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Godrej Consumer Products (GOCP.BO, Rs346, EW, PT Rs360)
Investment Thesis: Why are we EW?
• Potential rise in competitive pressures in soaps segment.
• Potential sharp increase in input costs for soaps business.
• We expect a better entry opportunity as margins/market
share in the soaps business come under pressure and
the company consolidates its acquisitions.
We Are Equal-weight
We believe GCPL will give a better entry opportunity as
margins and market share in the soaps business come under
pressure and the company consolidates its acquisitions. In our
view, GCPL was performing below its full potential; strategic
changes have begun to help the company unleash its full
potential. However, the current stock price already factors in
potential margin expansion and acceleration of earnings
growth arising from these changes, in our view.
Investor focus should now shift from potential
value-accretive acquisitions to a combination of:
1) Increased business volatility; integration and currency
risk on its international business,
2) Continuing competitive pressures in domestic soaps,
3) Potential sharp increase in input costs and consequent
adverse impact on overall margins, and
4) Potential slowdown in overall revenue growth
GCPL has utilized its balance sheet effectively to create
significant shareholder value through its recent acquisitions, in
our view. While the emerging markets foray builds long-term
growth drivers, it also increases the business volatility
(leverage, foreign exchange, etc.), near term, in our view. We
are cognizant of the integration risk and consequent potential
adverse impact on near term earnings progression for GCPL.
Investment Positives
Potential gain in shares in hair color and soaps
Potential synergies and value-accretion on account of
recent acquisitions
Potential synergies from consolidation of all FMCG
businesses under GCPL
Investment Concerns
Initial difficulties in integrating and digesting acquisitions
Volatile input costs
Historical loss in hair color market share and poor
profitability in the soaps business
Foreign currency fluctuations
F3Q11 – Concerns to the Fore: GCPL reported consolidated
Q3F11 results with revenue, operating profit and adjusted
PAT growth of 89% 72% & 43% respectively, which compares
with our estimates of 93% 74% & 48% respectively. Key
highlights of the quarter:
1) Tepid organic revenue growth - international business
revenue grew by 5% YoY and domestic (ex-GHPL)
revenue grew by 8%
2) Severe pressure on profitability of domestic business -
gross margins declined by 450bps YoY and
3) Anecdotal evidence of continuing high competitive
intensity – consolidated ad spends to sales at 10.8% for
the consolidated business are the highest since F2004.
Key Negatives:
1) Soap inventory pipeline correction seems to have
continued in the quarter under review with soap revenues
growth of 6%. This performance should be viewed in
context of increased promotions and ad-spends during
the quarter.
2) Volume growth in the hair color business was flat, in our
view
3) Soap market share declined by 40bps sequentially
4) Excluding technical fees from group companies,
domestic EBITDA margins declined by 150 bps
5) Operating margins for Megasari declined by 190 bps
sequentially
6) Disappointing operating performance of UK & African
businesses
Key Positives:
1) Megasari reported revenue of Rs18.5bn for the quarter
versus our expectation of Rs16.5bn
2) GHPL reported growth of 24% for the quarter driven by
310bps increase in market share and continuing
favorable weather conditions
3) Staff cost declined by 310 bps (EVA linked compensation
policy) which helped cushion the margin decline
Investment Thesis
• We believe GCPL will give a better
entry opportunity, as margins and
market share in the soaps business
comes under pressure and the
company consolidates its acquisitions.
• While the emerging markets foray
builds long-term growth drivers, it also
increases the business volatility
(leverage, foreign exchange, etc), near
term.
• Management restructuring and margin
expansion priced in.
• Investor focus will now likely shift to: 1)
continuing competitive pressures in
the domestic soaps business, 2)a
potential slowdown in revenue growth,
3) pricing power vis-à-vis sharp
increase in input costs, and 4)
currency risk from its international
business.
Key Value Drivers
• Market share trend in soaps.
• Return on capital employed for the
acquisitions.
• Overall margin trend for the company.
Potential Catalysts
• Increase/decrease in market shares in
soaps and hair colors.
• Profitable expansion of international
business including successful cross
border selling of products/brands.
• Operating profit trend for the domestic
business.
Key Risks
• Decline/increase in hair color margins.
• Further rise/fall in input cost pressures,
particularly in soaps.
• Loss/gain of market share in soaps.
