RESULT UPDATE 1st August, 2017
Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 India Equity Institutional Research II Result Update Q1FY18 II 1st August, 2017 CMP INR 1,035 Target INR 1,120 Potential Upside 8.2% Market Cap (INR Mn) 7,04,873 Innovation of products remains the key driver Recommendation Accumulate Sector FMCG 2 Result highlights GCPL Ltd. reported Q1FY18 revenue of INR 22,712.4Mn with growth of 3.5% yoy and de-growth of 8.8% qoq, which was in-line with our expectation. While the India Business recorded sales growth of 6% YoY with flat volume growth. The International business sales grew by 11% YoY on a constant currency basis. EBITDA for Q1FY18 was at INR 3,497.7 Mn, witnessed decline in margin by 206bps YoY and 652bps qoq on consolidated basis mainly due to higher spends in advertisements and marketing and higher excise duty. PAT for Q3FY17 was at INR 2325.7Mn with margins of 9.9% which has decreased by 132bps y-o-y and 566bps q-o-q. GCPL declared Bonus issue 1:1. Therefore its equity is 681.2 Mn from 340.6 mn shares. MARKET DATA Shares outs (Mn) 681 EquityCap (INR Mn) 681 Mkt Cap (INR Mn) 704873 52 Wk H/L (INR) 1084/643 Volume Avg (3m K) 769.0 Face Value (INR) 1 Bloomberg Code GCPL IN SHARE PRICE PERFORMANCE 140 120 100 80 Sensex GCPL MARKET INFO SENSEX 32515 NIFTY 10077 Key Financials - Consolidated Particulars (INR Mn) FY15 FY16 FY17 FY18E FY19E Net Sales 82,763.6 87,530.6 96,088.0 104,110.5 113,061.1 EBITDA 13,653.1 16,358.2 19,134.0 21,655.0 22,951.4 PAT 9,071.2 8,276.1 13,040.8 14,880.5 16,323.9 EPS 26.6 24.3 38.3 21.9 24.0 OPM 16.5% 18.7% 19.9% 20.8% 20.3% NPM 11.0% 9.5% 13.6% 14.3% 14.4% Sales in Line while Margins below expectation: In Q1FY18 GCPL has recorded consolidated net sales of INR 22,666.9 Mn with a growth of 3.4% YoY and de-growth of 8.6% QoQ; the India business reported net sales of INR 11,961.6 Mn which grew by 5.4% YoY and de-grew by 11.7% QoQ. This decline in sales was mainly due GST led cautiousness in trade during the month of June 2017, the destocking of inventories by stockiest and dealers and discounts in trade has resulted in subdued top line during the quarter; however, despite of GST disruption all the major segments of India Business has performed well on YoY basis, the Home Insecticide (HI) business being the major segment of GCPL witnessed a soft quarter mainly because of low demand due to weak season and hot weather across India and grew by 4% YoY, while Soaps and Hair care segment registered midsingle digit growth on YoY basis, the branded products has reported double digit growth of 20% YoY due withdrawal of promotions. During the quarter International business reported net sales of INR 10,954.1 Mn and delivered organic constant currency sales growth of 7% mainly driven by Africa and Europe. Africa business has reported net sales of INR 5,122.6 Mn with a growth of 12.9% YoY, 4.7% QoQ and 26% YoY on constant currency basis, the growth was mainly led by hair segment and the darling brand which delivered double digit growth during the quarter. The Indonesia business reported net sales of INR 3,228.8 Mn which declined by 14.2% YoY and 17.1% QoQ mainly due to higher sales promotion spends and around 10% lesser trading days due to Lebaran festival holidays in June 2017. Margins impacted due to Higher Advertisement Spends and Excise Duty: On the margin front GCPL has underperformed our expectations. EBITDA for Q1FY18 on consolidated basis was INR 3,497.7 Mn with margin of 15.4% which decreased by 206 bps YoY and 652 bps QoQ; the EBITDA in Q1FY17 de-grew by 8.7% YoY and 35.9% QoQ mainly due to high