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Research meeting excerpts: Godrej Consumer - Views on News from Equitymaster
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Research meeting excerpts: Godrej Consumer
Dec 7, 2004

We recently met the management at Godrej Consumer. The discussion hovered around the company’s strategy, strengths and opportunities going forward. Some excerpts:

Background
With Rs 5 bn revenues, 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 bought over the ‘Snuggies’ nappy brand in May 2003 (Rs 50 m revenues). The company continued to grow in double digits during 1HFY05, reporting 13% topline and over 25% bottomline growth.

On soaps:  Recent growth in the topline has been driven by its soaps business (64% of revenues). The division grew by a strong 18% YoY during 1HFY05. The company has offerings across all price points in the soaps category. It has been able to improve its market share in this segment from 6% in FY01 to 8% currently. Much of this improvement can be attributed to ‘Godrej No. 1’, the company’s offering in a value segment (lowest price point). The management views the brand’s USP as offering value at affordable pricing. Godrej No. 1 is the largest selling Grade 1 soap (in volume terms) as per the company.

Even in 1HFY05, the soaps category growth was led by both Cinthol (almost 30% of soap revenues) and Godrej No. 1. The company has also recently re-focused on Godrej Fairglow – a fairness soap. The profitability of this category has improved owing to lower vegetable oil costs and production related benefits at its new plant in Baddi, Himachal Pradesh.

On hair colour:  Though hair colour segment too (23% of revenues), grew by nearly 10% during the first half of FY05, the growth pattern has been inconsistent. The business grew by over 19% during the June quarter, but witnessed a marginal dip in the September quarter. The management attributed this fluctuation in performance to the trucker’s strike. The company could not move its raw and packaging materials to its Guwahati plant not only owing to the strike, but also owing to the flood like situation in the North East.

FY04 was a bad year for the company’s hair colour business, which has about 44% share of the Indian hair colour market. The division saw a 2% dip in revenues during that year, largely owing to a low priced offering by L’oreal in this category. The company took some time to fight back on this and recently launched new cream based hair colour ‘Godrej Renew’.

On contract manufacturing:  The company’s contract manufacturing initiative has grown by over 180% in the September quarter (only about 4% of 1HFY05 revenues). The company seemed to have got some demand from key players such as HLL, who were facing some teething troubles owing to new plant commissioning. Once these plants stabilise, the contract manufacturing division is unlikely to grow at the rates seen in the September quarter.

Future plans:  The management is aiming to enter one new category in household and personal care (excluding soaps and hair colour) every year to boost revenue growth.

Tax advantage:  Godrej Consumer has continuously looked at intelligent tax saving scenarios and has gone and set up plants in backward areas with tax benefits. Since FY02, when its effective tax rate was 33.6%, the tax rate has come down to 15.3% in FY04. This is set to reduce further owing to the company's new plants at Baddi (Himachal Pradesh) and Guwahati (Assam) that will give it a 10-year excise and income tax benefit. The effects of this were already visible in the first half of FY05 where tax rate has further reduced to 9.4%. This tax advantage has helped Godrej invest in quality, distribution strengthening and brand building to compete effectively against its bigger peers. This will therefore, continue to help reduce costs and keep up healthy margins in the medium term.

Conclusion
Godrej Consumer has declared cumulative interim dividends amounting to Rs 4 per share till date for FY05 (based on our expected dividend payout for FY05, dividend yield works out to 4.4%). The company has consistently paid out nearly 90% of its earnings over the past couple of years. The management has indicated a continuance of the same.

At Rs 246, the stock trades at a price to earnings multiple of 20 times annualised 1HFY05 earnings and market cap. to sales of 2.6 times. The management is shareholder friendly on account of its continuous dividend payouts and buyback programme. But based on our FY07 expected EPS of 16.4, the stock trades at 15 times earnings. In our view therefore, the valuations already factor in some of the aforesaid positives and one is better off looking at other mid-cap FMCG companies like Marico and Pidilite, which offer better value at this juncture, from a long-term perspective.

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