Buy Godrej Consumer Products: Ventura Securities

Ventura Securities is bullish on Godrej Consumer Products (GCPL) and has recommended buy rating on the stock in its February 04, 2013 research report. According to the research firm, the company is expected to post robust set of numbers in its domestic business going ahead on the back of new launches and increased A&P spends, continued distribution synergies and its focus in crème format.

"GCPL continued its strong growth momentum during Q3FY13 by recording 25.8% YoY growth in revenues to Rs 1,691.3 crore led by robust 20.4% YoY growth in its domestic business (HI – 28% YoY; Soaps – 20% YoY with volume growth of ~2% and Hair Colors – 17% YoY), which contributes ~55.5% to the consolidated revenues. Inflationary pressures and higher A&P expenses (+61% YoY) led to a contraction of GCPL's EBITDA margins to 16.8% (-320 bps YoY). However, the margins expanded on QoQ basis (v/s 15.6%; +120 bps QoQ).

As stated earlier, domestic business grew by 20.4% YoY led by robust growth in its key segments - Home Insecticides (~1.3x category growth) and Hair Colors (17% YoY). Household Insecticides segment witnessed growth on the back of continued distribution synergy benefits and launch of ‘Goodknight Advanced colour play'. The category also benefited due to high incidence of dengue and malaria. On the other hand, GCPL's soaps segment witnessed growth of 20% YoY primarily led by price hikes. The volume growth was lower at 2% as compared to category growth of 8%. Hair colors segment reported encouraging performance during the quarter (17% v/s 21% category growth) owing to positive response from crème format (recent entry).

Given the fact that domestic business is the mainstay of its operations, Godrej Consumer Products Ltd (GCPL) has displayed its consistency by clocking double digit revenue growth (in its core product categories) over the past several quarters. Also, GCPL enjoys a high operating profit margin of 15%+ due to its superior product profile especially in household insecticide segment. We continue to await the launch of HIT Magic paper (cross pollination from Indonesia), the innovative paper form of mosquito repellant, in India which we believe can be a game changer in the category. We expect GCPL to post robust set of numbers in its domestic business going ahead on the back of new launches and increased A&P spends (Cinthol and ‘aer' air refreshener), continued distribution synergies and its focus in crème format (under hair colours category). In the international business, integration of operations in Africa and Argentina is expected to bring synergies over the next few quarters. Also, we remain positive on the Indonesian operations on the back of regular innovations and distribution expansions. Given the fact that GCPL has a large number of brands under its umbrella (across emerging market geographies), we expect cross-pollination to play out over the next 2-3 years and add further scale to GCPL's operations. At a CMP of Rs 748, GCPL trades at a PE multiple of 33.6x and 26.9x its estimated earnings for FY13 and FY14 and we reiterate a BUY on the stock.

In the international business, integration of operations in Africa and Argentina is expected to bring synergies over the next few quarters. Also, we remain positive on the Indonesian operations on the back of regular innovations and distribution expansions. Given the fact that GCPL has a large number of brands under its umbrella (across emerging market geographies), we expect cross-pollination to play out over the next 2-3 years and add further scale to GCPL's operations. At a CMP of Rs 748, GCPL trades at a PE multiple of 33.6x and 26.9x its estimated earnings for FY13 and FY14 and we reiterate a BUY on the stock," says Ventura Securities research report.

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