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Godrej Consumer Products (GCPL)
Consumer products
Good all-round performance. GCPL reported strong sales growth – soaps 32%
(+19% volumes) household insecticides (HI) 29% (+25% volumes), hair color 15%
(+7% volumes) and Megasari, Indonesia 20% (in local currency). EBITDA and PAT
growth were 25% and 22%, respectively. We reckon that GCPL is likely gaining market
shares in HI and losing in hair color. It had net debt of Rs20 bn as of September 30,
2011. Our concerns on aggressive forex policy of GCPL remains. The key reason for our
optimism on the GCPL stock is our strong positive view on its prospects in HI business
(India HI and Megasari HI account for ~45% of sales and profits). ADD.
Good growth across categories
Standalone: GCPL reported sales of Rs7,581 mn (+24% yoy), EBITDA of Rs1,337 mn (+12% yoy)
and PAT of Rs1,168 mn (+10% yoy).
Sales growth of 24% yoy was driven by 32% growth in soaps (19% volumes), 29% growth in
household insecticides (~25% volume growth, in our view) and 15% growth in hair color (~7%
volume growth). The sales growth is commendable given that it excludes Ambi Pur and Kiwi
sales which were there in the base. The quarter was marked with (1) benefit of price hike taken
in soaps in 1QFY12, (2) good growth in the recently launched Rs15 hair color SKU and (3) likely
market share gains in household insecticides.
EBITDA margin declined 181 bps yoy to 17.6% due to (1) increased salience of soaps in the
sales mix and input cost inflation (palm oil price was higher by 17% yoy though it has corrected
from the peak) leading to increased material cost of 308 bps and (2) higher other expenditure –
likely higher freight cost (due to higher tonnage shipped as well). Staff cost declined by 198 bps
and advertising spends by 91 bps.
GCPL has discontinued providing market shares in domestic categories in the investor
communication. We reckon that it is having share gains in HI and loss in hair color.
Consolidated: GCPL reported sales of Rs11,860 mn (+23% yoy, KIE estimate Rs11,235 mn),
EBITDA of Rs2,088 mn (+25%, KIE estimate Rs1,732 mn) and PAT of Rs1,476 mn (+22%, KIE
estimate Rs1,318 mn).
Megasari, Indonesia sales (~50% of international sales) increased by 27% yoy (growth of
20% in local currency). The company has launched a household insecticide product
(insect repellant called ‘Magic Paper’) in paper format in Indonesia – perhaps the first of
its kind. This product, targeted at the mass segment, has the potential to reduce
consumer cost (with potentially higher gross margins for the company) and could result in
creative destruction of the coils category, in our view. It has already achieved 10%
penetration in the Indonesia market, as per the GCPL management. Launch of the
product in India is underway. Megasari’s EBITDA margin before payment of technical &
business support fee to GCPL was 19.4% (17% in 1QFY12 and 21% in 2QFY11).
Africa sales constitute 15% of international sales and grew by 47% yoy (like to like
growth of 28%). It completed the acquisition of 51% stake of Darling group operations
in South Africa and Nigeria during the quarter and further completed the Mozambique
leg in October 2011. According to the management, the full impact of synergy benefits
between Kinky and Darling group is expected from 4QFY12E onwards.
LatAm sales increased by 13% yoy and were impacted by ~6% negative currency
movement. EBITDA margin at 7.4% expanded by ~500 bps qoq. 1QFY12 was likely
impacted due to increased adspends towards the launch of the ammonia-free hair color
under the Issue brand. According to the company, the product has been received well by
consumers.
UK sales grew by 10% with marginal 60 bps improvement in EBIT margins.
Key monitorables are movement of INR versus USD and new launches
Performance of the new launches – (1) gel-based hair color portfolio in India, (2)
ammonia-free hair color in LatAm under Issue brand, (3) household insecticide in paper
format in Indonesia. Gauging the success of these new launches is imperative given the
high brand investments the company has made towards them.
Potential for improvement in standalone gross margins yoy with correction in palm oil
price and price hike taken in the soap segment.
