Godrej Consumer Products (Q1 FY15)

India Infoline News Service | Mumbai |

GCPL recorded slower ~10% yoy growth in revenues at Rs18.9bn during Q1 FY15 below our expectations of Rs19.8bn.

CMP Rs839, Target Rs916, Upside 9.2% 
  • GCPL recorded slower ~10% yoy growth in revenues at Rs18.9bn during Q1 FY15 below our expectations of Rs19.8bn mainly due to weakness in domestic business

  • Domestic FMCG revenues grew by mere 6% yoy to Rs9.8bn due to slower growth in household insecticide segment (impacted by delayed monsoon and capacity constraints) and weak 2% yoy growth in soaps segment. Hair colour segment recorded strong volume led 14% yoy growth

  • International business reported 14% yoy revenue growth at ~Rs9.2bn driven by strong growth in African and European businesses

  • OPM declined marginally by 50bps to 12.8% due to 100bps/60bps increase in raw material/ overhead cost respectively

  • We expect GCPL to witness a revenue/PAT CAGR of ~17%/18% respectively over FY14-16. Recommend Accumulate with 9-mth price target of Rs916

Result table
(Rs m) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Net sales 18,863 17,223 9.5 19,240 (2.0)
Other operating income 23 46 (51.1) 75 (70.0)
Total income 18,885 17,269 9.4 19,315 (2.2)
Material cost (7,628) (6,694) 14.0 (8,107) (5.9)
Purchase of FG (1,322) (1,314) 0.6 (1,126) 17.4
Personnel cost (1,814) (1,754) 3.4 (1,853) (2.1)
Advertising cost (2,502) (2,391) 4.7 (1,458) 71.6
Other overheads (3,201) (2,825) 13.3 (3,358) (4.7)
Operating profit 2,417 2,291 5.5 3,414 (29.2)
OPM (%) 12.8 13.3 (49) bps 17.7 (493) bps
Depreciation (221) (221) 0.0 (128) 72.7
Interest (254) (240) 5.6 (269) (5.6)
Other income 274 132 107.9 194 41.2
PBT 2,216 1,961 13.0 3,211 (31.0)
Tax (444) (338) 31.1 (737) (39.8)
Effective tax rate (%) 20.0 17.2 - 23.0 -
Other prov. / minority etc (139) (126) 9.6 (126) 10.4
Adjusted PAT 1,634 1,497 9.2 2,348 (30.4)
Adj. PAT margin (%) 8.7 8.7 (3) bps 12.2 (354) bps
Extra ordinary items (200) (170) 17.6 14 (1,485.4)
Reported PAT 1,435 1,327 8.1 2,363 (39.3)
Ann. EPS (Rs) 19.2 17.6 9.1 27.6 (30.4)
Source: Company, India Infoline Research

Revenue growth misses expectations

GCPL recorded slower ~10% yoy growth in revenues at Rs18.9bn during Q1 FY15 below our expectations of Rs19.8bn. GCPL’s domestic FMCG business registered mere 6% yoy revenue growth at ~Rs9.8bn due to slower growth in home insecticides and soaps segment. Home insecticides segment revenues grew by modest 9% impacted by delayed monsoons in Q1 while soaps segment recorded weak 2% yoy growth. Hair colours segment registered strong volume led 14% yoy revenue growth on a high base. International business reported 14% yoy revenue growth at ~Rs9.2bn driven by strong growth in African and European businesses.

Delayed monsoon impacts household insecticides segment performance

The key household insecticides (HI) segment registered a slower 9% yoy growth impacted by delayed monsoons, high base and capacity constraints. The management expects the growth to recover in Q2 FY15 as capacity constraints for Good Knight Fast card have been addressed and pickup in monsoon in July should boost growth. GCPL plans to grow 2x of the category growth in next 3-5 years as the under penetrated nature of the category coupled with the management’s willingness to look beyond mosquito repellents into other products such as anti roach gel would drive growth.

Soaps category witnessing pressure: hair colour segment records strong revenue growth

GCPL reported mere 2% yoy revenue growth and mid-single digit decline in volumes in the soaps segment due to sluggishness at the mass end of the market. Hair Colour segment though recorded strong 14% yoy growth despite a high base in Q1 FY14 led by strong performance of Godrej Expert Rich Hair Crème.


