BSE SENSEX S&P CNX 16,739 5,049 Bloomberg GCPL IN Equity Shares (m) 323.6 52-Week Range (INR) 464/325 1,6,12 Rel. Perf. (%) 3/3/16 M.Cap. (INR b) 135.6 M.Cap. (USD b) 2.7 24 January 2012 3QFY12 Results Update Sector: Consumer Godrej Consumer Products CMP: INR419 TP: INR428 Neutral Godrej Consumer s consolidated results for 3QFY12 were better than our expectations. Adjusted PAT was INR1.67b, led by 290bp expansion in consolidated EBITDA margin. We expect domestic margins to come under pressure due to higher PFAD prices in 4Q. We believe 38% EBITDA margin in Darling Group holdings, is unsustainable; high debt in a fluctuating forex environment remains a key risk. We revise our earnings estimates upwards by 2-3% for FY12-13, factoring in (1) higher revenue growth in soaps, (2) higher margins in Darling business, (3) acquisition of Cosmetica Nacional, and (4) preferential allotment to Temasek and resultant equity dilution. The stock trades at 24x FY12E EPS of INR17.2 and 19x FY13E EPS of INR21.9. We maintain Neutral, with a revised target price of INR428. Key takeaways from conference call Soaps business has posted 19% volume growth as compared to a decline in industry volumes; the management attributes the strong growth to successful new launches and distribution expansion in southern markets. The household insecticides (HI) business grew ~25% in volumes. Hair colors grew ~9%, entirely driven by higher volumes, but this was lower than the industry growth of 15%. In international business, Latin America, Megasari and Keyline posted a growth of 20%, 24% and 25%, respectively in constant currency terms. Overall currency component in consolidated sales growth was 3%. Africa margins at 31% were due to festive season sales, low cost purchase inventory and lower A&P spends in Darling business. Consolidated net debt is at INR 22b, of which INR20b are foreign currency loans. Cosmetica acquisition will be concluded by 1QFY13; there will be an outgo of USD38m for the 60% stake, which will be financed by low cost overseas debt. Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel:+91 22 3982 5404
Godrej Consumer s 3QFY12 consolidated results are above estimates with Adj PAT of INR1.67b (est INR1.42b), led by 290bp expansion in Cons EBITDA margin. India business reported sales of INR7.6b, up 24% YoY. EBITDA margin expanded 20bp YoY. Adj PAT grew only 14% due to forex loss of INR75m, higher interest cost and 120bp higher tax rate. International business reported sales of INR5.7b, up 68% YoY. EBIDTA margin expanded 670bp YoY to 21%. PAT grew 254% YoY to INR490m. GCPL has announced acquisition of 60% stake in Cosmetica Nacional of Chile at 9x EV/EBITDA. It has sales of USD36m (2011) with EBIDTA margin of 20%. Acquisition cost is ~USD40m which will be funded by low cost overseas debt. GCPL has announced that Baytree Investments (100% sub of Temasek) will acquire 16.7m shares (~5% of capital) in a preferential allotment at INR409/share aggregating to INR6.8b. We believe 38% EBIDTA margin in Darling Group holdings, double the management guidance of 20%, is unsustainable; high debt levels in a fluctuating forex environment remains a key risk. We revise our estimates upwards by 2-3% for FY12-13 to factor 1) Higher revenue growth in soaps 2) Higher margins in Darling business 3) The acquisition of Cosmetica Nacional 4) preferential allotment to Temasek and resultant equity dilution. The stock trades at 24xFY12E EPS of INR17.2 and 19xFY13E EPS of INR21.9. Neutral with a revised target price of INR428. Key takeaways from concall Soaps segment has posted a 19% volume growth as compared to decline in industry volumes; management attributes the strong growth to successful new launches and distribution expansion in southern markets. A 2% price hike has recently been taken in soaps; price increase impact YTD is 10%. HI volume growth is ~25% for 3Q; the 9% growth is hair colours is entirely volume driven but lower as compared to industry growth of 15%. Management expects improvement in hair colour growth led by new launches. In international business, Latin America, Megasari and Keyline posted 20%, 24% and 25% constant currency growth respectively. Overall currency component in the 36% consol sales growth was 3%. Africa margins at 31% are not sustainable; festive season sales, low cost purchase inventory and lower A&P spends in Darling were the reason for the steep margin expansion. Consolidated net debt is at INR 22b; INR 20b (USD400m) of this is in foreign currency denominated loans. The Cosmetica acquisition will be concluded by Q1FY13; an outgo of USD 38m for the 60% stake will be made, which will be financed by low cost overseas debt. The company has posted a 15% sales CAGR over the last 3 years. 