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Godrej Consumer Products Limited Neutral
GOCP.BO, GCPL IN
Q3FY11: A mixed bag; Home Care business drives growth
• Mixed performance for Q3FY11: 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 and
Megasari (Indonesia) was better/in line with expectations, Latin American,
African and UK businesses reported weak operational performance.
• Home Care (c50% of sales) was the only bright spot. Healthy sales growth of
24% and 27% y/y respectively for Godrej Household Products (GHPL) and
Megasari was above expectations and market share gains (+80bp q/q) for GHPL
are encouraging.
• Domestic personal care business performance was subdued, with sales and
EBITDA growth of 9% and 0% y/y. While soap sales growth recovered to 6%
(post 3 qtrs of decline), hair colors sales were subdued at 9% with low single
digit vol growth. High palm oil costs led to 140bp y/y decline in EBITDA
margins for this segment. Further market share trends were weak across soaps (-
40bp q/q) and hair colors (-50bp q/q).
• Weak performance for overseas operations (ex-Megasari): Performance of
Keyline (sales -14% y/y, EBITDA margin 3%), African operations (est LTL
growth of 3-4% y/y) and Latin American operations (subdued EBITDA margins
at 9.5%) was below expectations. Management highlighted weak economic
growth and increased competitive pressures in Africa and increased investments
in Latin America to be the reasons for tepid performance.
• Conference call takeaways: 1) Growth rates to pick up for soaps in coming
quarters supported by recent price increases and a favorable base. 2) Soap
margins to remain weak on account of significant increase in palm oil prices
(+50% y/y), 3) Market share and healthy double-digit growth rates for GHPL
likely to continue, 4) Interest charge for domestic debt (Rs2.5bn) to increase
from 8% to 9-10%, and 5) More synergistic benefits from merger of GCPL and
GHPL likely to be visible starting in FY12
Takeaways from earnings call
Domestic business updates
• Soaps – Soap sales rose 6% y/y (largely volume driven c5%) and recovered
from negative growth witnessed over past three quarters. With recent price
hikes, we would expect growth rates to firm up further as full impact of pricing
materializes in coming quarters. Market share trends were weak (-40bp q/q and -
30bp y/y) as ITC and HUL have gained shares marginally in soaps category.
Higher palm kernel oil prices were reflected in weak gross margin performance
for the standalone business. Company has undertaken price hikes recently
(amounting to 3-5%) for their soaps portfolio to mitigate the impact of higher
palm kernel oil prices. Management noted that palm oil prices continue to
remain firm (up 50% y/y) and are likely to be mitigated by c5% price hike for
soaps portfolio. Soap margins are likely to be lower y/y and more commensurate
with FY09 margins.
• Household Insecticide/Home Care – Q3FY11 was a good quarter for Godrej
Household Products (GHPL) with sales growth of 24% y/y. Market share moved
up 310bp y/y and 80bp q/q. Growth has been good across sub-segments like
coils, aerosols, electrics. Investments in distribution and marketing are
supporting good consumer traction and healthy sales growth in this category.
• New launches. As GCPL has now stopped distributing Ambipur (rights sold to
P&G), they are now looking to enter the air care category over next six months.
We believe they can leverage on the aircare portfolio of Megasari (Stella brand)
to do so.
International business updates
• Megasari registered good sales growth of 27% y/y during the quarter and
EBITDA margins at 14.6% (before payment of technical fees to GCPL, margins
were 19%) were lower by 190bp q/q due to unfavorable product mix.
• African operations (Kinky, Rapidol and Tura) reported weak performance in
our opinion. Combined sales for these businesses were Rs530mn (+18% y/y)
with likely low single digit sales growth for Rapidol and Kinky operations (as
Tura was not present in Q3FY10). Management noted that sales growth was
affected by weak economy and local competition particularly in hair extension
category where local players were resorting to deep discounting. EBITDA
margins (after adjusting for one time Rs30mn charge on account of inventory
write off) was 15% during the quarter.
