Hold Godrej Consumer; target of Rs 580: Emkay

Emkay Global Financial Services has recommended hold rating on Godrej Consumer Products with a target of Rs 580, in its August 07, 2010 research report.

“Godrej Consumer, Q1FY13 sales at Rs 13.9 bn up (39% yoy) met expectation. However, higher than expected growth in domestic soaps business (lower margin business) led to disappointment in Ebitda and Pat. Core Ebidta at ~Rs2 bn, up 38.2% yoy and APAT at Rs1.3 bn up 27.2% yoy. The Ebidta margins declined 10 bps yoy to 14.5% due to unfavorable revenue mix. Also, without considering tax benefit (down 61% yoy) profit growth would be meager 13.9%. It’s important to note that, performance is also aided by rupee depreciation bringing translation gains.”

“Domestic business grew by 23% yoy to Rs7.9 bn. This was led by key segments of personal wash and household insecticides. Both these segments grew ahead of the market growth, aided by healthy volume growth. The personal wash segment grew by 42% yoy, with inherent volume growth of 24% yoy against industry volume growth of 5% yoy. Whereas, household insecticide segment grew by +27% yoy (volume growth: 22- 23%), ahead of industry growth of 8% yoy. Hair Color business disappoint with meager 5% sales growth. Core Ebidta margins marginally down by 16 bps yoy to 16.2%, primarily led by unfavorable revenue mix. The Core Ebidta grew 22.2% yoy to ~Rs1.3 bn and APAT grew 11.1% yoy to Rs 910 mn. International business organic growth at 31% with strong growth across all major geographies. This was also aided by rupee depreciation bringing translation gains. International business (including acquisition) grew 68% yoy to Rs6 bn in the quarter. Ebitda grew 96% to Rs. 820mn. LatAm reported mere 3% Ebitda margin due to seasonality.”

“We remain concerned about the sharp deterioration in the consolidated return profile to around 20.5% (lowest in entire FMCG space) in FY12P. Also, 40% of capital employed and 45% of revenues from acquired businesses (international); risk profile of Godrej Consumer has increased manifold. With rupee depreciation contributing also contributing to growth in international business; we are a bit apprehensive about the pace of growth in the future. As the entire Indian FMCG pack is re-rated upwards, we have changed the valuation methodology for GCPL by giving separate valuation multiple to domestic business (23x FY14E) and international business (16x FY14E). Thereby raising the target price to Rs. 580/share. However, with sharp appreciation in market capitalization and resultant re-rating and rich valuations, downside risk is not protected. Maintain HOLD,” says Emkay Global Financial Services research report.

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