expenditure in advertisement and marketing promotions and high excise duty. During Q1FY18, the Domestic business EBITDA margin declined by 160 bps YoY, while for International business the Adjusted EBITDA margin declined by 250 bps YoY. The EBITDA margin for Indonesia, Africa and LATAM declined by 390 bps, 80 bps, 610 bps, 590 bps respectively on YoY basis due higher promotional spend, in response to intense competition, while the EBITDA margin for Europe improved by 260 bps YoY. Consolidated PAT for Q1FY18 was at INR 2,325.7 Mn with margins of 9.9% which has decreased by 132 bps YoY and 566 bps qoq. During the quarter PAT de-grew by 8.6% YoY and by 41.9% qoq. PAT of India Business during the quarter declined by 2% and that of International business declined by 13% on YoY mainly due to higher expenditure on sales promotions, marketing and advertisement in India as well as in International markets. SHARE HOLDING PATTERN (%) Particulars Jun 17 Mar 17 Dec 16 Promoters 63.27 63.27 63.27 FIIs 28.01 28.43 28.42 DIIs 2.15 2.16 2.11 Others 6.57 6.15 6.21 Total 100 100 100 8.1% 15.8% PAT CAGR between FY15 and Revenue CAGR between FY15 and FY19E FY19E
Valuations & Views: With GCPL, we anticipate increase in top line due to increase in penetration of Home Insecticide products, strong brand positioning, innovation and new product launches, which were favorably received by the market. We also believe that GCPL would see improvement in margins because of implementation of some of the cost saving projects. In addition to these, GCPL has strong balance sheet with ROE of 25% and D/E of 0.8x. Further, we expect with improvement in consumer demand and revival in economy, innovative products in different markets, etc will lead to growth in GCPL s top line of around 8-9% and bottom line of around 9-10%. At CMP of INR 1,035, the stock is trading at P/E of 46.7x for FY19E, we rate the stock with an ACCUMULATE rating with a target price of INR 1,120 representing an upside of 8.2%. 3 Q1FY18 Result Snapshot Exhibit 1: Quarterly Income Statement Consolidated (INR Mn) Particulars (INR Mn) Q1FY18 Q4FY17 Q1FY17 Q-o-Q Y-o-Y Net Sales 22,666.9 24,801.7 21,916.4-8.6% 3.4% Other operating income 45.5 93.2 25.5-51.2% 78.4% Net Sales & Other Operating Income 22,712.4 24,894.9 21,941.9-8.8% 3.5% Total Expenditure 19,214.7 19,437.0 18,110.0-1.1% 6.1% (Increase) / Decrease In Stocks -276.5 397.9-1,709.3-169.5% 83.8% Purchase of Finished Goods 1,525.0 1,100.9 1,204.5 38.5% 26.6% Cost of Raw Materials 8,884.6 8,838.4 10,331.1 0.5% -14.0% Operating & Manufacturing Expenses 4,772.1 5,028.0 4,188.6-5.1% 13.9% Employee Cost 2,403.7 2,520.8 2,415.7-4.6% -0.5% Selling & Distribution Expenses 1,905.8 1,551.0 1,679.4 22.9% 13.5% EBIDTA 3,497.7 5,457.9 3,831.9-35.9% -8.7% EBITDA Margins (%) 15.4% 21.9% 17.5% -652bps -206bps Depreciation 373.6 369.1 326.8 1.2% 14.3% EBIT 3,124.1 5,088.8 3,505.1-38.6% -10.9% Other Income 236.5 257.0 140.6-8.0% 68.2% Foreign Exchange -3.4-43.9 9.3-92.3% -136.6% Interest 397.1 379.3 326.5 4.7% 21.6% PBT 2,960.1 4,922.6 3,328.5-39.9% -11.1% Tax 634.4 1,119.0 770.1-43.3% -17.6% PAT 2,325.7 3,803.6 2,558.4-38.9% -9.1% PAT Margin (%) 10.2% 15.3% 11.7% -504bps -142bps Exceptional Item -75.2 72.5-94.9-203.7% 179.2% PAT After exceptional item 2,250.5 3,876.1 2,463.5-41.9% -8.6% PAT Margin (%) 9.9% 15.6% 11.2% -566bps -132bps EPS 3.3 5.7 3.6-41.9% -8.6% Exhibit 2: Segmental Revenue (INR Mn) Geography-wise Revenue Break-up (INR Mn) Q1FY18 Q4FY17 Q1FY17 QoQ (%) YoY (%) India 11,961.6 13,546.2 11,353.9-11.7% 5.4% Indonesia 3,228.8 3,893.4 3,762.0-17.1% -14.2% Africa 5,122.6 4,891.6 4,538.3 4.7% 12.9% Others 2,602.7 2,989.6 2,539.3-12.9% 2.5% 22,915.7 25,320.8 22,193.5-9.5% 3.3% Less: Inter Segment eliminations -203.3-425.9-251.6-52.3% -19.2% Total 22,712.4 24,894.9 21,941.9-8.8% 3.5%
