BSE SENSEX S&P CNX 18,755 5,698 Bloomberg GCPL IN Equity Shares (m) 340.3 52-Week Range (INR) 745/370 1,6,12 Rel. Perf. (%) 4/17/67 M.Cap. (INR b) 246.4 M.Cap. (USD b) 4.6 5 November 2012 2QFY13 Results Update Sector: Consumer Godrej Consumer Products CMP: INR724 TP: INR722 Neutral Godrej Consumer Products' (GCPL IN) 2QFY13 consolidated EBITDA was 15% below estimates and Adj PAT missed estimates by 8% (INR1.6b v/s est INR1.75b). Consolidated sales grew 35% to INR15.95b (our est INR16.2b), driven by 24% organic sales growth and balance by acquisitions. Consolidated EBITDA margins disappointed at 15.3%, down 210bp YoY v/s our expectation of flat margins. Consolidated PAT growth of 25% was higher than the 18% EBITDA growth due to lower-than-expected interest costs and tax rate. India business reported sales of INR9.2b, up 19% YoY. Gross margins remained flat, while EBITDA margins declined 120bp to 16.3%, led by higher ad spend (up 100bp). Soaps reported 24% sales growth, household insecticides 20% (lower than its recent trajectory of 25% plus) and hair color 10%. International sales grew 63% YoY (organic growth of 32%) to INR6.8b and EBITDA was up 33% to INR973m. Megasari continued to post strong performance, with 37% YoY sales growth (26% in constant currency) and 19% EBITDA margins. We lower our estimate by ~2% to incorporate the EBITDA miss for the quarter. The stock trades at 32.8x FY13 EPS of INR22 and 26x FY14 EPS of INR27.8. We note GCPL's sustained share gains in HI in India and the continued robust performance in Indonesia (45% of international business). Decline in PFAD prices can provide tailwind benefits in 2H. However, valuations reflect positives, post the strong outperformance in CY12 (stock up 88%). Maintain Neutral. Gautam Duggad (Gautam.Duggad@MotilalOswal.com); +9122 3982 5404 Sreekanth P V S (Sreekanth.P@MotilalOswal.com); +9122 3029 5120 1 Investors are advised to refer through disclosures made at the end of the Research Report.
Consolidated sales growth in line with estimates; consolidated EBITDA margins down 210bp v/s est of flat margins Consolidated sales increased 35% to INR15.95b (est INR16.2b), led by 24% organic sales growth and rest by acquisitions (Darling, Cosmetica). Organic growth was driven by domestic HI business, toilet soaps and Megasari, which posted a strong 20%, 24% and 37% revenue growth respectively. Gross margins expanded 30bp YoY to 51.9%, while consolidated EBITDA margins declined 210bp YoY at 15.3%, mainly due to a 150bp increase in staff costs. Higher staff cost is due to Darling and Cosmetica acquisitions, where employee expenses are higher vis-à-vis other geographies. Consolidated EBITDA grew 18% to INR2.44b (our est INR2.86b), while PAT increased 25% due to higher other income and lower tax rates. Company booked MTM forex losses of INR76m on a consolidated basis and gain of INR8m on standalone entity. Minority interest declined from INR213m in 1QFY13 to INR83m due to special exemption benefits from Nigeria in 1QFY13. Indian subcontinent (56% of consolidated sales): sales up 19%; soaps volumes moderate to 6%; HI grows 20%; margins decline 120bp India business reported sales of INR9.2b, up 19% YoY. Gross profit at INR4.4b increased 19%. EBITDA margins declined 120bp YoY at 16.3% led by higher adspends. Adj PAT increased 17% on account of INR8m forex gain (INR85m loss in base) and 150bp lower tax rate, despite a steep increase in interest cost from INR26mn to INR47mn. Household insecticides (HI) maintained strong growth, with sales up 20% YoY, which was far ahead of category growth rates (1.5x category growth), though lower than its own impressive track record of 9 consecutive quarters of 25% growth. New media campaigns of Good Knight and HIT and distribution gains due to GCPL's rural network continued to drive performance. As per industry data, GCPL has gained 310bp market share in HI in YTD CY12 (till August). Toilet