Godrej Consumer Products (Q4 FY14)

• GCPL recorded 12% yoy growth in revenues at Rs19.2bn during Q4 FY14 below our expectations of ~Rs20bn due to poor performance of soaps segment and sluggish growth in Indonesian business

• Domestic FMCG business registered 12% yoy revenue growth at ~Rs10.3bn led by healthy growth in hair colours and pick up in home insecticides revenues.

• International business reported 12% yoy revenue growth at ~Rs9.1bn driven by strong growth in African and European businesses

• Operating margins expanded by 150bps to 17.7% aided by 240bps decline in advertising cost

• We expect GCPL to witness a revenue/PAT CAGR of 17%/15% respectively over FY13-16. Maintain BUY with 9-mth price target of Rs916

Revenue growth marginally below expectations

GCPL recorded 12% yoy growth in revenues at Rs19.2bn during Q4 FY14 below our expectations of ~Rs20bn. GCPL’s domestic FMCG business registered 12% yoy revenue growth at ~Rs10.3bn led by healthy growth in hair colours (16% yoy) and pick up in home insecticides revenues which offset weak (1% yoy) soaps revenue growth.  International business reported 12% yoy revenue growth at ~Rs9.1bn driven by strong growth in African and European businesses.

Household insecticides segment growth back to normalcy

The FMCG business growth was primarily led by strong 17% yoy growth in the key household insecticides (HI) segment (well ahead of category growth). March quarter is the main season for HI sales. GCPL continues gain market share in the HI segment aided by success of Good knight Fast card and HIT Anti Roach Gel. The company has launched Good knight Xpress LV during the quarter which is expected to further drive growth.

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

GCPL reported mere 1% yoy revenue growth and 4% yoy decline in volumes in the soaps segment due to an extended harsh winter in northern India (GCPL doesn’t have a winter portfolio in soaps segment). The soaps category is witnessing a pressure with slowdown at the mass premium end of the category. The category de-grew in both value and volume terms in mid to high single digit respectively. Hair Colour segment though recorded strong 16% yoy growth led by strong performance of Godrej Expert Rich Hair Crème and Godrej Expert advanced hair colour (powder portfolio).

African and European businesses drive international business revenue growth

International business reported 12% yoy growth in revenues at ~Rs9.1bn driven by healthy growth in African and European businesses, aided by inorganic growth. Adjusting for one-off impact from adverse forex movement and low-margin food distribution sales in Indonesia, International business EBITDA grew by 36% yoy (revenues up by 17% yoy).

• Megasari in Indonesia (contributing ~45% to revenues) registered mere 5%+ yoy growth at ~Rs3.4bn impacted by adverse forex movement of ~7% and sluggish market environment. Adjusted for the divestment of Indonesia food business growth in constant currency terms stood at 12%. Operating margins (before payment of technical & business support fee and non food business) however contracted by 110bps to 18% (expanded by ~150bps qoq). With impact of price hikes kicking in yoy margin decline is narrowing down.

• Africa business (contributing ~25% to international business revenues) registered 39%+ yoy growth at ~Rs2.5bn (constant currency growth 33%) driven by strong performance of Darling business. Rapidol registered mid-20% yoy revenue growth during the quarter. GCPL has shut down 11 loss-making Kinky stores and expects this business to break even in latter part of the year. EBITDA margins expanded sharply by 850bps to 15%.

• Latin American business of GCPL, contributing ~20% to international business revenues recorded 5%+ yoy revenue growth at Rs1.5bn (constant currency growth of ~28%) driven by continuing market investments and market share gains. EBITDA margins expanded by 1,040bps to 20% (seasonally strong quarter) aided by better product mix and cost effectiveness program. The management targets to achieve ~15% margins in the next 18 months. The European business contributing ~6% to international business revenues registered 16% yoy growth at ~Rs1.2bn. However in constant currency terms, it degrew by 4% yoy. EBITDA margin contracted by 380bps to 9% due to higher adspend and a high base.

Lower advertising and overhead cost fuel margins by 150bps

Operating margins expanded by 150bps to 17.7% aided by 240bps/70bps decline in advertising and overhead cost. A 190bps increase in raw material cost (sharp rise in palm oil prices) restricted further margin expansion. 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.

Net profit in line with expectations

Net profit matched our expectations by recording 16.7% yoy growth at Rs2.5bn partly aided by improved operating efficiency. The growth could have been ever better but lower other income and higher tax outgo. Adjusted net profit (after extraordinary items and minority interest) declined by 29.3% yoy (on a high base) to ~Rs2.4bn.

Expect ~17%/15% revenues/PAT CAGR over FY13-16 … maintain BUY

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. The recent correction in stock price provides a good entry point. We expect GCPL to witness 16.9% / 15.1% CAGR in revenues / net profit respectively over FY13-16. At the current market price of Rs798, the stock is trading at 24.9x FY16E EPS of Rs32.1. We maintain Buy rating on the stock with a 9-month price target of Rs916.