3QFY12 results: Consolidated sales growth in-line; 290bp EBITDA margin expansion a positive surprise Consolidated sales increased 36% to INR13.4b (est INR12.9b) led by 30% sales growth in Domestic HI business, 31% growth in Toilet soaps, 32% growth in Megasari, 30% growth in Latin America and full quarter integration of Darling Holdings. 24 January 2011 2
Gross margins expanded 20bp YoY to 53.5% while EBIDTA margin expanded 290bp YoY to 19.7% mainly due to 290bp lower ad spend. EBITDA grew 60% to INR2.6b; 187% growth in other income to INR248m (5x increase in financial other income) enabled 62% increase in PBT and 41% increase in PAT, even as interest cost also increased by 116%. The company booked MTM forex losses of INR55m on consolidated basis. Minority interest increased from INR33m to INR162m on account of integration of Darling Group Holdings. Domestic margins improve sequentially; Africa performance pulls up international margins 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 Net Sales (INR m) Indian Subcontinent 4,590 6,260 6,450 6,436 6,256 7,760 7,790 GCPL (Standalone) 3,174 3,120 3,421 2,926 3,714 3,711 3,717 Godrej Home Products 1,416 3,000 3,029 3,510 2,542 3,870 3,938 GHPL Sri Lanka and Bangladesh 140 60 179 135 International 1,860 3,370 3,350 3,430 3,600 4,190 5,670 Africa 340 440 530 450 430 650 1,860 Latin America 120 590 630 640 560 650 820 Megasari 830 1,820 1,890 1,950 1,940 2,300 2,500 Keyline 570 480 300 390 670 530 430 Middle East 40 60 50 Total 6,450 9,630 9,800 9,866 9,856 11,950 13,460 EBITDA (INR m) Indian Subcontinent 879 1,158 1,197 1,189 958 1,367 1,462 GCPL (Standalone) 621 618 624 - - - - Godrej Home Products 258 540 573 - - - - International 312 532 479 570 470 722 1,191 Africa 60 60 50 50 40 169 577 Latin America 8 40 60 90 10 48 74 Megasari 174 382 359 390 330 446 515 Keyline 70 50 10 40 90 58 26 Total 1,191 1,690 1,676 1,778 1,428 2,088 2,653 EBITDA Margin (%) Indian Subcontinent 19.1 18.5 18.6 18.5 15.3 17.6 18.8 GCPL (Standalone) 19.6 19.8 18.2 - - - - Godrej Home Products 18.2 18.0 18.9 - - - - International 16.8 15.8 14.3 16.6 13.1 17.2 21.0 Africa 17.6 13.6 9.4 11.1 9.3 26.0 31.0 Latin America 7.0 6.8 9.5 14.1 1.8 7.4 9.0 Megasari 21.0 21.0 19.0 20.0 17.0 19.4 20.6 Keyline 12.3 10.4 3.3 10.3 13.4 11.0 6.0 Total 18.5 17.5 17.1 18.0 14.5 17.5 19.7 Source: Company/MOSL India business (58% of Cons Sales): Sales up 20%; Soaps growth at 31%; HI growth impressive at 30%; Margins expand by 20bp India business (including GHPL) reported sales of INR7.8b, up 20% YoY. Gross profit at INR4b increased 18% as margins declined 70bp. 50bp decline in staff cost and 160bp lower ad spends (1% decline in absolute terms) enabled 20bp increase in EBITDA margin even as other expenses increased 120bp. Adj PAT increased 14% as 24 January 2011 3
38% increase in other income was neutralized by forex loss of INR75m, higher interest cost and 120bp increase in tax rate. Household insecticides (HI) maintained strong growth, with sales up 30% YoY which was far ahead of category growth rates, 7 th consecutive quarter of 25% sales growth. Innovative marketing campaigns of Good Knight and distribution gains due to GCPL rural network continued to power sales growth. Toilet Soap sales grew by an impressive 31% YoY (32% in 2QFY12), much ahead of category growth at 7%. The strong growth was due a low base of declining volumes (inventory de-stocking) and healthy ad spends behind new launches. Margins increased QoQ as full impact of price increases coupled with efficient input cost sourcing benefitted the company. Hair color sales growth was disappointing at 9% (15% in 2Q) in spite of launch of value of money hair dye kit and