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Q2FY11 revenue surpasses expectations, but margins decline
Godrej Consumer’s (GCPL) Q2FY11 revenues jumped 66% to INR 9.53 bn.
EBITDA increased 51% to INR 1.69 bn, while margins contracted 171bps. COGS,
A&P inflation and other expenses contributed 132bps, 143bps and 53bps
pressure to margins, respectively, which was marginally offset by 158bps dip in
staff expenses due to lower provision for variable remuneration. PAT increased
41% to INR 1.31 bn. Q2FY11 numbers are, however, not exactly comparable to
previous quarters because of international acquisitions and GHPL consolidation.
HI, hair color & international businesses on track
The company continues to enjoy market leadership in household insecticides
(HI) and hair colour markets in India. Goodknight and HIT continue to
outperform their respective categories on the back of their innovativeness.
International business revenues stood at INR 3.37 bn (PBT at INR 250 mn).
International business now accounts for ~35% of total consolidated revenues.
Soaps business sours
Aggression of HUL and ITC, food inflation and high base last year due to
restocking took a toll on GCPL’s soaps business (10% Y-o-Y decline in sales).
GCPL continues to be the second largest toilet soaps player with a market share
of 10.4% for Q2FY11. In our visit note “GCPL – increasing scale, reasonable
valuation”, dated July 14, 2010, we highlighted that the company has reduced
salience on personal wash (from 60% profitability contribution two years back to
20% now). The paradigm shift was visible in Q2FY11 itself, with sales in personal
wash reducing from 33% in Q1FY11 to 22% in Q2FY11. Since soaps contribution
to profitability is just ~20%, we do not see any major risk to the group’s
profitability from competitors.
Outlook and valuations: Attractive; maintain ‘BUY’
Although the numbers are not comparable, the company has shown robust
growth in HI and hair colour businesses, which are faster growing and offer
stable margins compared with soap business. GCPL’s strategy to reduce
dependence on soaps business is on track. Though there would be near-term
pressure on soap volumes, valuation are attractive at these levels. We maintain
‘BUY’ on GCPL and rate it ‘Sector performer’ on relative returns.
Key takeaways from Q2FY11 concall
Soaps business in India: 10% Y-o-Y decline in sales with no impact of price hike (in
Q1FY11, 9% Y-o-Y decline in primary sales for GCPL in terms of both volume and value).
Industry growth in Q2FY11 was 2% in volumes in 3% in price. Decline in sales for GCPL
is due to high food inflation, down-stocking initiative taken by GCPL to improve market
hygiene and high base last year due to restocking. However, as per GCPL, this initiative
is now done and stock levels are now comfortable. In H1FY10, there was a very high
base in soaps as there was re-stocking (in anticipation of high soap prices, stocks were
piled up). The company expects H2FY11 to see good recovery in sales.
Hair colour business in India: GCPL saw 12% volume growth and 20% in value in
Q2FY11. It is not unduly concerned with the entry of Emami. On the other hand, it
expects to benefit from entry of P&G, as GCPL does not really compete with the high end
products of P&G, while P&G’s entry is clearly negative for L’Oreal.
Household insecticides: The company saw 38% Y-o-Y growth in Q2FY11. Market share
for GHPL has improved by 350bps Y-o-Y (160bps Y-o-Y improvement in Q1FY11). This is
due to new innovations and better focus (Goodknight natural, low smoke coil, HIT and
aerosol) and withdrawal of promotions from one of the large competitors (Jyothy). All
segments have done well. This segment is closely linked to performance of monsoons
(which has been good as per the GCPL management). Aerosols and liquids are growing
very well. Top two key raw materials are synthetic and liquid vaporized (liquid solvent),
which are herbal based, and are likely to remain at current price levels.
Seasonality in household insecticides: Q2 and Q4 are better quarters with Q4 being
the best, while Q1 and Q3 are leaner.
Status on Ambipur: While Ambipur has been sold to P&G globally (accounting for 3-4%
of GHPL), there is no non-compete clause with GCPL. GCPL is likely to potentially bring
its brand from overseas acquisition to India in the next two quarters.
Price increase in soaps: The company has recently taken a mix of price increase and
grammage decrease. It is looking at some more price hike in soaps through a mix of
price increase and grammage decrease.
Food inflation: GCPL expects that with food inflation declining gradually (now to
~12%), its impact on soaps will come down in H2FY11.
