Godrej Consumer Products

3QFY11 Results Update SECTOR: FMCG BSE SENSEX S&P CNX 19,151 5,743 Rs400 Godrej Consumer Products Neutral Bloomberg GCPL IN Equity Shares (m) 323.6 52-Week Range (Rs) 480/225 1,6,12 Rel. Perf. (%) 7/6/46 M.Cap. (Rs b) 129.4 M.Cap. (US$ b) 2.8 * Estimates from FY10 factor in 49% consolidation for Godrej Saralee Key takeaways from the concall The management indicated medium term target of 15-20% organic growth and ~10% inorganic growth. Megasari grew 27% during the quarter and reported 19% EBITDA margin. However, the management does not expect significant working capital improvement in the near term given the higher prevalence of modern trade. GCPL lost 40bp QoQ market share in the soaps business while ITC and HUL have gained. GCPL increased its soap prices by 3-5% but this only partly offsets the input cost pressure. The management indicated it would take major initiatives in the hair color business over the next six months to revive its growth and market standing. Home care sales boost domestic business: Godrej Consumer Products Ltd's (GCPL) domestic business posted sales of Rs6.5b and EBITDA of Rs1.2b (margin of 18.6%). Standalone sales grew 8.3% to Rs3.4b and gross margins declined 450bp YoY due to high input costs. EBITDA was flat (Rs624m), margins declined 140bp to 18.2%. Toilet soap sales grew 6% YoY and hair color sales grew 9%. Godrej Household Products posted sales growth of 24% to Rs3b and EBITDA margins increased 90bp QoQ to an estimated 18.9% (16.5% in FY10). GHPL's performance positive, but we maintain a cautious view: GHPL posted sales growth in high teens with healthy margins (90bp expansion QoQ). We expect margin pressure in the standalone business due to rising PFA (Palm Fatty Acid) prices and the company's delay in increasing its soap prices in the face of stiffening competition. A subdued performance of its subsidiaries in Africa and the UK and lower than guided margins in its recent acquisitions concern us. We are cautious on the stock given: (1) the company's integration risk, currency risk and interest rate risk in new acquisitions, (2) margin pressure in the toilet soaps business and decline in growth in the hair colour business and (3) margin pressure at various international subsidiaries. The stock trades at 23.3x FY12E and 19.9x FY13E earnings. Maintain Neutral. Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel:+9122 39825404 /Nikhil Kumar (Nikhil.N@MotilalOswal.com); Tel: +922 39825120

Key takeaways from the concall The management indicated a medium term target of 15-20% organic growth and ~10% inorganic growth. We see the likelihood of further acquisitions in emerging markets in categories like household insecticides, personal wash and hair color (in line with its 3x3 strategy). The home care (44% of sales) segment had an impressive quarter with 27% growth in Indonesia (Megasari) and 24% growth in India (GHPPL). We note that the business continues to improve its margin profile due to a better sales mix. Competitive has stiffened in the toilet soap segment and GCPL lost 40bp market share over the past three months while HUL and ITC gained over the period. Soap industry grew 6% in 3QFY11. The company increased the prices of its toilet soap by 3-5% to arrest a margin decline, but the increase is inadequate given the surge in PFAD prices (up 50%). The company has cover until April/May at prices lower than current prices. The management indicated major initiatives over the next six months in the hair color business, to revive its growth and market standing. Consolidated debt was ~Rs18b (US$350m in dollar denomination and Rs2.5b in rupees). The dollar denominated debt is being financed at LIBOR+150-175bp, while the rupee loan is being re-financed at ~9%. 3QFY11 results were in line with adjusted PAT of Rs1.2b Net sales of Rs9.8b were higher than estimates due to strong growth in Godrej Household Products (up 24%). EBITDA of Rs1.7b was in line, though margins were 160bp lower than our estimate. Standalone sales grew 8.3% to Rs3.4b, gross margin contracted 450bp due to input cost pressure. EBITDA was flat at Rs624m (EBITDA margin of 18.2%, down 140bp). We note that the margin decline was sharp despite a 10% price increase in the powder hair dye from August. Godrej Household Products posted sales growth of 24% to Rs3b. We estimate EBITDA margin at 18.9% against 18% in 2QFY11. The international business posted sales of Rs3.4b and EBITDA margin of 14.3%. Margins improved QoQ for Latin America but declined for Megasari and Africa. Domestic business posts double-digit sales growth The domestic business reported sales of Rs6.5b and EBITDA of Rs1.2b (margin of 18.6%). Standalone sales grew 8.3% to Rs3.4b and gross margins declined 450bp YoY due to high input costs. EBITDA was flat (Rs624m) and margins declined 140bp to 18.2%. Toilet soap sales grew 6% YoY (against our estimate of 3-5% volume growth), market share declined 40bp QoQ to 10%. Key brands Cinthol and Godrej No1 are running promotional offers to revive sales growth and Fairglow is being re-launched as a specialist fairness soap. Hair color sales grew 9% (against our estimate of volume decline of 1-2%). Market share was 29.4% (29.9% in 2QFY11). 24 January 2011 2

