Godrej Consumer-Growth led by mosquito repellant business: Kotak Sec

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Godrej Consumer Products (GCPL)
Consumer products
Growth led by mosquito repellant business, as expected. Favorable market
conditions (outbreak of mosquito-related illnesses) and competitive actions (Jyothy
rolling back trade discounts in its brand) have propelled GHPL’s 2Q sales growth (38%),
in our view. Favorable currency has likely benefited Megasari—transaction (IDR/USD)
and translation (IDR/INR), in our view. Accounting for the 2Q surprise, upgrade FY2011E
and FY2012E earnings by 6% and 3%. Upgrade to BUY for potential 17% upside.






GHPL performance significantly better than expected, FY2011E earnings upgraded by 6%
􀁠 GCPL reported standalone net sales of Rs3.2 bn, (-3%, KIE estimate Rs3.3 bn), EBITDA of Rs675
mn (+3%, KIE estimate Rs658 mn) and PAT of Rs765 mn (+12%, KIE estimate Rs520 mn).
Consolidated net sales stood at Rs9.5 bn, (+66%), EBITDA at Rs1.7 mn (+51%) and PAT at
Rs1.3 bn (+40%). These financials are not comparable on yoy basis due to string of acquisitions
in CY2010.
􀁠 The Indian household business (GHPL, the erstwhile Godrej Sara Lee businesses) grew 38% for
2Q, likely aided by strong performance this monsoon season in mosquito repellant business due
to outbreak of mosquito related illnesses (as highlighted in our note dated August 31, 2010
‘Why we value GCPL on SOTP’)

􀁠 In our view, this quarter would have benefitted from favorable currency movement – IDR/USD
(likely input cost benefit for Megasari in IDR) and IDR/INR (translation benefit of converting IDR
to INR) moved in favor of the company by ~11% and 7%
􀁠 Soaps portfolio, which forms about two-third of standalone sales, declined by10% driven by
lower category growth due to impact of food inflation and channel inventory correction taken
by the company and trade. Soaps accounts for ~20% of consolidated sales and ~12% of
EBITDA
􀁠 The hair colour business grew by 21% which augurs well as margins in this business are the
highest in GCPL’s portfolio. However, we note that historically, GCPL’s Indian hair color
business has exhibited significant quarterly volatility.
􀁠 Gross and EBITDA margin expanded by 55 bps and 125 bps, respectively. Staff cost was down
by 622 bps due to high base (2QFY10 includes variable remuneration).


High growth and high-margin household insecticides (India and Indonesia) is
the key
􀁠 The high margin household insecticides business, Godrej Household Products (GHPL) and
Megasari form ~52% of sales and contribute ~60% of EV. Both the businesses enjoy
high margins and have high growth rates.
􀁠 We have high conviction on GHPL’s business model which forms ~37% of consolidated
EBITDA and 42% of EV. This business has grown at a sales and PAT CAGR of 24% and
27% over FY2007-10 and ~17% over FY2000-10.
􀁠 GCPL acquired this business for ~13X trailing FY2010. Unlike competition, GHPL has
higher contribution of sales from high margin liquids, mats and aerosols (which are faster
growing segments as well).
􀁠 In 2QFY11, Jyothy laboratories reported 3% sales decline in Maxo (as Maxo withdrew
some of the trade promotions). This would have likely helped propel sales of GHPL’s
Good Knight brand as well, given the outbreak of dengue and malaria during this period.
GHPL reported gross sales growth of 38% in 2QFY11.
􀁠 Megasari has EBITDA margin of ~20.5% (one of the highest in the GCPL group) and
contributes 18% of EV and 19% of EBITDA. We believe that Megasari has good fit in the
GCPL universe as it provides the opportunity for potential scale benefits in sourcing (in
active ingredients, packing material) in household insecticides. This company puts GCPL at
No. 3 in Asia (ex-Japan) in household insecticides.
􀁠 The extant India business (soaps and hair color) is ~31% of FY2012E EBITDA and ~30%
of EV. India soaps, contributes just ~12% of GCPL’s EBITDA. Focus on regional brands
and micro-marketing initiatives by HUL and aggressive trade-spend driven growth strategy
of ITC seems to be hurting GCPL’s soaps business, in the near-term, in our view.
􀁠 The extant international business (Kinky and Rapidol in Africa and Keyline in UK) forms
7% of EBITDA 6% of EV. Within this Kinky and Rapidol have EBITDA margin of 17% and
21% respectively whereas Keyline is at 14%. The company has initiated merger of Kinky
and Rapidol
Upgrade to BUY, upgrade earnings and target price by 6% (amongst a spate of
muted performances in India consumer in 2QFY11)
We upgrade to BUY (ADD previously) and revise target price to Rs490. We upgrade our
FY2011E estimates by 6% and FY2012E by 3% to account for the better-than-expected
performance by GHPL business.
We value GCPL on an SOTP basis as the company operates in multiple categories with
varying growth characteristics and multiple geographies (India, Indonesia, Africa, UK and
Latin America).
Earnings upgrade is on the back of (1) higher sales growth rate in GHPL, Megasari and
(2) higher profitability for the domestic standalone business as the hair colour portfolio is
showing good growth. Key triggers are (1) potential for geographical distribution benefits -
GHPL is strong in South India (Good Knight) whereas GCPL is in North India, (2) cross
pollinating products across geographies.
The key risk is the company’s unhedged US$ loan (1% change in LIBOR = 2% of FY2011E
EPS).