soap sales grew a healthy 24% YoY, with 6% volume growth, down from 19% in 1Q. According to management, the volume growth should revive post 3Q as it has recently relaunched Cinthol, with youth centric positioning. Company has gained 40bp market share in soaps in CY12 YTD, even as the category posted 20% plus growth. Hair color performance remained muted with 10% sales growth. During the quarter, GCPL entered into Crème Hair Color format under Expert brand. Management, during the conference call, indicated strong response to this launch with demand far exceeding supply in the initial stages. Hair color has remained a sore point for GCPL due to lack of presence in the premium segment, which is growing significantly higher than the powder portfolio. 5 November 2012 2
Consol EBIDA margins down 210bp to 15.3% Sharp decline in PFAD; tailwind for 2H Market share gains over different periods in 1H GCPL gained shares in 1H every year post CY09 GCPL gains 40bp share in Godrej no.1 in CY12 (YTD Aug) Soaps category growing at 20% plus in CY12 (YTD Aug) Source: Company, MOSL International business (~44% of consolidated sales): organic sales up 32%, margins decline across geographies International sales expanded 63% to INR6.8b, driven by 32% organic growth, which in turn was aided by currency depreciation. EBITDA grew 33% and margins declined 300bp to 12.9% driven by a sharp fall in Africa margins. Megasari sales (45% of international) grew 37% YoY (constant currency growth of 26%) to INR3.2b and EBITDA margins stood at 19%. Hit Magic Paper continued to do well and grabbed 8% market share. GCPL launched HIT one push aerosol during the quarter. 5 November 2012 3
Africa (24% of international sales, includes Rapidol, Kinky, Tura and Darling Group) reported sales of INR1.63b and EBITDA of INR261m (INR274m in 1QFY13), with EBITDA margins of 4%. GCPL has acquired 51% in Darling's Kenya operations in phase II and will consolidate 65% of Darling's revenues in 3Q (from 45% in 2Q). It launched household insecticides in Nigeria as a part of its cross-pollination strategy under Good Knight brand. Latin America sales (19% of international) grew 93% YoY to INR1.27b led by new product launches and Chile business consolidation. EBITDA margins declined sharply to 4% due to higher brand spends for new launches. It launched various personal care products under Villeneuve and Pamela Grant brands. Keyline sales of INR680m were up 29% (10% growth in constant currency). It reported 9% EBITDA margins. During the quarter, company launched the skin care range under Apri and shampoo and conditioners under Touch of Silver umbrella. Margins improve across regions; Darling takes Africa margins towards sustainable levels 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Net Sales (INR m) Indian Subcontinent 4,590 6,260 6,450 6,543 6,256 7,760 7,790 7,990 7,777 9,170 GCPL (Standalone) 3,174 3,120 3,421 3,033 3,714 3,711 3,717 3,497 4,523 4,526 Godrej Home Products 1,416 3,000 3,029 3,510 2,542 3,870 3,938 4,493 3,254 4,644 GHPL SL and Bangladesh 140 60 179 135 International 1,860 3,370 3,350 3,430 3,715 4,190 5,660 5,240 6,110 6,810 Africa 340 440 530 450 430 650 1,860 1,280 1,440 1,630 Latin America 120 590 630 640 560 650 820 820 1,080 1,270 Megasari 830 1,820 1,890 1,950 1,940 2,300 2,500 2,550 2,710 3,160 Keyline 570 480 300 390 670 530 430 480 730 680 Middle East 40 115 60 50 110 150 70 Total 6,450 9,630 9,800 9,973 9,971 11,950 13,450 13,230 13,887 15980 EBITDA (INR m) Indian Subcontinent 879 1,158 1,197 1,189 958 1,346 1,462 1,522 1,100 1,467 GCPL (Standalone) 621 618 624 NA NA NA NA NA NA NA Godrej Home Products 258 540 573 NA NA NA NA NA NA NA International 312 532 479 570 470 722 1,191 959 889 973 Africa 60 60 50 50 40 169 577 247 274 261 Latin America 8 40 60 90 10 48 74 134 32 51 Megasari 174 382 359 390 330 446 515 528 488 600 Keyline 70 50 10 40 90 58 26 50 95 61 Total 1,191 