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UBS Investment Research
Godrej Consumer Products
Conference call takeaways
Soaps lose share
Management admitted it has lost market share in the soaps business (40bps QoQ)
to ITC and HUL. We believe the company will continue to lose share over the next
few quarters or the growth will come at a higher-than-industry ASP, causing
margin loss. We have built in a 3% YoY decline in soap sales in FY11E.
International business progress disappoints
GCPL’s international acquisitions have not fired, given either: 1) weather-related
underperformance on sales growth; 2) one-time write-off expenses; or 3) stock
write-offs. We believe GCPL’s acquisitions will turn around in two to three
quarters to provide positive trends in profit contribution.
Q4 view
Given commodity prices are not abating, we believe GCPL could continue to lose
soap shares as it raises prices further. We believe price increases in hair colour will
further slow down volume growth from Q4 FY11 onwards, but a cold winter could
see slower sales growth in the insecticides business.
Valuation: reiterate Sell rating and price target of Rs415
We reiterate our Sell rating on GCPL. We base our price target of Rs415 on our
sum-of-the-parts valuation.
Conference call takeaways
Business verticals
Domestic soaps business:
Management mentioned that it lost market share to ITC and HUL in Q3 FY11,
mainly due to ITC’s aggressive marketing. GCPL’s soaps business sales growth
was at 6% YoY, implying industry growth at +6%.
Management believes that palm oil prices have peaked and will stabilise going
forward. In addition, the price increases of 3-5% taken in early January this year
will support healthy growth in soaps business in Q4 FY11.
Domestic hair colour business:
The growth in the domestic hair colour business was adversely impacted by
price increases taken in Q2 FY11. Management expects strong growth in Q4
FY11. Management also mentioned that the company is about to unveil new
plans for the hair colour business in the next two quarters.
Home insecticides:
The home insecticides business continued to maintain a higher-than-industry
growth rate. GHPL market share increased to 37% from 33.9% in Q3 FY10.
According to management, it has increased its focus on innovation and
distribution to help the category grow faster.
Rural focus: key area for growth
With the rising food prices and increase in wages under the National Rural
Employment Guarantee Scheme (NREGA), there is increasing disposable
income in the hands of rural India, the opportunity which the company is set to
tap. The company has developed a sub-stockist methodology that keeps the
logistics costs low.
International focus:
Megasari: Management indicated that Megasari has been the most successful
international acquisition for the company. Q3 FY11 sales were at Rs1.8bn (+2%
QoQ), adversely impacted by a weak mosquito season. EBITDA margins at
19% were ~200bps lower than Q2 FY11. According to management, 18-19%
EBITDA margins are sustainable for Megasari.
Other international business: The Africa business was adversely impacted by
slower growth in South Africa in Q3 FY11, and a one-time financial charge of
Rs30m on account of stock write-offs. The UK business was impacted by a onetime
charge of Rs30m on account of warehouse transition-related expenses.
Crossover of products:
Management indicated it will most likely fill the gap created by the loss of
Ambipur and Kiwi (in process) by bringing in products from its international
acquisitions. For example, management is looking to replace Ambipur with
Megasari Makmur.
Godrej Consumer Products
Godrej Consumer Products (GCPL) focuses on home care, hair care and
personal wash products in Asia, Africa and Latin America. In FY10, personal
wash was its largest revenue contributor at 41%, while hair care and home care
contributed 20% each. Following the GHPL and Megasari acquisitions,
homecare contributed 9% of total revenue in Q1 FY11, while personal wash and
hair care contributed 33% and 18%, respectively. GCPL's FY10 turnover was
US$443m, of which US$365m was from domestic operations (including GHPL)
and the remaining US$79m from international operations.