Q1FY18 Concall Highlights: 4 For GCPL Innovation and new product launches remains the key driving factor for coming quarters despite of GST disruption and destocking. The management expects modest growth of top line till Q2FY18 due to GST. The primary sales of India business grew by 6% on YoY basis, the growth was mainly due price increase and withdrawal of promotions while volume growth was flat during the quarter. There was decline of 100 bps in EBITDA of India business due to higher spend on marketing and advertisement and higher excise duty, the management expects the investment is ad spend will yield benefits for quarters ahead. Also there was a strong growth in modern trade on the back of good incentives provided to the dealers by GCPL and around 2/3 rd wholesaler are back on track post GST implementation. The Home Insecticide (HI) segment in India has witnessed relatively soft performance during the quarter mainly due to the seasonality of the category and GST disruption. However, the management believes that penetration and consumption level has quite good amount of head room for further growth. So far the category has grown by 9-11% in last two years, GCPL has around 50-55% market share in the category. With its market leader ship and new launches in the category the management expects mid double digit growth during FY18E. The Hair care segment of India business continues to post double digit volume growth, while the primary sales growth in the category was 5% YoY. Godrej Expert Rich Crème continues to consistently deliver double-digit volume growth, GCPL has gained market share and also increased its penetration level in the category. The category will attract 28% tax rate under the new GST regime. GCPL is planning to enter Professional Hair care market in India. Hair care market in India is estimated to be around INR 3,500 Cr. and GCPL is the strongest player in Non-Professional hair segment with brands like Expert, Bblunt, Nupur and Renew, it has a market share of around 25% of the total hair care market. GCPL is planning to increase its market share in the Professional Hair Care segment by adding around 40 Stock Keeping Units (SKUs) in the total product portfolio including 21 shades in hair colour, colour lock shampoos and conditioners and high-end serums. The total market size of professional hair care in India is estimated to be around INR 1,200 Cr. of which professional hair colour market is estimated to be around INR500 Cr. and GCPL is targeting to grab around 10% market share in the professional hair care segment. The company expects the revenue share from hair care segment to increase from 13% to 20%. After almost 4 to 5 quarters GCPL has witnessed recovery in consumer demand especially in soap segment. Primary sales in the category grew by 7% during the quarter mainly due to price increase and withdrawal of consumer offers. Even after passing the benefits of GST to consumers by reducing the prices of soaps there was net increase in prices on YoY basis backed by lower input cost. The category will attract 18% tax rate under the new GST regime. International business delivers organic constant currency sales growth of 7% driven by Africa and Europe. Adjusted EBITDA margin of 14.8% declines 250 bps YoY. The Indonesia business had a weak performance during the quarter, the constant currency sales decline by 10-11%. The sales growth