Synergy benefits, accruing from the acquisitions made – (1) Megasari and GHPL, (2) GCPL
and GHPL, (3) Darling Group and Kinky, (4) Argencos and the Indian hair color business.
Performance of acquisitions in FY2012E - GHPL, Megasari, Tura, Argencos, Issue Group
would have completed about two years under the GCPL fold.
Movement of INR versus foreign currency basket and movement of LIBOR rates. The
company had net debt of Rs20 bn as of September 30, 2011 with D/E ratio being 1:1.
The Rupee debt is Rs2.5 bn and the rest is in USD. Effective interest cost is ~4% (without
taking currency hedging cost). The foreign currency debt is unhedged. Had the company
opted for hedging the forex debt, it would have likely impacted the profitability due to
corresponding hedging cost.
The repayment schedule of USD debt is ~5 years with quarterly repayment of ~US$20
mn. The recent INR depreciation has resulted in USD debt being higher by ~Rs1.75 bn as
of September 30, 2011 (in the balance sheet, debt and goodwill are higher by Rs1.75 bn
due to currency depreciation). However, the unhedged portion of interest and installment
payment could impact cash flows to the extent of currency depreciation in a particular
quarter.
Retain ADD
We retain ADD rating and target price of Rs510. We marginally tweak estimates as we
include Darling group financials and build in higher interest cost. We have calculated Darling
group financials as follows – the company reported sales of US$200 mn in CY2010. We
build in 10% growth on that and account for 45% of its sales for 6 months in FY2012 and
70% of its sales for the full year in FY2013E and make minority interest adjustment for the
51% stake. We will revisit our assumptions about the other operating categories after a
meeting with the management.
We continue to value GCPL on SOTP basis as the company operates in multiple categories
with varying growth characteristics and multiple geographies (India, Indonesia, Africa, UK
and Latin America). The key risks are (1) integration of the recent acquisitions, (2) increasing
business, political and currency risks due to operations in multiple geographies and (3) any
unexpected increase in competitive activity in the domestic insecticides business
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Godrej Consumer Products (GCPL)
Consumer products
Good all-round performance. GCPL reported strong sales growth – soaps 32%
(+19% volumes) household insecticides (HI) 29% (+25% volumes), hair color 15%
(+7% volumes) and Megasari, Indonesia 20% (in local currency). EBITDA and PAT
growth were 25% and 22%, respectively. We reckon that GCPL is likely gaining market
shares in HI and losing in hair color. It had net debt of Rs20 bn as of September 30,
2011. Our concerns on aggressive forex policy of GCPL remains. The key reason for our
optimism on the GCPL stock is our strong positive view on its prospects in HI business
(India HI and Megasari HI account for ~45% of sales and profits). ADD.
Good growth across categories
Standalone: GCPL reported sales of Rs7,581 mn (+24% yoy), EBITDA of Rs1,337 mn (+12% yoy)
and PAT of Rs1,168 mn (+10% yoy).
Sales growth of 24% yoy was driven by 32% growth in soaps (19% volumes), 29% growth in
household insecticides (~25% volume growth, in our view) and 15% growth in hair color (~7%
volume growth). The sales growth is commendable given that it excludes Ambi Pur and Kiwi
sales which were there in the base. The quarter was marked with (1) benefit of price hike taken
in soaps in 1QFY12, (2) good growth in the recently launched Rs15 hair color SKU and (3) likely
market share gains in household insecticides.
EBITDA margin declined 181 bps yoy to 17.6% due to (1) increased salience of soaps in the
sales mix and input cost inflation (palm oil price was higher by 17% yoy though it has corrected
from the peak) leading to increased material cost of 308 bps and (2) higher other expenditure –
likely higher freight cost (due to higher tonnage shipped as well). Staff cost declined by 198 bps
and advertising spends by 91 bps.
GCPL has discontinued providing market shares in domestic categories in the investor
communication. We reckon that it is having share gains in HI and loss in hair color.
