Godrej Consumer Products – 3QFY2011 Result Update - Angel Broking

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Godrej Consumer Products – 3QFY2011 Result Update

Angel Broking maintain  Neutral  view on Godrej Consumer Products.

Godrej Consumer (GCPL) posted good set of numbers for the quarter though

below our estimates due to margin contraction. Consolidated top-line growth was

strong at 89% yoy led by the recent acquisitions; domestic revenue growth stood

at 49% yoy aided by full consolidation of GHPL. Earnings grew at a modest 40%

yoy, despite margin contraction aided by strong top-line growth. Post 3QFY2011

results, we have revised our numbers – 1) top-line upward by 2-3% due to

significant traction in GHPL revenues and price hike in soap (weighted average

price hike of ~4–5% taken in January 2011), and 2) earnings downward by

3-13% to factor in increase in raw material cost, higher advertising and

promotional spends, interest and depreciation charges.

Recent acquisitions drive growth: GCPL reported strong top-line growth of 89%

yoy to `980cr driven largely by consolidation of the recent acquisitions. The

domestic business (including GHPL’s additional 51% consolidation) registered a

growth of 49% yoy to `645cr. Soaps registered ~6% yoy growth, while hair colour

registered 9% yoy growth during the quarter. International business revenues

stood at `335cr, registering a growth of 294% yoy. Earnings grew 40% yoy to

`119cr (`85cr) despite margin contraction, aided by strong top-line growth.

Outlook and Valuation: At the CMP of `400, the stock is trading at its fair multiple

of 22x FY2012E earnings. Hence, we maintain our Neutral view on the stock.

Top-line growth driven by consolidation of recent acquisitions

GCPL reported strong top-line growth at 89.4% yoy to `980.4cr (`517.6cr) driven

largely by consolidation of the recent acquisitions (Megasari, Tura, Issue and

Argencos) and the remaining 51% consolidation of Godrej Household Product

(GHPL). The domestic business registered a growth of 48% yoy to `645cr driven

largely by 24% yoy growth in GHPL (driven by 310bp yoy increase in market share

to 37%). Soaps registered ~6% yoy growth due to successful marketing initiatives

and hair colours registered a 9% yoy growth during the quarter.

International business revenues stood at `335cr (`85cr), registering a growth of

294.2% yoy aided by full quarter of consolidation of recent acquisitions even as

Keyline registered a dip in revenues (Cuticura had a high base on account of

H1N1 in 3QFY2010).

Recurring earnings grow due to robust revenue as margins contract

GCPL’s earnings registered a growth of 39.6% yoy to `118.8cr (`85.1cr), largely

aided by strong top-line growth, even as operating margins declined, interest and

depreciation costs increased and other income fell. On a yoy basis, while interest

and depreciation costs spiked by 558% and 142% yoy to `13.3cr (`2cr) and

`13.5cr (`5.6cr) respectively, on account of the recent acquisitions, other income

registered a decline of 43.3% to `6.3cr (`11.1cr). Going forward, we expect

earnings to register a CAGR of 31.6% over FY2010-12.

At the operating front, GCPL registered margin contraction of 248bp yoy on

account of the 81bp contraction in gross margins, primarily due to input cost

pressures in the soaps business, 243bp yoy and 237bp yoy rise in advertising

spend and other expenses, respectively. However, saving in staff cost (down 313bp

yoy) on account of lower provisioning for variable remuneration arrested further

margin contraction.

Soaps and hair colour report single-digit growth

GCPL’s soaps business registered a growth of ~6% yoy The company continued to

be the second largest toilet soaps player in India sustaining its market share at

10%. Management has clearly indicated that competitive intensity in soaps has

intensified from both HUL and ITC. Moreover, higher food/raw material inflation

and fading effect of price hikes coupled with higher competitive intensity are likely

to see moderation in the revenues of this segment. However, management is

confident of strong up-tick in growth in 4QFY2011 aided by a weighted average

price hike of ~4–5% taken in January 2011.

GCPL’s hair color business grew by 9% yoy driven by absorption of price hikes of

~10% taken in 3QFY2011 and strong advertising and marketing initiatives.

Market share of the hair colour business during the quarter stood at 29.4%.

International business grows 296% yoy due to recent acquisitions

The international business registered a strong growth of 296% yoy and currently

accounts for 34% of total consolidated revenues. We highlight that the yoy growth

figure is not comparable as Megasari, Tura and LatAm did not reflect in

3QFY2010. Hence, on a like-to-like basis, GCPL’s international business recorded

12.8% yoy decline in revenues. Sequentially, the growth in revenue was flat. The

international business posted PBT of `16cr for the quarter and management has

indicated that the new acquisitions have been EPS accretive.

