GCPL Post Robust March Quarter Numbers

Godrej Consumer Products (GCPL), one of the fastest growing FMCG companies, has posted robust March quarter and full financial numbers for FY12. The result was announced on the last day of April but the analyst meet was organised today to provide guidance about the road ahead. One should note that GCPL is one of the better performing stocks on a YTD basis. It has moved up by 42 per cent against the benchmark Sensex which has gained around 11 per cent. We had recommended GCPL in our Flash News under the title ‘Where To Invest In 2012’ and had also done a detailed analysis in our magazine’s Vol No 27, Issue No 4 dated February 12, 2012. We are happy to inform our investors that GCPL has created handsome returns over these four to five months.

For the March quarter the consolidated sales increased by 31 per cent to Rs 1,323 crore while the net profit jumped by 36 per cent to Rs 193 crore. Around 61 per cent of the total sales came from the domestic segment while the remaining 39 per cent was from the international segment. 

In the domestic business, all the three segments witnessed good growth. The sales of household insecticides grew by 28 per cent against the category growth of 9 per cent. The soap segment witnessed a growth of 30 per cent against the category growth of 20 per cent. GCPL also recorded good volume growth of 17 per cent. It launched a new variant called ‘Rosewater & Almonds’ under the Godrej No 1 brand. The hair colour sales grew by 13 per cent, primarily driven by Godrej expert powder and Nupur natural mehendi.

The management admitted to facing stiff competition in the hair colour segment and has again seen a reduction in its market share by an approximate 300 basis points to 26 per cent. However, the other two segments viz. soap and insecticides helped to increase the market share of the products, though the management did not disclose the actual figures.

According to the management, the pressure of raw material cost will continue for a couple of quarters. In CY12 GCPL did not hike product prices in the house insecticides and hair segment but increased prices in the soap segment by around 3 to 4 per cent.

Meanwhile, Asia continues to contribute a major chunk of around 49 per cent of the total international revenue. Megasari in Indonesia registered strong sales growth of 30 per cent to Rs 255 crore. Other business regions like Africa, Latin America and Europe continued to perform well in the March quarter. With the acquisition of Darling, Africa will continue to grow at a good rate and will start contributing more to the international segment category. The management further stated that they are focusing on the integration of its overseas business and hence this will not be an issue for the company going ahead.  

Now let us also look at the full year financial performance of the company. On a consolidated basis the net sales of the company increased by 32 per cent to Rs 4,850 crore while the net profit was up by a whopping 41 per cent to Rs 726 crore. As mentioned earlier, the higher input costs have affected the margins of most of the FMCG players. Raw material cost as a percentage to sales increased by 516 basis points to 44.82 per cent. In order to protect their margins, most of the FMCG players resorted to cost-cutting techniques and a higher level of efficiency. This resulted in the EBITDA margin to move slightly lower by 48 basis points to 18.7 per cent. The company continued its spending on advertising and publicity which increased by 27 per cent to Rs 449 crore. However, this, as a percentage of sales, remained almost stable at around 9.5 per cent.

The management has forecasted growth of 15 to 20 per cent through the organic route and around 5 per cent through the inorganic route of acquisitions). Though the hair colour segment faces stiff competition, the management has decided to strengthen their focus on it since it provides good margins that can help boost the bottomline of the company. During the quarter the company launched a new media campaign for the hair segment which will create awareness among the consumers and thereby result in better topline. The management expects the company to grow 10 times in the next decades.

We had recommended a ‘buy’ call on the company when it was trading at a price to earnings multiple of around 19 times while now it is trading at a multiple of 25 times. We believe that previously it was undervalued and that now it is fairly valued so that GCPL can trade at a P/E multiple of around 27 to 29 times. But we believe there could be some profit booking in the scrip and hence in the near term this could lead to downward pressure. One could invest in the scrip in a staggering manner keeping in mind a long-term horizon.