South African business: The company slowed down (8% Y-o-Y growth) in South Africa
in Q2FY11 as the geography’s GDP contracted.
Nigerian business: In the Nigerian business, the company is looking at long-term
growth, and expects FY12 to be good. Company is investing in Nigeria to tap the largest
population country in Africa.
Indonesian business: Megasari has done better than expectation (sales growth of 20%
Y-o-Y), while Nigeria and Latin America have been below expectation in terms of profits
because of higher A&P investments in these markets.
Debtor levels: Debtor levels have shot up as modern trade has a higher component in
recent international acquisitions compared with Indian business which is cash and carry.
Tax rate: For standalone business it is likely to be ~20%, while for consolidated
business it could be ~22-23%.
Consolidated net debt: USD 350 mn international loan (long term in nature and
unlikely to come down over medium term as rate is quite low) and INR 2 bn in INR
(likely to come down) currently. Rate of interest for international loan is 150-175bps
over LIBOR.
Other highlights
In our visit note “GCPL – increasing scale, reasonable valuation”, dated July 14, 2010,
we highlighted that the company has reduced salience on personal wash (from 60%
profitability contribution two years back to 20% now) with full consolidation of new
international businesses and 100% share in GHPL. The paradigm shift was visible in
Q2FY11 result itself, with the salience on personal wash reducing from 33% in Q1FY11 to
22% in Q2FY11. Since, soaps contribution to profitability is just ~20%, we do not see
any major risk to the group’s profitability from ITC and other competitors.
EBITDA increased 51% to INR 1.69 bn, while margins contracted 171bps. COGS, A&P
inflation and other expenses contributed 132bps, 143bps and 53bps pressure to
margins, respectively, which was marginally offset by 158bps dip in staff expenses due
to lower provision for variable remuneration. PAT increased 41% to INR 1.31 bn.
Domestic business
GCPL flagged that FMCG sector continues to grow, but at a slower pace due to inflation
pressures. Growth predominantly is volume driven. Commodity prices are higher than
FY10, but lower than peak FY09 rates.
International business performance
International business revenues stood at INR 3.37 bn (PBT at INR 250 mn). International
business now accounts for ~35% of total consolidated revenues.
Asia (excluding India)
Megasari continues to enjoy its number two position in household insecticides markets
and leadership positions in air care and wipes markets in Indonesia. Megasari recorded
sales of INR 1.82 bn with EBITDA of INR 300 mn. EBDITA margins was 21% before
payment of Technical & business support fee to GCPL. Middle East business registered
sales of INR 40 mn.
Africa
Rapidol continues to enjoy its market leadership position in the ethnic hair colour
market in South Africa. Kinky’s retail business sales were lower due to lower retail
demand following the strike of government employees. Legal merger of Rapidol and
Kinky has been initiated. Sales stood at INR 440 mn and EBDITA stood at INR 60 mn for
Q2FY11.
Latin America
Sales of Latam business stood at INR 590 mn and EBDITA at INR 40 mn.
• Issue brand enjoys volume leadership in Argentina with 20% market share
• Argencos has a strong portfolio of brands in the hair care space
• Roby enjoys market leadership in hair styling sprays while ‘919’ occupies the midpremium
space
Other geographies
UK business revenues stood at INR 480 mn and EBDITA at INR 50 mn. The growth
deflated by around 8%, due to weak GBP. Sales (ex. cuticura, which had a high base
effect due to H1N1 last year) recorded good performance, despite tough environment in
European markets.
Investment Theme
GCPL boasts of a patented technology for PHDs that has helped it drive usage of hair
colours at the lower end of the market. The company also provides high-quality valuefor-
money soap brands, which has helped it garner market share. GCPL’s aggressive
stance to take its operations to the international platform has resulted in several
acquisitions in past three years. The company can be expected to benefit from its new
ventures, increasing consumer spending and inorganic growth, going forward.
Key Risks
GCPL’s ability to gain market share in its soap segment could be adversely impacted due
to right pricing by HUL especially of its low end soap brand, Breeze. Intensifying
competition could result in aggressive price war, which could impact GCPL’s pricing.
The entry of players such as L’oreal and Schwarzkopf has put pressure on GCPL’s hair
colour business because of which it has been losing market share at the top end of the
market. Entry of more foreign players could worsen the situation.
Some of the recent international acquisitions are still at the integration stages. GCPL
needs to successfully integrate these businesses to prove its execution capabilities.
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