Business wise quarterly performance
Business Q1 FY14 (% yoy) Q2 FY14 (% yoy) Q3 FY14 (% yoy) Q4 FY14 (% yoy) Q1 FY15 (% yoy)
Domestic business 19% 14% 13% 12% 6%
Insecticides 24% 25% 8%+ 17%+ 9%
Soaps 13%+ (7% volume growth) 3%+ (4% volume growth) 6%+ (6% volume growth) 1%+ (4% volume decline) 2%+ (mid-single digit volume decline)
Hair Colours 32% 24% 37% 16% 14%
Liquid Detergents  NA NA 36% NA NA
           
International business 30%+ 33% 22% 12% 14%
Indonesia 17%+ 14%+ 18%+ 1%+ 10%+
Africa 49%+ 53%+ 29%+ 39%+ 17%+
Latin America 21%+ 19%+ 15%+ 5%+ -4%
Europe 59%+ 102%+ 124%+ 16%+ 42%+
Source: Company, India Infoline Research

African and European businesses drive international business revenue growth

International business reported 14% yoy growth in revenues at ~Rs9.2bn driven strong growth in African and European businesses, aided by inorganic growth.

  • Megasari in Indonesia (contributing ~45% to revenues) registered 10%+ yoy growth at ~Rs3.5bn. In constant currency terms the growth was 21% led by new product launches and distribution expansion. Operating margins expanded by 120bps aided by calibrated price hikes, favourable price mix, cost reduction measures.

  • Africa business (contributing ~25% to international business revenues) registered 17%+ yoy growth at ~Rs2.5bn (constant currency growth 12%) driven by strong performance of Darling business. Rapidol registered strong revenue growth in South Africa however its exports declined. GCPL expects the Kinky business to break-even toward the latter part of the year. EBITDA margins expanded by 100bps to 14% during the quarter.

  • Latin American business of GCPL, contributing ~20% to international business revenues recorded 26%+ yoy revenue growth in constant currency basis at ~Rs1.3bn driven by continuing market investments and market share gains. EBITDA margins however contracted by 210bps due to higher up-front marketing investments. The management expects margins to improve from current 9-10% to 14% over the next 24 months as streamlining of manufacturing facilities and sales structure yield results. The European business contributing ~6% to international business revenues registered strong 42% yoy growth at ~Rs1.6bn (constant currency terms 21%) driven by strong performance of Soft and Gentle brand.

Operating margins decline by 50bps to 12.8%

Operating margins declined by 50bps to 12.8% mainly due to 100bps and 60bps increase in raw material and overhead cost respectively. 60bps decline each in staff and advertising cost restricted further margin erosion. The management has guided adspend for FY15 to remain at ~10-10.5% of net sales. Further it expects cost savings of Rs2.5bn to accrue over the next 2-3 years.


Cost analysis
As a % of net sales Q1 FY15 Q1 FY14 bps yoy Q4 FY14 bps qoq
Material cost 40.4 38.8 163 42.0 (158)
Purchase of FG 7.0 7.6 (61) 5.8 117
Personnel cost 9.6 10.2 (55) 9.6 1
Advertising cost 13.2 13.8 (59) 7.5 570
Other overheads 17.0 16.4 59 17.4 (43)
Source: Company, India Infoline Research

Net profit in line with expectations

Net profit matched our expectations by recording 9.2% yoy growth at ~Rs1.8bn aided by higher other income (Rs274mn against Rs132mn in Q1 FY14). Adjusted net profit (after extraordinary items and minority interest) increased by 8.1% yoy to ~Rs1.4bn.

Expect ~17% revenue/PAT CAGR over FY14-16 … Recommend Accumulate

GCPL is transforming itself in to an emerging-market play on high growth categories such as home insecticides, hair extensions and hair colours. With healthy growth momentum in both domestic and international businesses, successful acquisitions, GCPL management is confident of achieving 26% revenue CAGR over the next 10 years. The cross-pollination opportunity of products across geographies and leveraging of front-ended A&P spends for new product launches will further drive growth. Slower growth in domestic business is however a cause to worry. We expect GCPL to witness ~17%/18% CAGR in revenues/net profit respectively over FY14-16. At the current market price of Rs839, the stock is trading at 26.8x FY16E EPS of Rs31.3. We recommend Accumulate rating on the stock with a 9-month price target of Rs916.


Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E
Revenues 63,997 75,826 86,654 1,03,552
yoy growth (%) 31.9 18.5 14.3 19.5
Operating profit 9,824 11,503 12,973 15,933
OPM (%) 15.4 15.2 15.0 15.4
Pre-exceptional PAT 6,672 7,539 8,569 10,667
Reported PAT 7,961 7,597 8,569 10,667
yoy growth (%) 9.5 (4.6) 12.8 24.5
EPS (Rs) 19.6 22.1 25.2 31.3
P/E (x) 42.8 37.9 33.3 26.8
Price/Book (x) 8.6 7.6 6.4 5.4
EV/EBITDA (x) 30.8 26.3 23.0 18.7
Debt/Equity (x) 0.7 0.6 0.5 0.5
RoE (%) 21.8 21.3 20.9 22.0
RoCE (%) 18.1 18.3 18.9 20.8
Source: Company, India Infoline Research


***Note: This is a NSE Chart

 

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