Godrej Consumer -Visibility improves on strong Sep Q results; Buy: BofA ML

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Godrej Consumer Products Ltd.
Visibility improves on strong
Sep Q results; Buy


􀂄 Acquisition benefit starts to flow in; PO raised to Rs470
Sep Q profit of Rs1.3bn was up 40% yoy beating our est by 27% on lower interest
costs, higher other op income & lower tax. Operating profit in line with our est as
higher sales growth was offset by lower margins. We have raised our est by 5-6%
over FY11-12E to factor in lower interest cost & higher other op income. Maintain
Buy and raise PO to Rs470 to factor in earnings raise and higher multiple 24x (vs
22x) on expected re-rating on better visibility on earnings post the strong Sep Q.



Domestic business weakness continues; Expect revival
Soaps declined 10% on low primary sales as de-stocking of high inventory levels
continued. Hair Colors revived with 20% growth (12% vol growth). Though we
have cut domestic est by 6-7% to factor in the current weakness, we are not
concerned for long term health as 1) market share trends are positive 2) we
expect revival in 2H as normal monsoons lead to fall in inflation & support rural
demand and 3) favorable base as inventory de-stocking is now behind us.

Godrej Household products continues to outperform
GHPL sales grew 38% yoy led by new product launches and rising demand from
disease threat in India. Our confidence on 25% sales growth and EBITDA margin
of 21-22% is reaffirmed post this strong performance. GHPL is also generating
additional royalty income from Megasari for its share of R&D efforts. This has led
to Other income surprise in this qtr which we have adjusted for going forward.

New international acquisitions are a mixed bag
Existing international business of Keyline and Rapidol had weak growth on tough
market conditions and unfavorable currency move. Also, Tura in Africa and Issue
Group in LAtAm performed weaker than expected as GCPL is investing
significantly behind these companies. However, Megasari, largest international biz
of GCPL has done well beating the expected 20% growth with 20% margin est.