encouraging response to Expert Care and Advanced Powder Hair Color. We are surprised by the high double digit growth rates in toilet soaps by all the major players like GCPL, HUL, Wipro, Reckitt and ITC. While all the leading players deny any structural increase in growth rates, market share gains by all the leading players (75-80% of the market) and high growth rates amidst mid to high singledigit category growth forces us to believe that either the unorganized sector in losing big time or there is high pipeline of inventory getting accumulated in the system. Expect Soap margins to come under pressure in 4Q as INR prices of PFAD are ruling just below 5% of all time peak prices. We note that INR prices have increased by more than 30-35% from the recent lows. 3QFY12 domestic revenue breakup Domestic margins up 20bp YoY; improve 140bp QoQ Hair care 10% Others 10% Exports 3% Home Care 45% 47.5 20.1 Gross Margin (%) EBITDA Margin (%) 55.1 49.0 52.5 52.8 55.9 59.4 50.2 53.4 51.4 47.0 48.1 24.8 20.0 19.9 19.7 19.6 21.2 18.2 18.5 14.9 17.6 19.0 Pers ona l Wash 32% 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 Source: Company/MOSL International business (~42% of Cons Sales): Strong growth, margin expansion across regions; Darling margins surprise unsustainable International business sales grew 68% YoY to INR5.7b, and EBITDA expanded over 3x to ~INR1.13b (INR350m in 3QFY11 and INR722m in 2QFY12). EBIDTA margins expanded 670bp YoY and 380bp QoQ to 21%. PAT increased 254% to INR490m (140m in 3QFY11). While all regions have posted strong sales growth and margins, we believe International business performance has been boosted by (1) rupee depreciation 24 January 2011 4
and 2) exceptionally high EBITDA margin of ~38% in Darling Group Holdings. This is nearly twice the management guidance of 20% at the time of acquisition, and we believe is unsustainable. Megasari sales (14% of Cons) grew 32% YoY to INR2.5b, and EBITDA grew 43% to INR515m, led by 160bp YoY margin expansion. This is the first quarter of margin expansion after many quarters. Growth was driven by distribution expansion and success of new launches; it launched HIT extra power electric mosquito repellent during the quarter. Africa (14% of Cons Sales, includes Rapidol, Kinky, Tura and Darling Group) reported sales of INR1.86b and EBIDTA of INR577m (INR50m in 3QFY11), with EBIDTA margin of 31% (26% in 2Q and 9.4% in 3QFY11). Favourable format mix, good festive season sales and continuation of historically low levels of ad in Darling Group boosted margins. We note that the current profit margins of African business build in ~38% EBITDA margins for the Darling group which is nearly double the management guidance of 20% at the time of acquisition and is unsustainable. Latin America (6% of sales) sales grew 29% YoY to INR820m. EBITDA margins expanded 160bp QoQ even as it was 50bp lower YoY. Margins improved due to strong summer season sales and new launches. Marketing investments behind new launches and expansion to neighbouring countries continues. Keyline reported sales of INR430m and EBIDTA of INR26m. Sales growth was led by Cuticura and Touch of Silver brands. Region wise international revenue breakup Region wise international EBITDA breakup Africa 33% Asia (ex India) 45% Africa 49% As ia (ex India) 43% La tam 14% UK 8% Lata m 6% UK 2% Source: Company/MOSL GCPL announces acquisition of Cosmetica Nacional in Chile, Temasek to pick up 5% stake at INR409 GCPL has announced acquisition of 60% stake in Cosmetica Nacional of Chile at 9x EV/EBIDTA. It will increase its stake to 100% over the next 3-5 years. The acquisition will be completed by the end of FY12. Acquisition cost is ~USD40m which will be funded by low cost overseas debt. CN operates in hair color and color cosmetic segments in Chile. Hair color market is USD110m and growing at 9% while color cosmetics is USD60m and growing at 16%. Top 3 players account for 85% of market. CN is the market leader in hair color segment since 2002 while it is No2 in color cosmetics market. Hair colors are 60% of sales with Illicit being the major brand. Other brands are Pamela Grant and U2. 24 January 2011 5
