in the Indian FMCG space with presence in the personal care, hair care and fabric care categories and top-of-the-mind brands such as Cinthol, Fairglow, Godrej No.1 (soaps) and Ezee liquid detergent being a few amongst them. The company bought over the ‘Snuggies’ brand in the child nappy segment in 2003. The company has state-of-the-art manufacturing facilities at Malanpur (MP) Baddi (Himachal Pradesh), Guwahati (Assam) and Silvassa. With the acquisition of 100% ownership of Keyline Brands Limited, one of the admired FMCG companies in the United Kingdom, which also owns several international brands and trademarks in developed markets that include Europe, Jordan, Australia and Canada. In July 2006, GCPL entered into an agreement to acquire the South African hair color business of Rapidol, UK as well as its subsidiary Rapidol International, which had a combined turnover Rs 330 m in 2005.

What has driven performance in 2QFY07?
Its party time for all: GCPL continued to deliver encouraging growth across all its categories. Toilet soaps sales grew 19% YoY in value terms during the quarter. Both the popular and sub popular categories continued to drive growth with the company’s flagship brand Cinthol, Fairglow and Godrej No1 showing encouraging growth. Inspite of the 5% to 8% price hike taken on its toilet soaps in the quarter, GCPL outperformed (18.7%) the industry growth (12.8%) yet again. GCPL maintained its position as the second largest toilet soaps player with a market share of 9.3% for the quarter (up from 8.4% in 2QFY06).

Personal Care sales on a consolidated basis improved by a significant 118% YoY for the quarter under review. Hair colorant business grew 17% YoY in value terms on a consolidated basis and 10% YoY on a standalone basis. Consolidated sales include sales of Rapidol, which enjoys 80% of the ethnic hair colour market in South Africa. However the company’s hair colour growth was way below the industry growth of 38.2% in the quarter.

Toiletries sales increased significantly during the quarter with growth being witnessed across all categories namely Talcum Powder, Shaving cream and Diapers. While on a stand-alone basis, toiletries have shown a 37% YoY growth in sales, this segment has reported a 602% YoY on the consolidated basis which includes the sales of Keyline Brands.

Liquid detergents business continues to perform well with sales increasing by 24% YoY. Sale of this product is particularly strong during the winter months. The company plans to introduce new varieties in this category, which will lead to higher revenues in future.

Consolidated revenue break-up
Rs m 2QFY06 2QFY07 (%) Change 1HFY06 1HFY07 (%) Change
Godrej Brands            
Soaps 1,045 1,240 18.7% 2,087 2,505 20.0%
Hair Colour 360 427 18.7% 784 900 14.8%
Toiletries 82 576 601.6% 175 1,169 569.6%
Liquid Detergents 31 39 24.7% 40 49 21.0%
Total Godrej Brands 1,518 2,282 50.3% 3,086 4,623 49.8%
Contract Manufacturing 10 - - 77 - -
By-products 43 36 -15.2% 78 72 -7.1%
Total 1,571 2,318 47.6% 3,241 4,695 44.9%

Acquisitions: Sales of Keyline were Rs 463 m, which contributed 20% of the 2QFY07 consolidated sales. The net margins were 9.5% during 2QFY07. Rapidol reported sales of Rs 30 m in its one-month performance. Together these acquisitions grew the topline by 31% YoY.

Consolidated cost break-up
as a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 49.4% 51.0% 49.5% 50.5%
Staff Cost 6.7% 5.8% 6.3% 5.7%
Advertising 6.6% 6.8% 7.0% 8.6%
Other Expenditure 20.0% 19.3% 18.7% 17.8%

Stable margins: Inspite of the staff cost falling by 90 basis points, the margins remained stable due to higher raw material and advertising costs. There was a 17% YoY increase in the vegetable oil prices, which is the main input in soaps. Going forward, the company expects the input prices to go up further. This is likely to offset the benefit of the rise in product prices that the company effected in the second quarter of FY07.

Acquisitions save the bottomline: On standalone basis, the company’s profits fell by 6% YoY. This was due to lower other income, higher interest cost and tax outgo. On the consolidated basis the bottomline was up 115% YoY, which was due to a 17.5% growth due to the Keyline and Rapidol business.

What to expect?
At the current price of Rs 157, the stock is trading at a price to earnings multiple of 26.9 times its trailing 12 month earnings. The acquisitions are growing at much faster rate than the company’s established products. Also, the lower margin products are witnessing faster growth. Seeing the company’s future prospects and access to newer regions, we continue to be positive on the stock.

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