GCPL's 2QFY11 results below estimates,::Motilal Oswal

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GCPL's 2QFY11 results are below estimates, with adjusted PAT at Rs1.3b. EBITDA was Rs1.7b (v/s our estimate of
Rs2.1b); EBITDA margin was 17.7%. Lower interest cost at Rs89m and higher other income enabled PAT growth of 40%.
GHPL reported 38% increase in sales to Rs3b; EBITDA increased 34%, as margins declined 50bp. Keyline reported 33%
decline in sales and 60% decline in EBITDA. Megasari reported sales of Rs1.8b and EBITDA of Rs382m (21% margin)
excluding technical fee paid to GCPL. Africa (Kinky, Rapidol and Tura) business clocked sales of Rs440m (up 25%)
EBITDA declined 14% to Rs60m. Latin America business reported sales of Rs590m and EBITDA of Rs40m, with EBITDA
margin of 6.8% as against an indicated 14% at the time of acquisition.
Cash flows to lag profit growth; downgrading estimates by 8-11%; Neutral

 GCPL's debtors have increased from Rs1.1b in March 2010 to Rs5.1b currently. The management attributed this to
new acquisitions that derive significant sales from modern trade (with higher credit period). We estimate that the
acquisitions of Megasari, Tura, Issue Group and Argencos have debtor days of 120.
 Working capital has increased from Rs245m (consolidated in FY09) to Rs545m (FY10) and Rs4b (as at September
2010). We note that cash flow accretion would lag profits in new acquisitions.
 GCPL has debt of Rs19.3b, including forex debt of US$350m (Libor+150-170bp), which is completely un-hedged,
exposing it to adverse currency fluctuations.
 We are lowering our EPS estimates by 11.5% (to Rs13.9/share from Rs15.6/share) for FY11 and by 8% (to Rs17.5/
share from Rs19/share) for FY12. Our estimates factor in (1) impact of higher PFAD prices in soaps business, (2)
lower profitability in Latin America, Keyline and African business, (3) higher depreciation, (4) 100bp increase in tax
rate to 22.5% as per management guidance, and (5) 5-8% higher profits in GHPL due to robust sales growth.
 The stock trades at 30.6x FY11E EPS of Rs13.9 and 24.2x FY12E EPS of Rs17.5. We believe that current valuations
do not factor in deterioration in balance sheet and risks associated with new businesses. Maintain Neutral.



business and risks associated with international acquisitions. We are downgrading our
earnings estimates by 11% for FY11 and by 7.5% for FY12 to factor in (1) lower margins
in Godrej Home Products and standalone operations, (2) higher depreciation and tax rates,
and (3) low profitability in international acquisitions of Tura, Issue Group and Argencos.
Key takeaways from conference call
New acquisitions except Megasari to remain in investment mode
 The management indicated that Megasari has performed better than their expectations
while Tura, Issue Group and Argencos have performed poorly.
 GCPL has plans to scale up the business of Tura (Nigeria), Issue Group and Argencos
(Latin America), as they are small in size. Topline of Tura is estimated at Rs400m and
that of Latin American business at Rs2b.
 GCPL intends to increase investment in brands and distribution in Latin America,
which will impact sales and profits for some time. It has reported sales of Rs590m and
PBIT of Rs40m, with EBITDA margin of 6.8% (had indicated margin of 14% at the
time of acquisition).
 Tura is being envisaged as a long-term investment in the Nigerian market and will
contribute positively only in the long term.
 Megasari has grown topline by 20% and the integration process is progressing smoothly;
a 3-member Indian team has joined the Megasari management.
Soap volumes to recover; input costs challenging
 The toilet soap market has been under pressure due to high food inflation and shift in
consumer wallet share towards essential items, as per the management. Decline in
food inflation will result in improved sales in the coming quarters.
 The management indicated that de-stocking in toilet soaps is over and the current
quarter should report bounce back in performance. GCPL reported 10% decline in
volumes and sales in 2QFY11 as against industry growth of 2-3%.
 Input costs are a challenge and the company would look at a combination of grammage
adjustment and price increase to ward off the impact. We note that PFAD prices have
increased 32% in the last six weeks and are currently up 79% YoY. Although there
would be a time lag between actual input price increase and effective price increase
due to forward contracts, margins are likely to come under pressure after a lag of one
quarter.
GHPL sales up 38% YoY; Ambipur taken over by P&G; GHPL to launch new
brand in air fresheners
 Godrej Household Products (GHPL) reported 38% increase in sales to Rs3b; however,
EBITDA increased 34% as margins declined 60bp to 18%. The management has
indicated sustainable margins of 18-19% for this business.
 The company has launched Goodnight Naturals and low smoke mosquito coils during
the quarter.
 It has stopped marketing of Ambipur, as it has shifted to P&G due to global sale.
GHPL has plans to launch its own brand of air fresheners in the coming six months.