The margin decline in the standalone business is a negative given that the company increased prices of hair color in 2QFY11. We expect margins to be under pressure as PFAD prices have been firming up over the past few months. Godrej Household Products posted sales growth of 24% to Rs3b and EBITDA margin increased 90bp QoQ to an estimated 18.9% (16.5% in FY10). Key brands like Hit and Good Knight have outgrown their respective category enabling ~300bp YoY market share gain to 37%. Margin expansion in the SBU is likely to be driven by an improved sales mix (faster growth in aerosols and electrics) and strong sales growth. Standalone gross, EBITDA margins decline Gross Margin (%) EBITDA Margin (%) 39.7 14.2 47.5 20.1 55.1 20.0 52.8 55.9 59.4 24.8 19.9 19.7 50.2 19.6 53.4 51.4 21.2 18.2 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 as palm fatty acid prices reach a new high (USD/MT) 1,250 1,000 1,015 750 500 250 290 453 629 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 Source: Company/MOSL International business: margins decline across geographies International business reported sales of Rs3.4b and EBITDA of ~Rs479m (margin of 14.3%, down 150bp QoQ). Megasari reported sales of Rs1.9b and EBITDA of Rs359m (EBITDA margin of 19%) prior to royalty payment to GCPL, a decline of 150bp QoQ. The African business reported sales of Rs530m and EBITDA of Rs50m (EBITDA margin of 9.4%) impacted by a one-time stocks write-off of Rs30m. Growth was impacted by a slowing economy and higher competition. Rapidol maintained dominance in the ethnic hair color market in South Africa. Latin America sales were Rs630m and EBITDA was Rs60m (margin of 10%) against margin of 6.8% in 2QFY11. GCPL has operationally merged Issue Group and Argencos and the combined business is being led by the Issue Group CEO. Argencos' CEO will focus on developing business in markets outside Argentina. 24 January 2011 3

Keyline reported a sales decline of ~15% due to the high base of Cuticura (H1N1 last year). Sales were impacted by currency translation by 4%. EBITDA was Rs10m including a one-time warehouse depletion and leasehold write-off of Rs30m. Margins under pressure across geographies Net Sales (Rs m) EBITDA (Rs m) EBITDA Margin (%) 2QFY11 3QFY10 3QFY11 YoY (%) QoQ (%) 2QFY11 3QFY11 QoQ (%) 2QFY11 3QFY11 QoQ (%) Domestic 6,186 4,327 6,450 49.1 4.3 1,158 1,197 3.4 18.7 18.6-0.2 GCPL (Standalone) 3,186 3,160 3,421 8.3 7.4 618 624 1.0 19.4 18.2-1.1 Godrej Home Products 3,000 1,167 3,029 23.9 1.0 540 573 6.1 18.0 18.9 0.9 International 3,370 850 3,350 294.3-0.6 532 479-10.0 15.8 14.3-1.5 Africa 440 451 530 17.6 20.5 60 50-16.7 13.6 9.4-4.2 Latin America 590 0 630 NA 6.8 40 60 50.0 6.8 9.5 2.7 Rest of Asia (Megasari) 1,860 50 1,890 High 1.6 382 359-6.0 20.5 19.0-1.5 Other Geographies 480 349 300-14.1-37.5 50 10-80.0 10.4 3.3-7.1 Total 9,556 5,177 9,800 89.3 2.6 1,690 1,676-1.0 17.7 17.1-0.6 * GHPL 3QFY10 sales are for 49% stake only Source: Company/MOSL Revising sales, margin assumptions; maintain cautious view We like the growth opportunity in GHPL over the coming years. However, margin pressure in the standalone business is likely to be sustained due to rising PFAD (Palm Fatty Acid) prices and the company's delay in raising its product prices due to rising competition. Subdued performance of existing subsidiaries in Africa and the UK and lower-than-guided margins at recent acquisitions are also concerns. We are revising our assumptions to factor in (1) higher growth in Megasari and GHPL, (2) lower sales traction and margin in the domestic business, (3) lower margins in the Africa business and (4) a lower tax rate. Changes to our estimates (Rs m) FY11E FY12E Particulars Prev. Est. New Est. % Chg. Prev. Est New Est. % Chg. Net Sales 33,892 35,416 4.5 43,522 44,313 1.8 Sales Growth (%) 66.0 73.5 28.4 25.1 EBITDA 6,264 6,312 0.8 8,214 7,968-3.0 EBITDA Margin (%) 18.5 17.8 18.9 18.0 PBT 5,787 5,835 0.8 7,413 7,166-3.3 PBT Growth (%) 31.3 32.4 28.1 22.8 Tax 1,244 1,150-7.5 1,669 1,542-7.6 Tax Rate (%) 22.5 20.7 23.5 22.5 PAT 4,485 4,628 3.2 5,672 5,555-2.1 PAT Growth (%) 24.5 28.4 26.5 20.0 Source: MOSL We maintain a cautious view on the stock due to: (1) its integration risk, currency risk and interest rate risk in new acquisitions, (2) margin pressure in the toilet soaps business and decline in growth in the hair colour business and (3) margin pressure at various international subsidiaries. The stock trades at 23.3x FY12E and 19.9x FY13E earnings. Maintain Neutral. 24 January 2011 4