was impacted due to high expenditure on sales promotion in HI segment due to significant ram-up in promotional activity by competition in Indonesia; looking at attractive innovation and new launches the management expects to continue to gain market share in many brands in Indonesia. Also the sale was impacted due to around 10% lesser trading days due to Lebaran festival holidays in June 2017. However, recovery from recession and slight improvement in economy has been witnessed in Indonesia during the quarter. The Africa business remains the strongest business for GCPL in the international market. It has posted a double-digit growth of 26% on constant currency basis which was led by strong performance by Hair care segment in the region. Adjusted EBITDA margin declines by 80 bps YoY due to upfront investments in scaling up wet hair care. The Wet hair care category contributes around 43% to the total product portfolio and rest is contributed by dry hair products. The LATAM also had a soft quarter with constant currency sales growth of 4%. Adjusted EBITDA margin declines by 610 bps y-y due to scale de-leverage in Chile, upfront A&P investments and higher G&A expenses in Argentina. While the Europe had a good quarter with constant currency sales growth of 24% led by strong growth in branded product portfolio. Adjusted EBITDA margin increases by 260 bps y-y driven by positive operating leverage. The management also thrives to work hard to improve the margins during FY18E and it expects to keep the EBITDA growth ahead of sales growth by the end of FY18E.
5 Key takeaways from AGM Meeting Management remained optimistic on the growth of GCPL in FY16-17, on back of top line growth of 10% and EBIDTA and PAT margins at around 20% and 13.6% respectively. It delivered ROE and ROCE of around 27.2% and 16.6% respecively. In FY16-17, with demonetization, company had face slow down but everything was recovered in Q3FY17 which had helped to post better results and growth in the company. Management mentioned that its strategy was investment behind its brands and innovating products according to the demand, (which could be different from country to country). It also believed that GCPL is far more better and different in terms of products and geographical expansion (Domestic and internationally) from its competitors like Patanjali. With implementation of GST it has faced slow-down in June quarter due to de-stocking of goods but going ahead after Q2FY18 it expects recovery and remains positive on GST. It also believes that GST will lead to growth for whole consumers sector with improvement in logistics and supply chain management. GST rates for Soaps remains at 18% while for Hair care it is around 28% Exhibit 3: Geography-wise distribution FY16-17 FY16-17 International 48.0% Domestic 52.0% Africa 21.0% India 52.0% Indonesia 16.0% Latin America 6.0% UK 4.0% Others 1.0% Exhibit 4: Segment wise distribution FY16-17 House hold Insecticides 30.0% Personal Wash 17.0% Air care 7.0% Hari Care 31.0% Others 15.0%
Exhibit 5: Income Statement Consolidated 6 INR Mn FY15 FY16 FY17 FY18E FY19E Total Revenue from Operations 82,763.6 87,530.6 96,088.0 104,110.5 113,061.1 Cost of Materials Consumed 33,707.5 34,577.8 38,019.1 40,603.1 45,224.4 Purchase of Stock-in-Trade 4,357.3 5,013.6 4,639.4 4,789.1 5,200.8 Changes in Inventory 350.4-919.0-1,333.3-1,457.5-1,582.9 Cost of Goods Sold 38,415.2 38,672.4 41,325.2 43,934.6 48,842.4 % of Revenue 46.4% 44.2% 43.0% 42.2% 43.2% Employee Benefits Expense 7,769.5 9,441.3 9,884.6 10,411.1 11,306.1 % of Revenue 9.4% 10.8% 10.3% 10.0% 10.0% Other Expenses 