􀂄 UK: Keyline Brands registered 14.1% decline in revenue to `30cr (`35cr) partly

on account of currency fluctuation (4% deflation due to weak GBP) and partly

on account of a high base (Cuticura had a high base due to H1N1 last year).

EBITDA for the quarter stood at `1cr.

􀂄 Asia: Continuous rains (which saw reduced menace of mosquitoes) restricted

Megasari revenues to `185cr, a growth of mere 1.6% qoq, which came

primarily on the back of distribution expansion and product mix. Operating

profit of Megasari stood at `27cr, with margin at 19% (before payment of

technical fees to GCPL). Megasari continues to maintain its leadership position

in the air care and wipes markets in Indonesia. GGME registered flat revenues

of `4cr sequentially, while revenue declined by 19% yoy with 3QFY2010

revenues at ~`5cr.

􀂄 Africa: Sales from the African region registered a growth of 17.6% yoy to

`53cr. Tura contributed `13cr to top-line. Sales growth was affected on

account of the slowing economy (the South African economy grew by ~2% as

against expectations of ~5% growth) and increase in competitive intensity from

the local brands. Operating profit, including one-time expense on stock writeoffs

to the tune of `3cr, stood at `5cr.

􀂄 Latin America (LatAm): The LatAm business includes sales of both the Issue

Group and Argencos, this quarter. During the quarter, the region recorded

revenues of `63cr (a growth of 6.8% qoq). Issue and Argencos got merged

operationally during the quarter, led by the CEO of Issue. Going ahead, the

merger is expected to result in significant purchase and distribution synergies.

Investment Rationale

􀂄 EPS accretive acquisitions to drive 32% CAGR in earnings over FY2010-12E:

Management has constantly re-iterated that all recent international acquisitions

have been EPS accretive. Consolidation of additional 51% stake in GHPL is

also likely to be EPS accretive by 8-10% further boosting earnings. Over

FY2010-12, we expect GCPL to post 32% CAGR in earnings (post dilution of

~5% through the recent QIP) driven largely by consolidation of recent

acquisitions.

􀂄 Dependence on soaps to decline, home care to emerge as largest category:

Over FY2010-12, we expect contribution of soaps to total consolidated

revenues to decline from 40% to 22% and home care to increase from 24% to

52% aided by consolidation of Megasari and additional 51% consolidation of

GHPL. We believe the shift in revenue mix is likely to help GCPL de-risk its

dependence on the highly competitive soaps market and increase focus on the

high-margin, high-growth insecticides business.

􀂄 Synergistic benefits and cross-pollination opportunities hold upside risk: We

believe there are significant synergistic benefits in terms of distribution and

supply chain networks through integration of GHPL, which is likely to reflect

over FY2011-12E. Moreover, GHPL’s strong presence in the south

complements GCPL’s strong presence in north India extremely well, giving

GCPL a balanced presence. Moreover, cross-pollination opportunities from its

recent international acquisitions hold upside risks to our estimates.

Outlook and Valuation

Post the 3QFY2011 results, we have revised our numbers – 1) top-line upward by

2-3% to reflect the significant traction in GHPL revenues and price hike in soap

(weighted average price hike of ~4–5% taken in January 2011), and 2) earnings

downwards by 3-13% to factor in increase in the raw material costs, higher

advertising and promotional spends, interest and depreciation charges.

During FY2010-12, we expect GCPL to post a strong CAGR of 44.5% in

consolidated revenues driven largely by consolidation of the recent acquisitions.

We have modeled in 29% CAGR in domestic revenues (driven by 100%

consolidation of GHPL and expect up-tick in soaps in 4QFY2011) and 99% CAGR

in international revenues. In terms of margins, we have modeled in a 285bp

contraction largely due to input cost pressure in soaps, higher advertising and

promotional spends (management has indicated launch of new products

particularly in hair care category in 4QFY2011 and 1QFY2012) and contribution

from the low-margin acquisitions of Tura, Issue and Argencos (estimate ~15%

OPM in these businesses). Hence, we expect GCPL to post 32% CAGR in earnings

during the period (post the ~5% dilution on account of the recent QIP). At the CMP

of `400, the stock is trading at its fair multiple of 22x FY2012E earnings. Hence,

we remain Neutral on the stock.