GCPL

Godrej Consumer Product (CMP: Rs297)           
Mkt Cap: Rs91.7bn; US$2bn       Bloomberg code (GCPL IN)

Highlights of FY10 results and Management interaction post results
•    For the quarter Q4FY10, lower than our estimates, GCPL has reported consolidated revenue growth of 48.6% at Rs5.09bn, EBITDA growth of 62.6% at Rs1.07bn and PAT growth of 56.3% at Rs917m (estimates of Rs932m)
•    This includes Rs1.46bn of revenues for its 49% stake in the Godrej Sara Lee JV and PAT of R228m.
•    GCPL’s continuing operations reported revenues growth of 5.7% at Rs3.6bn and PAT at Rs689m. While GCPL’s standalone domestic operations grew by just 2.1% while international business grew by 21% in rupee terms.
•    Food inflation has taken its toll on soaps as well as hair color categories – subdued growth albeit market share gains. Soaps business is expected to have reported a ~3% decline yoy with no price hike taken during the year and volumes down during the quarter. However, GCPL has gained 110bp of market share at 10.5% during the quarter, indicating pressure across the category. Hair colors business on the other hand has grown in low single digit.
•    After 4 quarters of high growth, GCPL has felt the growth pressures and we believe that the pressure may continue as long as the food inflation concern.
•    Consolidated margins during the quarter stood at 21.1% (not comparable to Q4FY09). However, margins have improved by 140bp on QoQ basis.
•    Gross margins during the quarter stood at 55.5% (300bp higher QoQ), Staff Cost has dropped from Rs601m in Q3FY10 to Rs327m on a back of sharp dip in variable performance pay. GCPL has also brought down ASP spends by 20% QoQ. Other expenditures have risen sharply to Rs1.08bn as against Rs668m in Q3FY10 as GCPL has spent heavily on promotions
•    Standalone business operation has reported EBITDA margin expansion of 471bp at 24.8% in Q4FY10 with gross margins improving sharply from 47.7% in Q4FY09 to 59.4% in Q4FY10. Substantial portion of savings in material cost is reinvested in ASP spends (up from Rs114.7m in Q4FY09 to Rs281.7m in Q4FY10)
•    Employee cost was lower than expectations (down from Rs169.2m in Q4FY09 to Rs103.2m in Q4FY10).
•    During the year, GCPL reported a consolidated revenue growth of Rs46% at Rs20.4bn, EBITDA at Rs4.09bn and PAT at Rs3.39bn.
•    This includes Rs4.07bn of revenues for its stake in Godrej Sara Lee JV and PAT of Rs639m (effective from from June 2009)
•    During the year, GCPL’s continuing operations reported revenues growth of 17% at Rs16.4bn and PAT at Rs2.75bn. GCPL’s domestic operations grew by 16% while international business grew by 21% in rupee terms
•    During the year, the international business reported revenue growth of 21% at Rs3.78bn and PAT growth of 81% at Rs332m. The Keyline Brands, Kinky business, Rapidol and GGME business grew by 9%, 40%, 42% and 45% respectively in rupee terms.
•    Further to GCPL’s 3x3 strategy of extending competitive positioning in Asia, Africa and Latin Americas in personal wash, hair care and insecticide segments, GCPL announced the acquisition of Tura in Nigeria. Tura, with expected annual sales of ~USD50m, manufactures and distributes a range of beauty products, including soaps, moisturizing lotions and skin-toning creams
•    In April-2010, GCPL announced the acquisition of Megasari. Meagsari – a leading consumer company in Indonesia clocked in revenues of USD120m in the current year and estimate PAT margins of 11-12%. Megasari is the second largest player with 35% market share of Indonesia’s household insecticides market (USD150m market growing at 20%+), leader in air care market with 45% market share (USD68m market growing at 45%) and enjoys 80% market share of USD21m wipes market (growing at 45%). Megasari also has 15% share of the breakfast cereals market. The deal value is estimated at USD250m-300m (20-22x earnings) and will be funded through debt
•    GCPL has passed an enabling resolution to raise Rs30bn in order to fund inorganic growth (India and other emerging markets would be key focus areas). The remaining 51% stake in Godrej Sara Lee and the global pesticides business of Sara Lee appear as the potential acquisitions in the offing.
Easing commodity costs, HUL losing market share at the mass segment and GCPL targeting the mass to mid mass segment of hair color category rather than taking on likes of L’Oreal in the premium segment, GCPL has made the most of the gains available in the domestic personal wash and hair color categories. Further, strong momentum in the acquired international operations and recent acquisition of 49% stake in Sara Lee, GCPL has been on a very high double digit growth path in the last 4 quarters. However, pressure points are building up incrementally for GCPL. With food inflation at near its all time high (touched 20% during the quarter), not only is the growth under pressure (consumer downtrading – more prominent amongst urban mass) but would also refrain GCPL from taking any price hikes to pass on the impact of increasing vegetable oil prices. Domestic business earnings would get impacted further by increasing effective tax rate (300bp). We thereby see
near term pressure on standalone operations (7% downgrade in FY11E estimates). On the other hand, while we like GCPL’s aggression on inorganic growth and newly emerged 3x3 strategy, GCPL’s ability to manage these varied acquisition in the international market will hold the key for future scalability. As we seek more details on the recent acquisitions (25% of consolidated revenues) and work out GCPL’s numbers post this, we put our rating on GCPL under review