CN has sales of USD36m (2011) with an EBIDTA margin of 20%. Sales growth was 19% in CY2010; domestic business is 90% of sales. This is the first entry of GCPL in the color cosmetics market and needs to be watched closely as this segment entails very different marketing and sales strategies than the traditional businesses of GCPL. 5% stake by Temasek: GCPL has announced that Baytree Investments (100% sub of Temasek) will acquire 16.7m shares of GCPL (~5% of capital) in a preferential allotment at INR409/share aggregating to INR6.8b. High sales growth in Toilet soaps, margins in Africa unsustainable, est forex loss of INR2b in unhedged USD loans We remain positive on the rapidly growing household insecticides business which has in the last two years consistently outperformed market growth. We believe this segment remains the key growth driver for GCPL in the future. GCPL has announced yet another acquisition in Chile funded by cheap overseas debt. We note that GCPL had gross debt of INR25b in Sep-2011 out of which it has forex debt of more than USD400m, which is completely unhedged. We estimate forex loss of INR2b on unhedged long-term loans (taken at USD/INR of 41), which has not been provided in accordance with new forex related guidelines. We believe domestic margins will come under pressure due to higher PFAD prices in 4Q even as we remain surprised by above average market growth by all the leading players in Toilet soap market. Megasari is progressing well, working capital reduction is key in that business. We revise our estimates upwards by 2-3% for FY12-13 to factor 1) Higher revenue growth in soaps 2) Higher margins in Darling business 3) The acquisition of Cosmetica Nacional 4) preferential allotment to Temasek and resultant equity dilution. The stock trades at 24xFY12E EPS of INR17.2 and 19xFY13E EPS of INR21.9. Neutral with a revised target price of INR428. 24 January 2011 6
Godrej Consumer Products: an investment profile Company description GCPL is a the second largest player in the INR90b Toilet Soap category with a market share of ~10%.Godrej Consumer Products Ltd. is a market leader in INR10b hair dye/color segment with a market share of approximately 35%. The 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 is the key growth driver for the company GCPL has a low tax base with 65% of its sales coming from excise free and tax free zones. Key investment risks Increasing contribution of acquisitions will likely increase margin volatility for GCPL in the future Aggressive competition in the soap segments may lead to pricing pressures which may negatively affect the margins. Recent developments The company acquired the Darling group, a Sub Saharan Africa based hair care company during the quarter. The company has acquired Cosmetica Nacional; a personal care player with leading shares in colour cosmetics and hair colour in Chile. Valuation and view We revise our EPS estimates upwards by 2-3% for FY12 and FY13 at INR17.2 and INR21.9. We believe that the risk reward ratio is unfavorable at 24xFY12 and 19xFY13 Earnings. We maintain Neutral. Sector view We have a cautious view on the sector on back of the inflationary pressure which might impact volumes as well as profit margins of companies. Companies with low competitive pressures and broad product portfolios will be able to better with stand any slowdown in a particular segment. Longer term prospects bright, given rising incomes and low penetration. Comparative valuations GCPL Dabur Marico P/E (x) FY12E 24.2 26.5 28.4 FY13E 19.0 22.0 23.5 P/BV (x) FY12E 6.5 9.9 8.2 FY13E 4.4 8.0 6.3 EV/Sales (x) FY12E 3.2 3.4 2.4 FY13E 2.6 2.9 2.0 EV/EBITDA (x) FY12E 18.4 19.4 19.5 FY13E 14.3 16.2 16.0 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY12 17.2 17.6-2.3 FY13 21.9 21.7 0.6 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 419 428 2.8 Neutral Stock performance (1 year) Shareholding pattern (%) Dec-11 Sep-11 Dec-10 Promoter 67.3 67.3 67.4 Domestic Inst 2.4 2.4 1.8 Foreign 19.9 19.7 19.4 Others 10.4 10.6 11.4 Godrej Consumer Sensex - Rebased 480 430 380 330 280 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 24 January 2011 7
Financials and Valuation 24 January 2011 8
N O T E S 24 January 2011 9
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