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Godrej Consumer Products (GCPL)
Consumer products
Mosquito repellant business saves the day. In 3QFY11, GHPL was the clear
outperformer (sales growth of 24%), in line with our expectations. Key variables to
watch, (1) input cost inflation impact on soaps’ margins, (2) increasing competitive
activity in household insecticides, (3) initial signs of stress in international businesses,
(4) potential impact of an extended winter on mosquito breeding and consequential
impact on GHPL business and (5) potential synergy benefits of acquisitions.
GHPL outperforms, stress on international businesses
GCPL reported standalone net sales of Rs3,421 mn (+8%, KIE estimate Rs3,418 mn), EBITDA of
Rs624 mn (+0%, KIE estimate Rs585 mn) and PAT of Rs664 mn (+18%, KIE estimate Rs543
mn).
Soaps grew by 6% which was largely volume driven (after two quarters of channel inventory
correction) and hair color grew by 9% which was primarily pricing led (10% price hike taken in
1QFY11), in our view. This is the first positive growth in the soap portfolio after 8% and 10%
decline in sales on yoy basis in 1QFY11 and 2QFY11, respectively. While the 6% growth is on
the back of a relatively low base (12% growth in 3QFY10), it is notable given the high
competitive intensity and likely low category growth due to impact of food inflation. Market
share loss of 40 bps in soaps was expected as (1) there is higher competitive activity by HUL and
(2) continued aggression from ITC.
Performance in hair color is disappointing with likely 1% volume decline. We note that
historically, GCPL’s Indian hair color business has exhibited significant quarterly volatility.
Godrej Household Products (GHPL)’s sales growth at 24% is impressive given that the harsh
winter this year which would have led to lower mosquito breeding. This business is likely
benefitting as Jyothy Laboratories has withdrawn trade promotions on Maxo (potential gains for
competitors like GHPL, Reckitt Benckiser etc.).
Standalone gross margins declined 450 bps to 51%; as the full impact of input cost inflation
will be seen in 4QFY11E (51% increase in palm oil price during the quarter). EBITDA margin
declined by 140 bps to 18.2% driven by higher adspends (200 bps) and other expenditure (290
bps). Higher other income (+130%) led to PAT margin improvement by 160 bps to 19.4%.
Consolidated net sales stood at Rs9.8 bn (+89%), EBITDA at Rs1.7 bn (+65%) and PAT at Rs1.2
bn (+40%). These financials are not comparable on yoy basis due to a string of acquisitions in
CY2010.
Key variables to watch
Input cost inflation impact on soaps – palm oil prices have been inflationary (51% in
3QFY11) and GCPL being a price taker and value-for-money player in soaps gets
impacted disproportionately. However, soaps account for ~20% of sales and ~12% of
EBITDA; this limits the overall impact.
High competitive intensity in (1) soaps led by micro-marketing initiatives by HUL and
aggressive trade-spend driven growth strategy of ITC (2) in household insecticides with
Jyothy Laboratories’ efforts to turn the Maxo brand profitable and its rolling out of new
product developed in association with DRDO.
Initial signs of stress in international businesses, (1) stock write-off in African business
and (2) lower sales growth in Megasari and higher sales promotion expenses in most
businesses implying difficult market conditions, in our view.
Potential impact of extended winter on mosquito breeding and consequential impact
on GHPL business—typically, an extended and harsh winter is negative for mosquito
repellant business.
Consolidation of the acquisitions made in CY2010 and synergy benefits accruing from
the same (1) Megasari and GHPL in the household insecticides business, (2) geographical
distribution benefits exist as GHPL is strong in South India (Good Knight) whereas GCPL is
in North India (soaps and hair color) and (3) leverage on Argencos’s technology and
introduce crème hair color in sachets in India. We would await demonstration of synergy
benefits before incorporating it in our forecasts.