Godrej Consumer Products: an investment profile Company description Godrej Consumer Products Ltd (GCPL) is an emerging market FMCG player with presence in the homecare, personal wash and hair color segments. The company has market leadership in India and Indonesia in the household insecticides business, Indian hair color space and is the second largest player in the Rs90b Indian soap market. GCPL is expanding its presence in emerging markets through the inorganic route through recent acquisitions like Megasari, Issue, Argenicos and Tura. Key investment arguments Strong leadership in the high potential household insecticide space in India and Indonesia. Market growth is accelerating in soaps and hair dyes/ colors and growth is likely to be sustained with market share gains in soaps and category growth in hair color. GCPL has a low tax base with 65% of its sales coming from excise free and tax free zones. Key investment risks Competition in getting stiff in the soaps and hair dye/ color segments in India. The company made four acquisitions across three continents in the past one year, which concerns us regarding the integration risk. Comparative valuations GCPL Dabur Marico P/E (x) FY11E 28.0 30.8 30.5 FY12E 23.3 25.8 25.0 P/BV (x) FY11E 7.9 12.5 9.5 FY12E 6.9 9.9 7.2 EV/Sales (x) FY11E 4.1 4.3 2.6 FY12E 3.3 3.6 2.1 EV/EBITDA (x) FY11E 23.3 23.0 21.2 FY12E 18.3 19.5 16.7 Recent developments High food inflation has impacted the growth of soaps and hair color. The company increased its toilet soap prices by 3-5% to partly offset the input cost pressures. The company acquired Swastik and Genteel brands in India to consolidate its presence in niche segments. Valuation and view We are upgrading our estimates by 3% for FY11 but downgrading FY12 and FY13 estimates by 1-2%. The stock trades at 23.3x FY12E and 19.9x FY13E earnings. Maintain Neutral. Sector view We have a cautious view on the sector due to inflationary pressure, which might impact volumes and profit margins. Companies with low competitive pressures and broad product portfolios will be able to better withstand a slowdown in the segment. Long term prospects are bright, given rising incomes and low penetration. EPS: MOSL forecast v/s Consensus (Rs) MOSL consensus variation Forecast forecast (%) FY11 14.3 14.7-2.9 FY12 17.2 18.2-5.9 Target Price and Recommendation Current Target Upside Reco. Price (Rs) Price (Rs) (%) 400 362-9.6 Neutral Stock performance (1 year) 520 Godrej Consumer Sensex - Rebased Shareholding Pattern (%) Dec-10 Sep-10 Dec-09 Promoter 67.4 67.7 73.5 Domestic Inst 1.8 1.5 1.1 Foreign 19.4 19.7 16.6 Others 11.4 11.1 8.8 440 360 280 200 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 24 January 2011 5

Financials and Valuation 24 January 2011 6

NOTES 24 January 2011 7

For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021 This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement Godrej Consumer Products 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. 24 January 2011 8