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Godrej Cons: Wage costs depress margins - Views on News from Equitymaster

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Godrej Cons: Wage costs depress margins

Nov 6, 2012

Godrej Consumer Products Ltd. has announced its second quarter results of financial year 2012-2013. The company has reported a 35% YoY growth in sales and 25% YoY rise in net profit. Here is our analysis of the results.

Performance summary
  • Backed by 19%growth in domestic operations and 32% increase in the organic international business, overall topline grew by 34% in 2QFY13. For 1HFY13, revenues were up by 37%.
  • A steep rise in staff costs in 2QFY13 has led to a 220 basis points contraction in operating margin. For 1HFY13, the operating margin was lower by 120 basis points.
  • Earnings grew by 25% on the back of lower tax incidence and forex loss and 30% rise in other income. However, net profit fell by 21% due to higher exceptional income earned in the year-ago quarter.

Consolidated financials
(Rs m) 2QFY12 2QFY13 % Change 1HFY12 1HFY13 % Change
Total Income 11,911 16,003 34.4% 21,926 29,924 36.5%
Expenditure 9,792 13,514 38.0% 18,346 25,412 38.5%
Operating profit (EBITDA) 2,119 2,490 17.5% 3,580 4,513 26.0%
EBITDA margin (%) 17.8% 15.6%   16.3% 15.1%  
Other income 109 144 32.3% 205 291 42.1%
Forex gain/loss (173) (76)   (149) (252) 69.7%
Interest 154 200 30.1% 262 364 39.1%
Depreciation 159 206 29.6% 319 405 27.3%
Profit before tax 1,741 2,151 23.5% 3,056 3,781 23.8%
Exceptional Items 1 -   1,752 - -100.0%
Tax 432 476 10.1% 1,105 588 -46.8%
Profit after tax/(loss) 1,310 1,676 27.9% 3,703 3,194 -13.8%
Minority Interest 33 83   33 296  
Net profit after minority interest 1,277 1,593 24.7% 3,670 2,898 -21.0%
Net profit margin (%) 10.7% 10.0%   16.7% 9.7%  
No. of shares (m)         340  
Diluted earnings per share (Rs)*         19.5  
Price to earnings ratio (x)*         35.3  
(*On a trailing 12-month basis)

What has driven performance in 2QFY13?
  • GCPL clocked a 34% increase in revenues led by 24% rise in organic business sales. Domestic business grew by 19% backed by double-digit growth in all product categories. The largest segment household insecticides, with 45% sales share, grew 1.5 times faster than the category at 20%. The second largest segment soaps having 35% sales share grew by 24% with underlying volume growth of 6%. The Cinthol range of bathing and fragrance products were re-launched. Hair colours registered a sales growth of 10%. The company entered into the cream format through a differentiated offering during the quarter. The international business posted organic sales growth of 32% with strong growth across all geographies. Africa reported a 152% jump in revenues on the back of the consolidation of Darling operation. Its other large markets, Indonesia and Latin America clocked growth of 37% and 93%, respectively.

    Cost break-up 2QFY12 2QFY13 Change in basis points
    Total Cost of goods 48.1% 48.0% -18.48
    Staff Cost 6.8% 8.3% 149.10
    Advertising 9.3% 9.7% 38.40
    Other Expenditure 17.9% 18.5% 53.92

  • GCPL has not been able to translate its robust growth in turnover into higher profitability due to sharp rise in staff costs. As a proportion of sales, staff costs grew by 149 basis points. Additionally, higher brand investments have resulted in each of the ad-spends and other expenses growing in excess of 35% during the quarter. Therefore, despite softening vegetable oil price reducing cost of goods to sales ratio marginally, the overall operating margin contracted by 220 basis points during the quarter.

  • Earnings grew by a relatively faster 25% on a 17.5% rise in operating profit. This growth has been account of a 32% increase in other income and lower tax charges. A 270 basis points drop in tax incidence led to a modest 10% increase in tax outgo for the quarter. Additionally, the company pared forex loss by more than half to Rs 76 m. The company continued to resort to below-the-line adjustment for brand amortisation. Thus, the amount of Rs 133 m pertaining to amortisation of the acquired Good Knight and Hit brands was directly debited to the General Reserves. Excluding this impact, net profits would have grown by tepid 14.3% during the quarter.

What to expect?
GCPL is likely to witness improvement in margins going forward on the back of moderating vegetable oil prices and investments behind brands gaining traction. However as the second phase of consolidation of Darling Group is likely to be funded through debt, its interest cost is likely to remain high. GCPL expects 65% of the consolidation to complete by the December 2012 quarter. The company would continue to benefit from distribution synergies, product re-launches as well as introduction of brands from its overseas portfolio. Additionally, revenue accretion from further integration of the Darling Group is also expected to drive growth.

At a price of Rs 689, the company is trading at 19 times its FY15 estimated earnings. At these valuations the stock appears overpriced and we re-itereate a 'SELL' on the stock.

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