1,690 1,676 1,778 1,427 2,068 2,653 2,481 1,988 2440 EBITDA Margin (%) Indian Subcontinent 19.1 18.5 18.6 18.2 15.3 17.3 18.8 19.0 14.1 16.0 GCPL (Standalone) 19.6 19.8 18.2 NA NA NA NA NA NA NA Godrej Home Products 18.2 18.0 18.9 NA NA NA NA NA NA NA International 16.8 15.8 14.3 16.6 12.6 17.2 21.0 18.3 14.5 14.3 Africa 17.6 13.6 9.4 11.1 9.3 26.0 31.0 19.3 19.0 16.0 Latin America 7.0 6.8 9.5 14.1 1.8 7.4 9.0 16.3 3.0 4.0 Megasari 21.0 21.0 19.0 20.0 17.0 19.4 20.6 20.7 18.0 19.0 Keyline 12.3 10.4 3.3 10.3 13.4 11.0 6.0 10.5 13.0 9.0 Total 18.5 17.5 17.1 17.8 14.3 17.3 19.7 18.8 14.3 15.3 Source: Company, MOSL 5 November 2012 4
Valuation and view: Positive on HI business; valuations leave little room for error; Neutral We note GCPL's continued market share gains in HI category led by distribution synergies between GCPL and GHPL, and the accelerated investments behind marketing and innovative products. However, we believe most of the low hanging fruits have been plucked and thus incremental share gains will be gradual. Decline in PFAD prices augurs well for 2H gross margins. However, it raises the risk of higher competitive intensity from unbranded and regional players who have lost market shares in the past 24 months due to unfavorable operating dynamics arising from higher RM costs. We lower our estimate by ~2% to incorporate the EBITDA miss for the quarter. The stock trades at 32.8x FY13 EPS of INR22 and 26x FY14 EPS of INR27.8. Valuations reflect positives after strong outperformance in CY12 (stock up 88%). Maintain Neutral. 5 November 2012 5
Godrej Consumer Products: an investment profile Company description GCPL is the second largest player in the INR90b toilet Soap category, with a market share of ~10%. It is a market leader in the INR10b hair dye/color segment, with a market share of ~35%. Company's international business now constitutes 36% of consolidated revenues. Key investment arguments Market leadership and strong 20%+ growth in the domestic household insecticides business are the key growth drivers for the company. GCPL has a low tax base, with 65% of sales coming from excise free and tax free zones. Key investment risks Increasing contribution of acquisitions would increase margin volatility for GCPL in the future. Aggressive competition in the soap segments may lead to pricing pressures, which may negatively affect margins. Recent developments Acquired the Darling group, a Sub Saharan Africa based hair care company during the quarter. GCPL has acquired Cosmetica Nacional, a personal care player with leading shares in color cosmetics and hair color in Chile. Valuation and view We lower our estimate by ~2% to incorporate the EBITDA miss for the quarter. The stock trades at 32.8x FY13 EPS of INR22 and 26x FY14 EPS of INR27.8. We believe the risk reward ratio is unfavorable at 24x FY12 and 19x FY13E earnings. Maintain Neutral. Sector view We have a cautious view on the sector on the back of inflationary pressure which could impact volumes and profit margins of companies. Companies with low competitive pressures and broad product portfolios shall fairly withstand any slowdown in a particular segment. Longer term prospects bright, given rising incomes and low penetration. Comparative valuations GCPL Dabur Marico P/E (x) FY13E 32.8 27.5 28.3 FY14E 26.1 23.0 22.7 P/BV (x) FY13E 7.6 9.7 6.1 FY14E 6.5 8.0 4.9 EV/Sales (x) FY13E 4.1 3.4 2.7 FY14E 3.3 3.0 2.2 EV/EBITDA (x) FY13E 23.2 20.5 19.8 FY14E 18.0 17.1 15.7 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY13 22.0 22.2-0.7 FY14 27.8 27.2 2.1 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 724 722-0.2 Neutral Stock performance (1 year) Shareholding pattern (%) Sep-12 Jun-12 Sep-11 Promoter 63.8 64.0 67.3 Domestic Inst 1.2 1.0 2.4 Foreign 27.4 27.2 19.7 Others 7.6 7.8 10.6 5 November 2012 6
Financials and Valuation 5 November 2012 7
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