22,925.8 23,058.7 25,744.2 28,109.8 29,961.2 % of Revenue 27.7% 26.3% 26.8% 27.0% 26.5% Total Expenses 69,110.5 71,172.4 76,954.0 82,455.5 90,109.7 % of Revenue 83.5% 81.3% 80.1% 79.2% 79.7% EBITDA 13,653.1 16,358.2 19,134.0 21,655.0 22,951.4 EBITDA Margin 16.5% 18.7% 19.9% 20.8% 20.3% Other Income 915.1 839.0 753.0 840.9 1,719.0 Depreciation and Amortization Exps 907.8 1,006.3 1,415.7 1,536.3 1,670.0 EBIT 13,660.4 16,190.9 18,471.3 20,959.7 23,000.4 EBIT Margin 16.5% 18.5% 19.2% 20.1% 20.3% Foreign Exchange Gains/Losses - - -156.8-104.1-113.1 Finance Costs 1,001.5 1,001.7 1,452.2 1,910.3 2,103.4 EBT before exceptional items 12,658.9 15,028.2 16,862.3 19,409.2 21,147.6 Exceptional Items -171.7-3,335.1 0.8 0.0 0.0 EBT after exceptional items 12,487.2 11,665.7 16,863.1 18,945.3 20,783.9 Total Tax Expenses 2,722.9 3,360.5 3,791.6 4,073.2 4,468.5 Share of P&L in Associate Companies 0.4 1.0 8.2 8.5 8.5 Minority Interest -693.5-30.1-38.9 0.0 0.0 PAT for the year 9,071.2 8,276.1 13,040.8 14,880.5 16,323.9 PAT Margin 11.0% 9.5% 13.6% 14.3% 14.4%
Exhibit 6: Balance Sheet - Consolidated 7 INR Mn FY15 FY16 FY17 FY18E FY19E EQUITY AND LIABILITIES Shareholders funds Share Capital 340.4 340.5 340.6 681.2 681.2 Reserves and Surplus 42,766.5 42,429.3 52,678.8 61,959.5 73,159.6 Net Worth 43,107.0 42,769.8 53,019.4 62,640.7 73,840.8 Minority Interest 1,620.3 0.0 0.0 0.0 0.0 Non-Current Liabilities Long-Term Borrowings 20,230.3 24,490.3 40,194.9 44,857.3 50,219.0 Deferred Tax Liabilities (Net) 31.3 2,111.7 2,924.9 2,924.9 2,924.9 Other Long-term Liabilities 41.2 671.9 10.5 10.5 10.5 Long-Term Provisions 263.4 347.6 397.8 416.4 452.2 Total 20,566.2 27,621.5 43,528.1 48,209.1 53,606.7 Current Liabilities Short-Term Borrowings 1,466.6 1,818.9 12,551.9 13,179.5 13,838.5 Trade Payables 10,869.4 14,850.8 17,239.0 12,638.7 14,050.6 Other Current Liabilities 12,813.1 9,772.4 3,070.5 4,485.7 5,021.9 Short-Term Provisions 976.8 703.9 904.3 1,093.6 1,009.5 Total 26,125.9 27,146.0 33,765.7 31,397.5 33,920.4 Total 91,419.4 97,537.3 130,313.2 142,247.3 161,367.9 ASSETS Fixed Assets Tangible Assets 5,581.1 8,470.9 9,425.8 9,388.4 9,347.2 Intangible Assets 9,487.9 9,419.6 24,777.5 25,643.2 26,552.3 Capital Work-in-Progress 2,246.1 436.6 1,035.0 3,011.8 1,011.8 17,315.1 18,327.1 35,238.3 38,043.4 36,911.3 Goodwill on Consolidation 40,440.5 41,423.6 46,625.6 46,534.6 46,543.1 Non-Current Investments 343.1 561.5 2,763.8 2,517.5 2,517.5 Deferred Tax Assets (Net) 343.4 749.9 962.8 962.8 962.8 Long-Term Loans and Advances 2,081.1 327.4 445.2 570.7 553.7 Other Non-Current Assets 0.6 1,219.8 2,171.0 2,106.1 2,106.1 Current Assets 60,523.8 62,609.3 88,206.7 90,735.1 89,594.4 Current Investments 1,513.8 1,545.5 6,817.9 6,817.9 6,817.9 Inventories 10,717.1 13,069.8 14,125.0 14,444.3 16,057.8 Trade Receivables 8,045.8 11,180.1 10,287.4 11,409.4 12,390.3 Cash and Cash Equivalents 8,942.2 7,537.9 9,126.6 16,248.2 33,825.5 Short-Term Loans and Advances 1,600.9 93.1 263.1 1,041.1 1,130.6 Other Current Assets 75.8 1,501.6 1,486.5 1,551.4 1,551.4 30,895.6 34,928.0 42,106.5 51,512.3 71,773.4 Total 91,419.4 97,537.3 130,313.2 142,247.3 161,367.9 Note: The company has declared bonus issue of 1:1. The bonus shares will be issued 2 months after the Boards approval (after 9 th July, 2017). We have projected the change in share equity for FY18 & FY19 and accordingly we have increased the number of shares from 340.6 Mn shares to 681.2 Mn shares. However, we have not considered the price effect at this point in time, post the bonus issue there will be correction in the price and would consider it from Q1FY18.
