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Godrej Consumer: Tax advantage - Views on News from Equitymaster
 
 
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  • Nov 22, 2004

    Godrej Consumer: Tax advantage

    Performance summary
    Mid-cap FMCG companies are the flavour of the season. With these companies largely growing in double digits, valuations look attractive to the investor. In this light, let us take a look at Godrej Consumer. The company reported a decent 12% growth in the first half of FY05 led by strength in its soaps and hair colour businesses. This and nearly 100 basis point improvement in operating margins led the company to report over 25% growth in bottomline during 1HFY05.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 1,215 1,342 10.5% 2,394 2,708 13.1%
    Processing charges 9 0 - 20 0 -
    Total revenues 1,224 1,342 9.7% 2,414 2,708 12.2%
    Expenditure 1,037 1,126 8.5% 2,042 2,268 11.1%
    Operating profit (EBDITA) 187 217 16.1% 372 440 18.3%
    EBDITA margin (%) 15.2% 16.1%   15.4% 16.2%  
    Other income 4 10 115.9% 6 11 73.8%
    Interest (net) 6 8 39.3% 12 15 29.3%
    Depreciation 23 26 12.9% 46 52 12.6%
    Profit before tax 162 192 18.5% 320 384 19.8%
    Tax 23 18 -24.8% 44 36 -16.6%
    Profit after tax 139 174 25.8% 277 348 25.5%
    Net profit margin (%) 11.4% 13.0%   11.6% 12.8%  
    No. of Shares (m) 57.1 56.6   57.1 56.6  
    Diluted earnings per share* (x) 9.8 12.3   9.8 12.3  
    Price to earnings ratio (x)         19.1  
    (* annualised)            

    What is the company’s business?
    Godrej Consumer Products Ltd. is one of the most well known mid-cap companies in the Indian FMCG space with presence in the personal care, hair care and fabric care categories with top-of-the-mind brands such as Cinthol, Fairglow, and Godrej No.1 (soaps), Fairglow fairness cream, Godrej Shaving Cream & Round, Godrej hair dyes, Colour Soft hair colour and Ezee liquid detergent. The company recently bought over the ‘Snuggies’ brand in the child nappy segment. Soaps and hair colours form over 85% of the company's revenues.

    What has driven performance in 2QFY05?
    Sales:  Growth was driven by strong showing from its soaps business (64% of revenues). The segment grew by a strong 18% YoY during 1HFY05. Though hair colour too, grew by nearly 10% during the period, the growth pattern has been inconsistent. Hair colours (23% of revenues) grew by over 19% during the June quarter, but witnessed a marginal dip in the September quarter. On the whole however, the growth numbers are much better compared to those witnessed in FY04 (13.3% YoY for soaps and a dip of 2.2% in hair colours). The company has introduced new variants in its hair colour business, in a bid to sustain its growth momentum.

    Sales mix
    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Godrej Brands            
    Soaps 774 871 12.4% 1,475 1,739 17.9%
    Hair Colour 275 272 -0.8% 568 623 9.7%
    Toiletries 74 56 -23.8% 139 124 -11.0%
    Liquid Detergents 32 31 -2.8% 40 40 -0.3%
    Total Godrej Brands 1,154 1,230 6.5% 2,221 2,525 13.7%
    Contract Manufacturing 27 78 188.5% 85 115 35.5%
    By Products 33 34 2.7% 87 68 -22.3%
    Total 1,215 1,342 10.5% 2,394 2,708 13.1%

    Operating margins:  While most of the significant cost heads like cost of goods, advertising and staff costs as a percentage of sales went up during the quarter, Godrej Consumer managed to improve its margins led by a decline in other expenditure as a percentage of sales (from 19.4% of sales last year to 15.6% in 1HFY05). If we look at it the other way, the PBIT margins of both the soaps and personal care business improved over last year. While margins for soaps improved from 8.6% in 1HFY04 to 10.3%, personal care margins (including hair colour) escalated to 36.6% from 35.1% earlier.

    Cost break-up
    as a % of net sales 2QFY04 2QFY05 1HFY04 1HFY05
    Total Cost of goods 50.5% 52.1% 51.1% 52.2%
    Staff Cost 5.1% 5.6% 4.9% 5.7%
    Advertisement & Promotion 9.7% 10.2% 9.2% 10.2%
    Other Expenditure 19.5% 15.9% 19.4% 15.6%
    Total Expenditure 84.8% 83.9% 84.6% 83.8%

    Over the last five quarters
    In the past year, Godrej Consumer, has managed to sustain its topline trend led by strength in its core business, as well as support from its contract manufacturing initiative. Tax sops have also resulted in lower tax burden.

      2QFY04 3QFY04 4QFY04 1QFY05 2QFY05
    Sales growth (YoY) 1.2% -0.8% 13.0% 14.8% 9.7%
    Advertising as % of sales 9.7% 13.5% 9.0% 10.2% 10.2%
    OPM (%) 14.7% 19.9% 20.2% 16.4% 16.1%
    Net profit growth (YoY) -0.9% 21.4% 60.3% 25.3% 25.8%

    What to expect?
    Buoyed by its 1HFY05 performance, Godrej Consumer has declared cumulative interim dividends amounting to Rs 4 per share till date. At Rs 235, the stock trades at a P/E of 19 times annualised 1HFY05 earnings and market cap. to sales of 2.5x. The company's new plant at Baddi in Himachal Pradesh will give it a 10 year excise and income tax benefit. This will therefore, continue to help it cut costs and keep up healthy margins in the medium term. The management is shareholder friendly on account of its continuous dividend payouts and buyback programme, but in our view, the valuations already factor in some of these positives.

     

     

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