Retain ADD, TP of Rs440
We value GCPL on an SOTP basis as the company operates in multiple categories with
varying growth characteristics and multiple geographies (India, Indonesia, Africa, UK and
Latin America). Our EPS estimates are broadly maintained and we retain TP of Rs440 on the
stock. The key risks are (1) unhedged US$ loan, (2) integration issues with recent acquisitions
and (3) underperformance of highly profitable hair color business
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Godrej Consumer Products (GCPL)
Consumer products
Mosquito repellant business saves the day. In 3QFY11, GHPL was the clear
outperformer (sales growth of 24%), in line with our expectations. Key variables to
watch, (1) input cost inflation impact on soaps’ margins, (2) increasing competitive
activity in household insecticides, (3) initial signs of stress in international businesses,
(4) potential impact of an extended winter on mosquito breeding and consequential
impact on GHPL business and (5) potential synergy benefits of acquisitions.
GHPL outperforms, stress on international businesses
GCPL reported standalone net sales of Rs3,421 mn (+8%, KIE estimate Rs3,418 mn), EBITDA of
Rs624 mn (+0%, KIE estimate Rs585 mn) and PAT of Rs664 mn (+18%, KIE estimate Rs543
mn).
Soaps grew by 6% which was largely volume driven (after two quarters of channel inventory
correction) and hair color grew by 9% which was primarily pricing led (10% price hike taken in
1QFY11), in our view. This is the first positive growth in the soap portfolio after 8% and 10%
decline in sales on yoy basis in 1QFY11 and 2QFY11, respectively. While the 6% growth is on
the back of a relatively low base (12% growth in 3QFY10), it is notable given the high
competitive intensity and likely low category growth due to impact of food inflation. Market
share loss of 40 bps in soaps was expected as (1) there is higher competitive activity by HUL and
(2) continued aggression from ITC.
Performance in hair color is disappointing with likely 1% volume decline. We note that
historically, GCPL’s Indian hair color business has exhibited significant quarterly volatility.
Godrej Household Products (GHPL)’s sales growth at 24% is impressive given that the harsh
winter this year which would have led to lower mosquito breeding. This business is likely
benefitting as Jyothy Laboratories has withdrawn trade promotions on Maxo (potential gains for
competitors like GHPL, Reckitt Benckiser etc.).
Standalone gross margins declined 450 bps to 51%; as the full impact of input cost inflation
will be seen in 4QFY11E (51% increase in palm oil price during the quarter). EBITDA margin
declined by 140 bps to 18.2% driven by higher adspends (200 bps) and other expenditure (290
bps). Higher other income (+130%) led to PAT margin improvement by 160 bps to 19.4%.
Consolidated net sales stood at Rs9.8 bn (+89%), EBITDA at Rs1.7 bn (+65%) and PAT at Rs1.2
bn (+40%). These financials are not comparable on yoy basis due to a string of acquisitions in
CY2010.
Key variables to watch
Input cost inflation impact on soaps – palm oil prices have been inflationary (51% in
3QFY11) and GCPL being a price taker and value-for-money player in soaps gets
impacted disproportionately. However, soaps account for ~20% of sales and ~12% of
EBITDA; this limits the overall impact.
High competitive intensity in (1) soaps led by micro-marketing initiatives by HUL and
aggressive trade-spend driven growth strategy of ITC (2) in household insecticides with
Jyothy Laboratories’ efforts to turn the Maxo brand profitable and its rolling out of new
product developed in association with DRDO.
Initial signs of stress in international businesses, (1) stock write-off in African business
and (2) lower sales growth in Megasari and higher sales promotion expenses in most
businesses implying difficult market conditions, in our view.
Potential impact of extended winter on mosquito breeding and consequential impact
on GHPL business—typically, an extended and harsh winter is negative for mosquito
repellant business.
Consolidation of the acquisitions made in CY2010 and synergy benefits accruing from
the same (1) Megasari and GHPL in the household insecticides business, (2) geographical
distribution benefits exist as GHPL is strong in South India (Good Knight) whereas GCPL is
in North India (soaps and hair color) and (3) leverage on Argencos’s technology and
introduce crème hair color in sachets in India. We would await demonstration of synergy
benefits before incorporating it in our forecasts.
Retain ADD, TP of Rs440
We value GCPL on an SOTP basis as the company operates in multiple categories with
varying growth characteristics and multiple geographies (India, Indonesia, Africa, UK and
Latin America). Our EPS estimates are broadly maintained and we retain TP of Rs440 on the
stock. The key risks are (1) unhedged US$ loan, (2) integration issues with recent acquisitions
and (3) underperformance of highly profitable hair color business
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