8 Exhibit 7: Cash flow statement - Consolidated INR Mn FY15 FY16 FY17 FY18E FY19E PBT 12,658.9 15,000.8 16,862.3 18,945.3 20,783.9 Depreciation 907.8 1,006.3 1,415.7 1,536.3 1,670.0 Interest 1,001.5 1,190.1 1,910.3 1,910.3 2,103.4 Tax -2,573.3-3,360.3-4,072.9-4,073.2-4,468.5 Changes in WC -974.7-4,645.3 3,563.0-4,777.8-144.1 CF from Operations 10,045.7 8,473.7 18,049.9 12,699.9 18,225.7 CF from Investing -12,138.1-6,022.5-21,697.6-3,254.1 1,181.1 CF from Financing -120.4-2,024.7 6,646.5-2,148.0-1,829.6 Change in Cash -2,212.8 426.5 2,998.8 7,297.7 17,577.3 Exhibit 8: Ratio Analysis - Consolidated INR FY15 FY16 FY17 FY18E FY19E EPS (Rs.) 26.6 24.3 38.3 21.9 24.0 DPS (Rs.) 5.5 5.5 5.8 6.0 6.3 BVPS (Rs.) 126.6 125.6 155.7 92.0 108.4 PE (x) 39.1 55.0 43.8 47.5 43.3 P/BV (x) 8.2 10.6 10.8 11.3 9.6 EV/EBITDA (x) 26.9 29.0 32.1 34.5 32.1 EV/Sales (x) 4.4 5.4 6.4 7.2 6.5 EBITDA Margin (%) 16.5% 18.7% 19.9% 20.8% 20.3% EBIT Margin (%) 16.5% 18.5% 19.2% 20.1% 20.3% Net Profit Margin (%) 11.0% 9.5% 13.6% 14.3% 14.4% Dividend Payout ratio (%) 20.6% 22.6% 15.0% 27.5% 26.1% Net Debt/Equity 0.3 0.4 0.8 0.7 0.4 RoE (%) 22.4% 19.3% 27.2% 25.7% 23.9% RoCE (%) 17.3% 17.0% 16.6% 14.5% 14.0%
9 Rating Legend Date CMP (INR) TP (INR) Recommendation Our Rating Upside 1-Aug-17 1,035 1,120 ACCUMULATE Buy More than 15% 12-July-17 971 1,120 ACCUMULATE Accumulate 5% 15% 10-May-17 1,929 2,090 ACCUMULATE Hold 0 5% 12-Apr-17 1,677 1,930 BUY Reduce -5% 0 Note: Bonus issue 1:1 in July 2017 Sell Less than 5% CERTIFICATION: I, Nirvi Ashar (B.com, MBA), research analyst, & Kunal Jagda (B.com, MBA), research associate, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. 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