Godrej Consumer Products – 2QFY2011 Result Update Angel Broking

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   Godrej Consumer Products  – 2QFY2011 Result Update

Angel Broking maintains a Neutral on Godrej Consumer Products.

Godrej Consumer (GCPL) posted modest set of numbers for the quarter though

below our estimates due to margin contraction. Consolidated top-line growth

came in strong at 66% yoy led by recent acquisitions; domestic revenue growth

stood at 32% yoy aided by full consolidation of GHPL. Earnings grew a modest

41% yoy, despite margin contraction aided by strong top-line growth. Post the

2QFY2011 results (first quarter of full consolidation of recent acquisitions), we

have marginally tweaked our numbers – 1) revised top-line upwards due to

significant traction in Megasari and GHPL revenues, 2) revised earnings

downwards to reflect higher staff costs, ad-spend and depreciation charges.

Recent acquisitions drive growth: GCPL reported strong top-line growth at 66%

yoy to `953cr driven largely by consolidation of recent acquisitions. Domestic

business (including GHPL’s additional 51% consolidation) registered a growth of

32% yoy to `619cr. Soaps registered ~10% yoy decline due to high base and

inventory de-stocking, and hair colour registered a bounce-back registering 21%

yoy growth during the quarter. International business revenues stood at `337cr,

registering whopping yoy growth of 205%. GCPL’s earnings registered a strong

growth of 41% yoy to `131cr (`93cr), despite margin contraction, aided by strong

top-line growth, 40% yoy growth in other income and lower-than-anticipated

jump in interest cost to `8.9cr (`2.6cr).

Outlook and Valuation: At the CMP of `424, the stock is trading at 23.4x

FY2012E earnings, which is at the upper band of its historical valuations. Hence,

owing to rich valuations and possible volatility in earnings due to uncertainty in

international business due to currency fluctuations, we maintain Neutral view on

the stock.

Investment Rationale

�� EPS accretive acquisitions to drive 32% CAGR in earnings over FY2010-12E:

Management has constantly re-iterated that all recent international acquisitions

have been EPS accretive and expect an addition of `60cr in PAT (post deduction

of interest cost) from these acquisitions over the mentioned period. Moreover,

consolidation of additional 51% stake in GHPL is also likely to be EPS accretive

by ~8-10% further boosting earnings. Over FY2010-12, we expect GCPL to post

32% CAGR in earnings (post dilution of ~5% owing to the recent QIP) driven

largely by consolidation of recent acquisitions.

�� Dependence on soaps to decline, home care to emerge as largest category:

Over FY2010-12, we expect contribution of soaps to total consolidated revenues

to decline from 42% to 23% and home care to increase from 23.5% to 51%

aided by consolidation of Megasari and additional 51% consolidation of GHPL.

We believe the shift in revenue mix is likely to help GCPL de-risk its dependence

on the highly competitive soaps market and increase focus on the high-margin,

high-growth insecticides business.

�� Synergistic benefits and cross-pollination opportunities hold upside risk: We

believe there exist significant synergistic benefits in terms of distribution and

supply chain networks through integration of GHPL, which is likely to reflect over

FY2011-12E. Moreover, GHPL’s strong presence in the South complements

GCPL’s strong presence in North India extremely well. Moreover,

cross-pollination opportunities from its recent international acquisitions hold

upside risks to our estimates.

Outlook and Valuation

Post the 2QFY2011 results (first quarter of full consolidation of recent acquisitions),

we have marginally tweaked our numbers – 1) revised top-line upwards for

significant traction in Megasari and GHPL revenues, 2) revised earnings downwards

to reflect higher staff costs, ad-spend and depreciation charges.

Over FY2010-12, we expect GCPL to post a strong CAGR of 45% in consolidated

revenues driven largely by consolidation of recent acquisitions. We have modeled in a

robust 29% CAGR in domestic revenues (driven by 100% consolidation of GHPL, expect

up-tick in soaps in 2HFY2011) and 100% CAGR in the international revenues. In terms of

margins, we have modeled in a 90bp contraction largely due to input cost pressure in

soaps and contribution from low-margin acquisitions of Tura, Issue and Argencos

(estimate ~15% OPM in these businesses). Hence, we expect GCPL to post a robust 32%

CAGR in earnings during the period (post the ~5% dilution owing to the recent QIP).

At the CMP of `424, the stock is trading at 23.4x FY2012E earnings, which is at the

upper band of its historical valuations. Hence, owing to rich valuations and possible

volatility in earnings due to uncertainty in the international business due to currency

fluctuations, we maintain Neutral view on the stock.