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Godrej Consumer Products Ltd.
Earnings momentum continues to pick up; Buy
„Dec Q profit Rs1.2bn, up 45% yoy; Maintain Buy
GCPL reported yet another strong quarter after consolidation of acquisitions.
Sales growth of 90% yoy was in line with estimate though higher A&P spends and
overheads led to higher than expected margin decline of 210bp. Gross margin fell
only 60bp which was a positive given rising input costs. We tweak our estimate by
2-5% to factor in slower recovery in domestic business and higher integration
costs for international acquisitions. But maintain Buy with revised PO of Rs460 as
earnings trajectory still remains strong with EPS CAGR of 32% over FY10E-12E.
Domestic business turnaround slower than expected
Soaps reversed declining trend with a slower than expected 6% yoy growth. We
expect pick up going forward with support from rural demand and price hikes. Hair
color growth at 9% was also below expectations. Market share drop for both
Soaps and Hair Colors is also cause for concern as it indicates slowdown at both
primary and tertiary levels. We have cut our domestic sales est by 2% and
EBITDA est by 3-6% over FY11-12E on slower recovery at higher A&P cost.
Godrej Household products strong performance continues
GHPL sales grew 24% yoy led by new product launches and rising demand from
disease threat in India. Our confidence on 25% sales growth and EBITDA margin
of 21-22% is reaffirmed post this strong performance. Also encouraging is strong
gain in market share which has gone up to 37%, a gain of 310bp yoy.
New international acquisitions growing well
Megasari, largest international business of GCPL has done well with in line growth
of 20% yoy with 19-20% margin levels. Also, overall African and LatAm business
has shown QoQ improvement in both sales and profitability levels as integration
and stabilization is making progress. However, Keyline and Rapidol had weak
growth on tough market conditions and unfavorable currency move.
Dec Q continues ramp up in growth
GCPL continued its strong growth in Dec Q as well with a 45% yoy growth in
profits. This was led by a strong 90% yoy growth in sales which was in line with
our expectations. However, margin pressures continued as rising input costs,
higher A&P spends in both domestic and international business and integration
and overhead costs led to 210bp decline. As expected, interest costs continued to
rise on leveraging of balance sheet for recent acquisitions.
Domestic business turnaround slower than expected
Domestic soaps business grew 6% yoy. This marked a strong turnaround vs 10%
decline seen in 1H. However, it missed our expectations of a much stronger
turnaround as we expected trade inventory filling up to support consumer
demand. We do expect improvement in domestic business to continue as rural
demand picks up and there is pricing support going forward.
Hair color growth of 9% was disappointing as well. Given strong focus by Godrej
on this category and rise in consumer demand, we expect the category to grow at
least in mid-teens.
Godrej Household Products continues to shine
GHPL grew 24% yoy during Dec Q. This is in line with our expectations of a 25%
sales growth and maintenance of 20% EBITDA margin for the household
insecticides business of the company. New launches and strong A&P support
continues to drive the performance of this division.
Market share gains are a mixed bag
Market shares across both Soaps and Hair Colors were down marginally during
the quarter. This is a cause for concern as combined with weak sales growth, this
indicates slowdown at both primary and tertiary levels. On the positive side is the
strong 310bp gain in margins for GHPL which mirrors the strong growth reported
by the division.
Margin pressure to continue on input costs and A&P spends
EBITDA margin declined 210bp vs our estimates of 120bp decline. This was on
higher than expected hit from A&P spends which remained high in both domestic
and international operations. This hit the margins by 230bp. Gross margin hit of
60bp was a positive surprise given sharp jump in input costs. Though GCPL does
have cushion of exceptionally high staff costs of last year, we believe high A&P
spends and rising input costs will continue to create pressure on margins.
Growth of existing international operations weak
Keyline, the UK business of GCPL declined 12% during the quarter on high base
of last year, weak market conditions and Re appreciation. Also, the existing South
African business had a flat growth on slowdown in economic conditions of the
country. We expect growth to return in African business once economic
conditions revive and synergies with Tura start to flow in.
New acquisitions – performance shows improvement
The largest international business – Megasari continued to do well with what we
believe to be a 20%+ growth and 19-20% EBITDA margin. Also, sequentially the
other two recent acquisitions – Tura and Issue appear to have shown
improvement with both Sales and EBITDA showing QoQ rise. With integration
and stabilization making progress, we expect such improvement to continue.
Price objective basis & risk
Godrej Consumer Products Ltd. (XGOCF)
Our preferred valuation methodology is a target P/E multiple on one year forward
EPS. Our target multiple for Godrej is 24x, which on FY12E EPS of Rs19.3 gives
us our price objective of Rs460. Our target multiple is at 10pc premium to the
FMCG universe and last 5-year trading multiple for Godrej. We believe this
premium is justified given expected stronger earnings CAGR of 32pc over FY11-
12E. Upside risks are better than expected top-line growth, higher synergies from
international acquisitions. Downside risks are lower than expected margin
expansion on rising palm oil prices and low visibility on performance of
international business.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Godrej Consumer Products Ltd.