• Latin America (Issue and Argencos) operations - These reported sales growth
in region of c20% y/y which is inline. However EBITDA margins for the quarter
stood at 9.5% which is quite low when compared to FY10 EBITDA margins of
c14%, though margins were better on a sequential basis (Q2FY11 margins of
6.8%). Investments being made to expand the presence beyond Argentina were a
reason for these lower margins.
• Keyline operations (UK) – These registered 14% y/y decline in sales during
Q3FY11, impacted by lower sales for hand sanitizers which benefited from
incidence of H1N1 last year. Nearly 4% decline in topline is also on account of
weak GBP. EBITDA margin for Keyline was 3.3% during the qtr as a result.
Please note that this excludes one time expense of Rs30mn on warehouse
transition related dilapidation and leasehold write/off. If we include these
charges there was an EBITDA loss during the qtr.
Other updates
• Debt levels. Overseas debt on GCPL’s books is US$350mn with interest charge
of 6-month LIBOR+150-175bps. Domestic debt is Rs2.5bn as of Dec'10 end
which will witness increase in interest rate to 9-10% from 8% currently.
• Tax rates. Management guided to 20% and 22-23% effective tax rates for FY11
and FY12 respectively for the consolidated business.
• Expect organic sales CAGR of 15-20% in medium term for GCPL.
Q3FY11 – A snapshot
Godrej Consumer reported a mixed bag for Q3FY11 earnings last evening. Given a
host of acquisitions undertaken during last quarter, consolidated results for the
company are not comparable on a y/y basis. Except for good performance of
household insecticide (both domestic and Indonesia) business, performance of other
businesses was weak and below expectations.
Standalone numbers (includes domestic personal care business) are comparable y/y,
with Sales, EBITDA and PAT growth of 8%, 0% and +18% y/y, respectively. While
soap sales growth recovered to 6% from de-growth seen in past three quarters, hair
color sales growth disappointed at just 9%. EBITDA margins for standalone
contracted 140bp y/y largely on account of higher input cost push (gross margins
dropped 450bp y/y).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Godrej Consumer Products Limited Neutral
GOCP.BO, GCPL IN
Q3FY11: A mixed bag; Home Care business drives growth
• Mixed performance for Q3FY11: 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 and
Megasari (Indonesia) was better/in line with expectations, Latin American,
African and UK businesses reported weak operational performance.
• Home Care (c50% of sales) was the only bright spot. Healthy sales growth of
24% and 27% y/y respectively for Godrej Household Products (GHPL) and
Megasari was above expectations and market share gains (+80bp q/q) for GHPL
are encouraging.
• Domestic personal care business performance was subdued, with sales and
EBITDA growth of 9% and 0% y/y. While soap sales growth recovered to 6%
(post 3 qtrs of decline), hair colors sales were subdued at 9% with low single
digit vol growth. High palm oil costs led to 140bp y/y decline in EBITDA
margins for this segment. Further market share trends were weak across soaps (-
40bp q/q) and hair colors (-50bp q/q).
• Weak performance for overseas operations (ex-Megasari): Performance of
Keyline (sales -14% y/y, EBITDA margin 3%), African operations (est LTL
growth of 3-4% y/y) and Latin American operations (subdued EBITDA margins
at 9.5%) was below expectations. Management highlighted weak economic
growth and increased competitive pressures in Africa and increased investments
in Latin America to be the reasons for tepid performance.
• Conference call takeaways: 1) Growth rates to pick up for soaps in coming
quarters supported by recent price increases and a favorable base. 2) Soap
margins to remain weak on account of significant increase in palm oil prices
(+50% y/y), 3) Market share and healthy double-digit growth rates for GHPL
likely to continue, 4) Interest charge for domestic debt (Rs2.5bn) to increase
from 8% to 9-10%, and 5) More synergistic benefits from merger of GCPL and
GHPL likely to be visible starting in FY12
Takeaways from earnings call
Domestic business updates
• Soaps – Soap sales rose 6% y/y (largely volume driven c5%) and recovered
from negative growth witnessed over past three quarters. With recent price
hikes, we would expect growth rates to firm up further as full impact of pricing
materializes in coming quarters. Market share trends were weak (-40bp q/q and -
30bp y/y) as ITC and HUL have gained shares marginally in soaps category.
