Godrej Consumer Products Limited (GOCP.NS): 1QF14: Strong Revenues; Earnings miss on higher A&P :Morgan Stanley Research
Quick Comment: GCPL reported Q1 revenue, operating profit and adjusted PAT growth of 24%, 11% and 5%, respectively, compared with our expectations of 20%, 17% and 19%. The highlight of the result is 430 bps gross margin expansion in the domestic business, driven largely by product mix improvement and lower palm derivative prices. Yet operating margins were down 50 bps on higher advertising and sales promotion (+480 bps).
Key Positives: 1) Strong domestic revenue growth of 19%, driven by hair color (32%), household insecticides (24%) and soaps (13%). 2) Consolidated gross margins expanded by 220 bps, led primarily by product mix improvement in the domestic business. 3) Strong local currency performance in the international business with LatAm (+31%), Africa (+58%) and Indonesia (+21%).
Key Negatives: GCPL reported consolidated operating profits 5% below estimates, led by higher staff costs (up 110bps) and advertisement expenses (up 270bps). According to management, Africa business margins (-570 bps) were affected by 1) store rationalization in Kinky and 2) depreciation of SAR against USD. In Indonesia, contract manufacturing of divested foods business at break-even margins and lag in price hikes to pass on ~58% increase in workers' wages affected margins (-260 bps).
Why EW: On the one hand, the recent launch of the hair color business has been very successful. This is a high-margin category that allows GCPL to reinvest part of the gross margin flexibility in driving volume growth in the domestic business. On the other hand, valuations are not favorable even for the strong growth franchisee that GCPL is. We remain particularly concerned about elevated earnings expectations amidst relatively low return ratios in the international business and higher volatility thereon.
Key Positives: 1) Strong domestic revenue growth of 19%, driven by hair color (32%), household insecticides (24%) and soaps (13%). 2) Consolidated gross margins expanded by 220 bps, led primarily by product mix improvement in the domestic business. 3) Strong local currency performance in the international business with LatAm (+31%), Africa (+58%) and Indonesia (+21%).
Key Negatives: GCPL reported consolidated operating profits 5% below estimates, led by higher staff costs (up 110bps) and advertisement expenses (up 270bps). According to management, Africa business margins (-570 bps) were affected by 1) store rationalization in Kinky and 2) depreciation of SAR against USD. In Indonesia, contract manufacturing of divested foods business at break-even margins and lag in price hikes to pass on ~58% increase in workers' wages affected margins (-260 bps).
Why EW: On the one hand, the recent launch of the hair color business has been very successful. This is a high-margin category that allows GCPL to reinvest part of the gross margin flexibility in driving volume growth in the domestic business. On the other hand, valuations are not favorable even for the strong growth franchisee that GCPL is. We remain particularly concerned about elevated earnings expectations amidst relatively low return ratios in the international business and higher volatility thereon.
No comments:
Post a Comment