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Godrej Cons: Robust growth continues - Views on News from Equitymaster

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Godrej Cons: Robust growth continues
Nov 22, 2013

Godrej Consumer Products Ltd. has announced its second quarter results of financial year 2013-2014. The company has reported a 22.5% YoY growth in sales and 22.4% YoY rise in net profit. Here is our analysis of the results.

Performance summary
  • Backed by 14% growth in domestic business and 33% rise in overseas operations, Godrej Consumer Products Ltd (GCPL) posted a 22.4% increase in revenues in 2QFY14. For 1HFY14, the revenues were up by 23%.
  • The operating margin was hit slightly in 2QFY14 by higher staff costs and ad-spends. For 1HFY14, the operating margin reduced by 0.9%.
  • However at the net level, margin was maintained at 9.9%in 2QFY14 due to lower tax outgo. In 1HFY14, net margin fell by 0.8%.
  • The company has declared a second interim dividend of Re 1 per share on a face value of Re 1 per share.

Consolidated financials
(Rs m) 2QFY13 2QFY14 % Change 1HFY13 1HFY14 % Change
Total Income 16,026 19,617 22.4% 29,966 36,886 23.1%
Expenditure 13,537 16,619 22.8% 25,454 31,635 24.3%
Operating profit (EBITDA) 2,490 2,998 20.4% 4,513 5,251 16.4%
EBITDA margin (%) 15.5% 15.3%   15.1% 14.2%  
Other income 144 128 -11.0% 291 260 -10.6%
Forex gain/loss (76) (63)   (252) (218)  
Interest 200 257 28.5% 364 497 36.6%
Depreciation 206 244 18.3% 405 465 14.8%
Profit before tax 2,151 2,562 19.1% 3,781 4,331 14.5%
Exceptional Items - -   - 22  
Tax 476 470 -1.2% 588 808 37.5%
Profit after tax/(loss) 1,676 2,092 24.8% 3,194 3,545 11.0%
Minority Interest 83 142   296 268  
Net profit after minority interest 1,593 1,950 22.4% 2,898 3,277 13.1%
Net profit margin (%) 9.9% 9.9%   9.7% 8.9%  
No. of shares (m)         340  
Diluted earnings per share (Rs)*         24.5  
Price to earnings ratio (x)*         35.2  
* On a trailing 12 months basis

What has driven performance in 2QFY14?
  • Riding on a robust growth trajectory, GCPL clocked a 22.4% topline growth. Domestic sales grew by 14%. Excluding the impact of discontinued third party contract manufacturing sales, branded sales in India grew by 17% with 37% of incremental growth from new launches. During the quarter, the company launched Good knight Fast card, a non-electrical format in mosquito repellent that is easy to use and is priced at a disruptive price of Re 1 per card. The household insecticides business grew by 25% ahead of the category with both HIT and Good knight brands cementing leadership position. Even the hair colour business sustained growth momentum recording 24% growth driven by Godrej Expert Rich Hair Creme and Godrej Expert Advanced Hair Colour. Only the soap business remained the slow mover posting a growth of 3% on a volume growth of 4%. The growth was hit by a slower ramp in its key consumer offer and political turmoil in Andhra Pradesh. The international business grew by 33% backed by organic constant currency growth of 14%. Sales growth was robust across geographies.

    Total Cost of goods 2QFY13 2QFY14 Change in basis points
    Total Cost of goods 49.1% 46.2% -297.59
    Staff Cost 8.3% 10.3% 198.86
    Advertising 9.9% 11.2% 134.46
    Other Expenditure 17.1% 17.0% -10.49

  • Waning commodity inflation enabled the company to keep operating margin intact. The raw material to sales ratio fell by 2.9% during the quarter. This has offset the steep rise in staff costs and ad-spends (both as a proportion of sales). In the overseas operations, the operating margin in the Indonesia business continued to be hit by hike in minimum wages as well as no margin contribution from distribution arrangement for divested foods business. The operating margin in Indonesia was down by 1.4% during the quarter.

  • Net profits grew by 22.4% on a 20.4% rise in operating profit coupled with lower tax outgo. The tax incidence fell to 18.3% in 2QFY14 from 22.1% in the year-ago quarter. The other income declined by 11% during the quarter. 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 for the quarter.
What to expect?

GCPL's profitability has been hit by higher ad-spends and wage costs. Going ahead, ad-spends in the domestic markets are expected to remain high due to intense competition and change in broadcast rules. Even margins in the Indonesian and African markets are likely to remain depressed in the near term.

At a price of Rs 863, the company is trading at 20 times its FY16 estimated earnings. As these valuations do not provide adequate margin of safety, we re-iterate a 'SELL' on the stock.

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