Godrej Consumer Products- 2Q FY11 - A mixed bag:: JPMorgan

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Godrej Consumer Products
Limited
Neutral
GOCP.BO, GCPL IN
2Q FY11 - A mixed bag

• GCPL reported a mixed performance for 2Q FY11: Given a host of

acquisitions undertaken during the last quarter, consolidated results for the

company are not comparable on a y/y basis. While the performance of domestic

household insecticide, domestic hair color products and Megasari (Indonesia)

was better/in line with expectations, Latin American, African and UK

businesses reported weak operational performance.

• Domestic personal care business disappoints, with sales de-growth of 3% and
subdued EBITDA growth of 3% y/y during 2Q FY11. Much of the top-line
weakness was on account of a 10% y/y decline in soap sales. However, strong
20% sales growth for hair color products (aided by a c8% price rise) led to
margin expansion of 120bp y/y. Market share was stable q/q.
• Godrej Household Products (GHPL) registered healthy 38% y/y revenue
growth on account of the higher incidence of mosquito-related diseases during
the quarter and encouraging market share gains. We have raised our revenue
and margin growth estimates for this division, now estimating sales and
EBITDA CAGR of 20% and 24% respectively over FY10-13.
• Weak performance for overseas operations (ex-Megasari): While the
performance of Keyline (sales -33% y/y, est. EBITDA margin -700bp y/y),
African operations (sales +8% y/y) and Latin American operations (subdued
EBITDA margins at 6.8%) was below expectations, Megasari reported an in-line
2Q registering LTL sales growth of 20% and an EBITDA margin of 21%.
• Conference call takeaways: 1) Growth rates to pick up for soaps in 2H FY11
supported by recent price increases and a favorable base. 2) Market share and
healthy double-digit growth rates for GHPL likely to continue, driven by healthy
offtake of high-margin products. 3) More synergistic benefits from merger of
GCPL and GHPL likely to be visible starting in 2H FY11. 4) Looking to enter
domestic air-care segment over the next six months. More details inside.
• Earnings estimate revisions: We raise FY12E EPS by 4% as we factor in
higher revenue growth and margins for GHPL and lower interest costs. We set a
new Sep-11 PT of Rs440 based on 21x one-year forward earnings. With five
cross-border acquisitions announced since the beginning of this year, integration
and execution of these operations should be a key stock catalyst.