Godrej Consumer Products: Defy Popular Notion, Maintain Accumulate:: Emkay

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Godrej Consumer Products

Defy Popular Notion, Maintain Accumulate

ACCUMULATE

CMP: Rs 400                                        Target Price: Rs 420

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n     Godrej Consumer Products (GCPL) defies popular notion – no reduction in gross margins alongside robust growth momentum, baring select pre-determined business

n     GCPL missed APAT expectation – reports APAT of Rs1.2 bn, up 39.6% yoy, led by lower other income – but meets revenue (Rs9.8 bn, up 90.2% yoy) and Ebidta (Rs1.7 bn, up 69.4% yoy)

n     As expected, Godrej Household reports robust performance, offsets negatives from – lower gross margins in Soaps and tepid performance from African and UK business

n     Tweak earnings estimates to factor lower other income –FY11E earnings at Rs15.2/Share (-1.8%) and FY12E earnings      Rs18.9/Share (-7%)– Maintain ‘ACCUMULATE’ rating

GCPL’s Q3FY11 performance defies popular notion- APAT growth of

39.6% yoy to Rs1.2 bn

As reiterated in recent report ‘Status Quo’ - GCPL Q3FY11 performance defies all

popular notion by reporting (1) insignificant reduction in gross margins on consolidated

basis and (2) continuation of growth momentum, barring select pockets. But, GCPL

missed our APAT estimates owing to lower-then expected other income. Overall, GCPL

performance was satisfactory (1) 90.2% yoy growth in revenues to Rs9.8 bn- led by

100% consolidation of GHCL and consolidation of acquired business of Megasari, Tura

and Issue (2) 69.4% yoy growth in Ebidta to Rs1.7 bn (3) 210 bps reduction in Ebidta

margins to 17.6% and (4) APAT growth at 39.6% yoy to Rs1.2bn- lower then

expectation owing to one-offs of Rs60 mn and lower other income (Rs8.8 mn versus

Rs103 mn).

Godrej Household stages robust performance, offsets all negatives

As expected, Godrej Household reports robust performance with 24% yoy growth in

revenues to Rs2.5 bn on like-to-like basis. This has offset the muted performance from

Keyline Brands and Africa Business. Both, Keyline and Africa business showed one-off

adjustments on inventory and warehouse transition leading to one-off adjustment of

Rs60 mn. Whereas, Megasari performance met expectations- revenues of Rs1.8 bn and

Ebidta of Rs270 mn. Even, Latam Business (Argencos & Issue) registered satisfactory

performance with revenues of Rs630 mn and Ebidta of Rs60 mn.

Cost pressure restricted to standalone operations, no significant cost

pressure on consolidation

Material cost pressure was restricted to soaps segment alone in standalone operations,

largely led by steep rise in Palm Oil prices. Other businesses, both acquiredinternational

and acquired-local i.e. Godrej Household, Megasari, Tura, Rapidol, etc had

witnessed insignificant cost pressures with gross margins remaining steady at 51%. The

standalone operations witnessed 210 bps qoq and 290 bps yoy contraction in gross

margins.

Tweak earnings estimates, Maintain ACCUMULATE rating

We are tweaking our FY11E and FY12E estimates - factor lower other income and better

performance from Godrej Household. Also, we are tweaking our assumptions on Interest

and taxation calculations. Consequently, FY11E earnings revised by -1.8% to

Rs15.2/Share and FY12E earnings revised by -7.0% to Rs18.9/Share. Our earnings

forecast do not capture the benefits of consolidation and leverage from Godrej Household

and Godrej Consumer business. We maintain ‘ACCUMULATE’ rating with revised target

price of Rs420/Share.