Earnings momentum continues to pick up; Buy
„Dec Q profit Rs1.2bn, up 45% yoy; Maintain Buy
GCPL reported yet another strong quarter after consolidation of acquisitions.
Sales growth of 90% yoy was in line with estimate though higher A&P spends and
overheads led to higher than expected margin decline of 210bp. Gross margin fell
only 60bp which was a positive given rising input costs. We tweak our estimate by
2-5% to factor in slower recovery in domestic business and higher integration
costs for international acquisitions. But maintain Buy with revised PO of Rs460 as
earnings trajectory still remains strong with EPS CAGR of 32% over FY10E-12E.
Domestic business turnaround slower than expected
Soaps reversed declining trend with a slower than expected 6% yoy growth. We
expect pick up going forward with support from rural demand and price hikes. Hair
color growth at 9% was also below expectations. Market share drop for both
Soaps and Hair Colors is also cause for concern as it indicates slowdown at both
primary and tertiary levels. We have cut our domestic sales est by 2% and
EBITDA est by 3-6% over FY11-12E on slower recovery at higher A&P cost.
Godrej Household products strong performance continues
GHPL sales grew 24% yoy led by new product launches and rising demand from
disease threat in India. Our confidence on 25% sales growth and EBITDA margin
of 21-22% is reaffirmed post this strong performance. Also encouraging is strong
gain in market share which has gone up to 37%, a gain of 310bp yoy.
New international acquisitions growing well
Megasari, largest international business of GCPL has done well with in line growth
of 20% yoy with 19-20% margin levels. Also, overall African and LatAm business
has shown QoQ improvement in both sales and profitability levels as integration
and stabilization is making progress. However, Keyline and Rapidol had weak
growth on tough market conditions and unfavorable currency move.
Dec Q continues ramp up in growth
GCPL continued its strong growth in Dec Q as well with a 45% yoy growth in
profits. This was led by a strong 90% yoy growth in sales which was in line with
our expectations. However, margin pressures continued as rising input costs,
higher A&P spends in both domestic and international business and integration
and overhead costs led to 210bp decline. As expected, interest costs continued to
rise on leveraging of balance sheet for recent acquisitions.
Domestic business turnaround slower than expected
Domestic soaps business grew 6% yoy. This marked a strong turnaround vs 10%
decline seen in 1H. However, it missed our expectations of a much stronger
turnaround as we expected trade inventory filling up to support consumer
demand. We do expect improvement in domestic business to continue as rural
demand picks up and there is pricing support going forward.
Hair color growth of 9% was disappointing as well. Given strong focus by Godrej
on this category and rise in consumer demand, we expect the category to grow at
least in mid-teens.
Godrej Household Products continues to shine
GHPL grew 24% yoy during Dec Q. This is in line with our expectations of a 25%
sales growth and maintenance of 20% EBITDA margin for the household
insecticides business of the company. New launches and strong A&P support
continues to drive the performance of this division.
Market share gains are a mixed bag
Market shares across both Soaps and Hair Colors were down marginally during
the quarter. This is a cause for concern as combined with weak sales growth, this
indicates slowdown at both primary and tertiary levels. On the positive side is the
strong 310bp gain in margins for GHPL which mirrors the strong growth reported
by the division.
Margin pressure to continue on input costs and A&P spends
EBITDA margin declined 210bp vs our estimates of 120bp decline. This was on
higher than expected hit from A&P spends which remained high in both domestic
and international operations. This hit the margins by 230bp. Gross margin hit of
60bp was a positive surprise given sharp jump in input costs. Though GCPL does
have cushion of exceptionally high staff costs of last year, we believe high A&P
spends and rising input costs will continue to create pressure on margins.
Growth of existing international operations weak
Keyline, the UK business of GCPL declined 12% during the quarter on high base
of last year, weak market conditions and Re appreciation. Also, the existing South
African business had a flat growth on slowdown in economic conditions of the
country. We expect growth to return in African business once economic
conditions revive and synergies with Tura start to flow in.
New acquisitions – performance shows improvement
The largest international business – Megasari continued to do well with what we
believe to be a 20%+ growth and 19-20% EBITDA margin. Also, sequentially the
other two recent acquisitions – Tura and Issue appear to have shown
improvement with both Sales and EBITDA showing QoQ rise. With integration
and stabilization making progress, we expect such improvement to continue.
Price objective basis & risk
Godrej Consumer Products Ltd. (XGOCF)
Our preferred valuation methodology is a target P/E multiple on one year forward
EPS. Our target multiple for Godrej is 24x, which on FY12E EPS of Rs19.3 gives
us our price objective of Rs460. Our target multiple is at 10pc premium to the
FMCG universe and last 5-year trading multiple for Godrej. We believe this
premium is justified given expected stronger earnings CAGR of 32pc over FY11-
12E. Upside risks are better than expected top-line growth, higher synergies from
international acquisitions. Downside risks are lower than expected margin
expansion on rising palm oil prices and low visibility on performance of
international business.
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