Consolidated: GCPL reported sales of Rs11,860 mn (+23% yoy, KIE estimate Rs11,235 mn),
EBITDA of Rs2,088 mn (+25%, KIE estimate Rs1,732 mn) and PAT of Rs1,476 mn (+22%, KIE
estimate Rs1,318 mn).
Megasari, Indonesia sales (~50% of international sales) increased by 27% yoy (growth of
20% in local currency). The company has launched a household insecticide product
(insect repellant called ‘Magic Paper’) in paper format in Indonesia – perhaps the first of
its kind. This product, targeted at the mass segment, has the potential to reduce
consumer cost (with potentially higher gross margins for the company) and could result in
creative destruction of the coils category, in our view. It has already achieved 10%
penetration in the Indonesia market, as per the GCPL management. Launch of the
product in India is underway. Megasari’s EBITDA margin before payment of technical &
business support fee to GCPL was 19.4% (17% in 1QFY12 and 21% in 2QFY11).
Africa sales constitute 15% of international sales and grew by 47% yoy (like to like
growth of 28%). It completed the acquisition of 51% stake of Darling group operations
in South Africa and Nigeria during the quarter and further completed the Mozambique
leg in October 2011. According to the management, the full impact of synergy benefits
between Kinky and Darling group is expected from 4QFY12E onwards.
LatAm sales increased by 13% yoy and were impacted by ~6% negative currency
movement. EBITDA margin at 7.4% expanded by ~500 bps qoq. 1QFY12 was likely
impacted due to increased adspends towards the launch of the ammonia-free hair color
under the Issue brand. According to the company, the product has been received well by
consumers.
UK sales grew by 10% with marginal 60 bps improvement in EBIT margins.
Key monitorables are movement of INR versus USD and new launches
Performance of the new launches – (1) gel-based hair color portfolio in India, (2)
ammonia-free hair color in LatAm under Issue brand, (3) household insecticide in paper
format in Indonesia. Gauging the success of these new launches is imperative given the
high brand investments the company has made towards them.
Potential for improvement in standalone gross margins yoy with correction in palm oil
price and price hike taken in the soap segment.
Synergy benefits, accruing from the acquisitions made – (1) Megasari and GHPL, (2) GCPL
and GHPL, (3) Darling Group and Kinky, (4) Argencos and the Indian hair color business.
Performance of acquisitions in FY2012E - GHPL, Megasari, Tura, Argencos, Issue Group
would have completed about two years under the GCPL fold.
Movement of INR versus foreign currency basket and movement of LIBOR rates. The
company had net debt of Rs20 bn as of September 30, 2011 with D/E ratio being 1:1.
The Rupee debt is Rs2.5 bn and the rest is in USD. Effective interest cost is ~4% (without
taking currency hedging cost). The foreign currency debt is unhedged. Had the company
opted for hedging the forex debt, it would have likely impacted the profitability due to
corresponding hedging cost.
The repayment schedule of USD debt is ~5 years with quarterly repayment of ~US$20
mn. The recent INR depreciation has resulted in USD debt being higher by ~Rs1.75 bn as
of September 30, 2011 (in the balance sheet, debt and goodwill are higher by Rs1.75 bn
due to currency depreciation). However, the unhedged portion of interest and installment
payment could impact cash flows to the extent of currency depreciation in a particular
quarter.
Retain ADD
We retain ADD rating and target price of Rs510. We marginally tweak estimates as we
include Darling group financials and build in higher interest cost. We have calculated Darling
group financials as follows – the company reported sales of US$200 mn in CY2010. We
build in 10% growth on that and account for 45% of its sales for 6 months in FY2012 and
70% of its sales for the full year in FY2013E and make minority interest adjustment for the
51% stake. We will revisit our assumptions about the other operating categories after a
meeting with the management.
We continue to value GCPL on SOTP basis as the company operates in multiple categories
with varying growth characteristics and multiple geographies (India, Indonesia, Africa, UK
and Latin America). The key risks are (1) integration of the recent acquisitions, (2) increasing
business, political and currency risks due to operations in multiple geographies and (3) any
unexpected increase in competitive activity in the domestic insecticides business
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