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Godrej Cons: Insecticide biz drags down growth - Views on News from Equitymaster
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Godrej Cons: Insecticide biz drags down growth
Nov 7, 2014

Godrej Consumer Products Ltd. has announced its second quarter results of financial year 2013-2014. The company has reported a 4.6% YoY growth in sales and 20% YoY rise in net profit (excluding exceptional item). Here is our analysis of the results.

Performance summary
  • Revenues for 2QFY15 grew by 5% led by 7% growth in the domestic business and 2% rise in international business. For 1HFY15, revenues were up by 7%.
  • However, the company has managed to expand operating margin by 1.3% in 2QFY15 backed by lower staff costs, ad-spends and other expenses. For 1HFY15, the operating margin remained flat.
  • Net profits grew by 20% in 2QFY15 aided by higher other income earned. The net profits for 1HFY15 have grown by 15.4%.
  • The company has declared a second interim interim dividend of Re 1 per share on a face value of Re 1 per share for the financial year 2014-15.

Consolidated financials
(Rs m) 2QFY14 2QFY15 % Change 1HFY14 1HFY15 % Change
Total Income 19,617 20,601 5.0% 36,886 39,486 7.0%
Expenditure 16,616 17,186 3.4% 31,594 33,654 6.5%
Operating profit (EBITDA) 3,001 3,415 13.8% 5,292 5,833 10.2%
EBITDA margin (%) 15.3% 16.6% 1.3% 14.3% 14.8% 0.4%
 Other income 128 346 169.9% 260 620 138.5%
Forex gain/loss (63) (32)   (218) (67)  
Interest 257 254 -1.1% 497 508 2.1%
Depreciation 244 227 -7.1% 465 448 -3.7%
Profit before tax 2,565 3,249 26.7% 4,372 5,430 24.2%
Exceptional Items (3) (7)   (19) (172)  
Tax 470 718 52.8% 808 1,161 43.7%
Profit after tax/(loss) 2,092 2,524 20.7% 3,545 4,097 15.6%
Share of profit in associate firm   (1)     (1)  
Minority Interest 142 178 25.2% 268 316 17.7%
Net profit after minority interest 1,950 2,345 20.3% 3,277 3,780 15.4%
Net profit margin (%) 9.9% 11.4% 1.4% 8.9% 9.6% 0.7%
No. of shares (m)         340  
Diluted earnings per share (Rs)*         24.8  
Price to earnings ratio (x)*         37.8  
* On a trailing 12 months basis

What has driven growth in 2QFY15?
  • GCPL's revenues recorded growth of 5%. Domestic business grew by 7% on account of sluggish growth in household insecticides business. The household insecticides business was adversely impacted by uneven rainfall distribution and grew by 2%, more than 2.5 times ahead of the category. Its GoodKnight Fast card has become a Rs 100 crore brand in the shortest time of 11 months. Excluding the central-northern India region, the HI business grew by 7%. Led by continued strong performance of Godrej Expert rich crème, hair colours grew by 9% on a high base quarter growth of 24%. The brand has become the highest selling within 20 months of launch. The company has forayed into premium hair care products under the BBlunt brand in which it has a 30% stake. In soaps, the company posted 13% value growth well ahead of the category that has de-grown during the quarter.

  • The international business posted a slow growth of 2% due to unfavourable currency movements. The constant currency sales growth was robust at 12%. Indonesia reported constant currency sales growth of 15% and excluding the foods distribution, the growth was better at 21%. Africa posted strong constant currency growth of 15% led by Darling business. Even the LaTAM region saw a sharp rise of 31% in business at constant currency. However the European region posted a 9% decline due to high-base effect and counterfeit issues in a major brand.

      2QFY14 2QFY15 Change in basis points
    Total Cost of goods 46.2% 47.7% 155.19
    Staff Cost 10.3% 9.4% -90.71
    Advertising 11.2% 10.3% -96.96
    Other Expenditure 17.0% 16.0% -95.71

  • GCPL's operating margin expanded by 1.3% aided by savings in other operational expenses that have more than offset higher raw material costs. As a percentage of sales, raw material costs increased by 1.6% during the quarter. The ad-spends to sales ratio was down by 0.96% as the company consciously kept advertisements low due to deficient rainfall and lesser mosquito infestations resulting in tepid demand. Even staff costs as a proportion of sales were lower by 0.9% due to higher labour productivity in the Darling business. Even the other expense to sales ratio fell by 0.96%. All regions, barring South Africa and Europe, posted incremental margins during the quarter.

  • The net margin increased by 1.4% benefitted by lower depreciation and interest charges and forex losses. Even other income surged by 170% further boosting the profitability. The tax incidence rose to 22% in 1QFY15 from 18.3% in the year-ago quarter.
What to expect?

GCPL's revenue growth continues to be impacted by sharp slowdown in the home and personal care business in the domestic markets, sluggish growth in the European region and adverse forex movements. In the domestic market slow growth in household insecticides business, which account for half of the overall sales, dragged down overall growth. Going ahead, the company wants to remain focussed on offering premium and innovative products. The company wants to move in adjacent product categories in personal wash and skin care through offerings that are disruptive in product and pricing. The company will be launching face wash under the Godrej No 1 brand at a disruptive price-point and distinct packaging. In household insecticides, the company would be making incremantal innovations to existing products.

At a price of Rs 938, the stock is trading at 21 times its FY17 earnings. As the valuations do not provide adequate margin of safety, we continue to maintain a BUY at lower level on the stock at current levels. Investors can consider buying the stock when the price corrects by around 19% from present levels.

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