Higher palm kernel oil prices were reflected in weak gross margin performance
for the standalone business. Company has undertaken price hikes recently
(amounting to 3-5%) for their soaps portfolio to mitigate the impact of higher
palm kernel oil prices. Management noted that palm oil prices continue to
remain firm (up 50% y/y) and are likely to be mitigated by c5% price hike for
soaps portfolio. Soap margins are likely to be lower y/y and more commensurate
with FY09 margins.
• Household Insecticide/Home Care – Q3FY11 was a good quarter for Godrej
Household Products (GHPL) with sales growth of 24% y/y. Market share moved
up 310bp y/y and 80bp q/q. Growth has been good across sub-segments like
coils, aerosols, electrics. Investments in distribution and marketing are
supporting good consumer traction and healthy sales growth in this category.
• New launches. As GCPL has now stopped distributing Ambipur (rights sold to
P&G), they are now looking to enter the air care category over next six months.
We believe they can leverage on the aircare portfolio of Megasari (Stella brand)
to do so.
International business updates
• Megasari registered good sales growth of 27% y/y during the quarter and
EBITDA margins at 14.6% (before payment of technical fees to GCPL, margins
were 19%) were lower by 190bp q/q due to unfavorable product mix.
• African operations (Kinky, Rapidol and Tura) reported weak performance in
our opinion. Combined sales for these businesses were Rs530mn (+18% y/y)
with likely low single digit sales growth for Rapidol and Kinky operations (as
Tura was not present in Q3FY10). Management noted that sales growth was
affected by weak economy and local competition particularly in hair extension
category where local players were resorting to deep discounting. EBITDA
margins (after adjusting for one time Rs30mn charge on account of inventory
write off) was 15% during the quarter.
• Latin America (Issue and Argencos) operations - These reported sales growth
in region of c20% y/y which is inline. However EBITDA margins for the quarter
stood at 9.5% which is quite low when compared to FY10 EBITDA margins of
c14%, though margins were better on a sequential basis (Q2FY11 margins of
6.8%). Investments being made to expand the presence beyond Argentina were a
reason for these lower margins.
• Keyline operations (UK) – These registered 14% y/y decline in sales during
Q3FY11, impacted by lower sales for hand sanitizers which benefited from
incidence of H1N1 last year. Nearly 4% decline in topline is also on account of
weak GBP. EBITDA margin for Keyline was 3.3% during the qtr as a result.
Please note that this excludes one time expense of Rs30mn on warehouse
transition related dilapidation and leasehold write/off. If we include these
charges there was an EBITDA loss during the qtr.
Other updates
• Debt levels. Overseas debt on GCPL’s books is US$350mn with interest charge
of 6-month LIBOR+150-175bps. Domestic debt is Rs2.5bn as of Dec'10 end
which will witness increase in interest rate to 9-10% from 8% currently.
• Tax rates. Management guided to 20% and 22-23% effective tax rates for FY11
and FY12 respectively for the consolidated business.
• Expect organic sales CAGR of 15-20% in medium term for GCPL.
Q3FY11 – A snapshot
Godrej Consumer reported a mixed bag for Q3FY11 earnings last evening. Given a
host of acquisitions undertaken during last quarter, consolidated results for the
company are not comparable on a y/y basis. Except for good performance of
household insecticide (both domestic and Indonesia) business, performance of other
businesses was weak and below expectations.
Standalone numbers (includes domestic personal care business) are comparable y/y,
with Sales, EBITDA and PAT growth of 8%, 0% and +18% y/y, respectively. While
soap sales growth recovered to 6% from de-growth seen in past three quarters, hair
color sales growth disappointed at just 9%. EBITDA margins for standalone
contracted 140bp y/y largely on account of higher input cost push (gross margins
dropped 450bp y/y).
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