Statement of Risk
We think the key risks to GCPL’s earnings and valuation include intensifying
competition, increasing raw material costs and slowing economic growth. With
GCPL’s expansion in international markets, we believe, the company also has
exposure to multiple country and currency risk.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Godrej Consumer Products
Conference call takeaways
Soaps lose share
Management admitted it has lost market share in the soaps business (40bps QoQ)
to ITC and HUL. We believe the company will continue to lose share over the next
few quarters or the growth will come at a higher-than-industry ASP, causing
margin loss. We have built in a 3% YoY decline in soap sales in FY11E.
International business progress disappoints
GCPL’s international acquisitions have not fired, given either: 1) weather-related
underperformance on sales growth; 2) one-time write-off expenses; or 3) stock
write-offs. We believe GCPL’s acquisitions will turn around in two to three
quarters to provide positive trends in profit contribution.
Q4 view
Given commodity prices are not abating, we believe GCPL could continue to lose
soap shares as it raises prices further. We believe price increases in hair colour will
further slow down volume growth from Q4 FY11 onwards, but a cold winter could
see slower sales growth in the insecticides business.
Valuation: reiterate Sell rating and price target of Rs415
We reiterate our Sell rating on GCPL. We base our price target of Rs415 on our
sum-of-the-parts valuation.
Conference call takeaways
Business verticals
Domestic soaps business:
Management mentioned that it lost market share to ITC and HUL in Q3 FY11,
mainly due to ITC’s aggressive marketing. GCPL’s soaps business sales growth
was at 6% YoY, implying industry growth at +6%.
Management believes that palm oil prices have peaked and will stabilise going
forward. In addition, the price increases of 3-5% taken in early January this year
will support healthy growth in soaps business in Q4 FY11.
Domestic hair colour business:
The growth in the domestic hair colour business was adversely impacted by
price increases taken in Q2 FY11. Management expects strong growth in Q4
FY11. Management also mentioned that the company is about to unveil new
plans for the hair colour business in the next two quarters.
Home insecticides:
The home insecticides business continued to maintain a higher-than-industry
growth rate. GHPL market share increased to 37% from 33.9% in Q3 FY10.
According to management, it has increased its focus on innovation and
distribution to help the category grow faster.
Rural focus: key area for growth
With the rising food prices and increase in wages under the National Rural
Employment Guarantee Scheme (NREGA), there is increasing disposable
income in the hands of rural India, the opportunity which the company is set to
tap. The company has developed a sub-stockist methodology that keeps the
logistics costs low.
International focus:
Megasari: Management indicated that Megasari has been the most successful
international acquisition for the company. Q3 FY11 sales were at Rs1.8bn (+2%
QoQ), adversely impacted by a weak mosquito season. EBITDA margins at
19% were ~200bps lower than Q2 FY11. According to management, 18-19%
EBITDA margins are sustainable for Megasari.
Other international business: The Africa business was adversely impacted by
slower growth in South Africa in Q3 FY11, and a one-time financial charge of
Rs30m on account of stock write-offs. The UK business was impacted by a onetime
charge of Rs30m on account of warehouse transition-related expenses.
Crossover of products:
Management indicated it will most likely fill the gap created by the loss of
Ambipur and Kiwi (in process) by bringing in products from its international
acquisitions. For example, management is looking to replace Ambipur with
Megasari Makmur.
Godrej Consumer Products
Godrej Consumer Products (GCPL) focuses on home care, hair care and
personal wash products in Asia, Africa and Latin America. In FY10, personal
wash was its largest revenue contributor at 41%, while hair care and home care
contributed 20% each. Following the GHPL and Megasari acquisitions,
homecare contributed 9% of total revenue in Q1 FY11, while personal wash and
hair care contributed 33% and 18%, respectively. GCPL's FY10 turnover was
US$443m, of which US$365m was from domestic operations (including GHPL)
and the remaining US$79m from international operations.
Statement of Risk
We think the key risks to GCPL’s earnings and valuation include intensifying
competition, increasing raw material costs and slowing economic growth. With
GCPL’s expansion in international markets, we believe, the company also has
exposure to multiple country and currency risk.
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