• Failure/success to integrate
international businesses
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Godrej Consumer Products (GOCP.BO, Rs346, EW, PT Rs360)
Investment Thesis: Why are we EW?
• Potential rise in competitive pressures in soaps segment.
• Potential sharp increase in input costs for soaps business.
• We expect a better entry opportunity as margins/market
share in the soaps business come under pressure and
the company consolidates its acquisitions.
We Are Equal-weight
We believe GCPL will give a better entry opportunity as
margins and market share in the soaps business come under
pressure and the company consolidates its acquisitions. In our
view, GCPL was performing below its full potential; strategic
changes have begun to help the company unleash its full
potential. However, the current stock price already factors in
potential margin expansion and acceleration of earnings
growth arising from these changes, in our view.
Investor focus should now shift from potential
value-accretive acquisitions to a combination of:
1) Increased business volatility; integration and currency
risk on its international business,
2) Continuing competitive pressures in domestic soaps,
3) Potential sharp increase in input costs and consequent
adverse impact on overall margins, and
4) Potential slowdown in overall revenue growth
GCPL has utilized its balance sheet effectively to create
significant shareholder value through its recent acquisitions, in
our view. While the emerging markets foray builds long-term
growth drivers, it also increases the business volatility
(leverage, foreign exchange, etc.), near term, in our view. We
are cognizant of the integration risk and consequent potential
adverse impact on near term earnings progression for GCPL.
Investment Positives
Potential gain in shares in hair color and soaps
Potential synergies and value-accretion on account of
recent acquisitions
Potential synergies from consolidation of all FMCG
businesses under GCPL
Investment Concerns
Initial difficulties in integrating and digesting acquisitions
Volatile input costs
Historical loss in hair color market share and poor
profitability in the soaps business
Foreign currency fluctuations
F3Q11 – Concerns to the Fore: GCPL reported consolidated
Q3F11 results with revenue, operating profit and adjusted
PAT growth of 89% 72% & 43% respectively, which compares
with our estimates of 93% 74% & 48% respectively. Key
highlights of the quarter:
1) Tepid organic revenue growth - international business
revenue grew by 5% YoY and domestic (ex-GHPL)
revenue grew by 8%
2) Severe pressure on profitability of domestic business -
gross margins declined by 450bps YoY and
3) Anecdotal evidence of continuing high competitive
intensity – consolidated ad spends to sales at 10.8% for
the consolidated business are the highest since F2004.
Key Negatives:
1) Soap inventory pipeline correction seems to have
continued in the quarter under review with soap revenues
growth of 6%. This performance should be viewed in
context of increased promotions and ad-spends during
the quarter.
2) Volume growth in the hair color business was flat, in our
view
3) Soap market share declined by 40bps sequentially
4) Excluding technical fees from group companies,
domestic EBITDA margins declined by 150 bps
5) Operating margins for Megasari declined by 190 bps
sequentially
6) Disappointing operating performance of UK & African
businesses
Key Positives:
1) Megasari reported revenue of Rs18.5bn for the quarter
versus our expectation of Rs16.5bn
2) GHPL reported growth of 24% for the quarter driven by
310bps increase in market share and continuing
favorable weather conditions
3) Staff cost declined by 310 bps (EVA linked compensation
policy) which helped cushion the margin decline
Investment Thesis
• We believe GCPL will give a better
entry opportunity, as margins and
market share in the soaps business
comes under pressure and the
company consolidates its acquisitions.
• While the emerging markets foray
builds long-term growth drivers, it also
increases the business volatility
(leverage, foreign exchange, etc), near
term.
• Management restructuring and margin
expansion priced in.
• Investor focus will now likely shift to: 1)
continuing competitive pressures in
the domestic soaps business, 2)a
potential slowdown in revenue growth,
3) pricing power vis-à-vis sharp
increase in input costs, and 4)
currency risk from its international
business.
Key Value Drivers
• Market share trend in soaps.
• Return on capital employed for the
acquisitions.
• Overall margin trend for the company.
Potential Catalysts
• Increase/decrease in market shares in
soaps and hair colors.
• Profitable expansion of international
business including successful cross
border selling of products/brands.
• Operating profit trend for the domestic
business.
Key Risks
• Decline/increase in hair color margins.
• Further rise/fall in input cost pressures,
particularly in soaps.
• Loss/gain of market share in soaps.
• Failure/success to integrate
international businesses
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