Motilal Oswal neutral on Godrej Consumer

Motilal Oswal has maintained neutral rating on Godrej Consumer Products with a target of Rs 722 in its November 5, 2012 research report.

“Godrej Consumer Products' (GCPL IN) 2QFY13 consolidated EBITDA was 15% below estimates and Adj PAT missed estimates by 8% (INR1.6b v/s est INR1.75b). Consolidated sales grew 35% to INR15.95b (our est INR16.2b), driven by 24% organic sales growth and balance by acquisitions. Consolidated EBITDA margins disappointed at 15.3%, down 210bp YoY v/s our expectation of flat margins. Consolidated PAT growth of 25% was higher than the 18% EBITDA growth due to lower-than-expected interest costs and tax rate. India business reported sales of INR9.2b, up 19% YoY. Gross margins remained flat, while EBITDA margins declined 120bp to 16.3%, led by higher ad spend (up 100bp). Soaps reported 24% sales growth, household insecticides 20% (lower than its recent trajectory of 25% plus) and hair color 10%. International sales grew 63% YoY (organic growth of 32%) to INR6.8b and EBITDA was up 33% to INR973m. Megasari continued to post strong performance, with 37% YoY sales growth (26% in constant currency) and 19% EBITDA margins.”

“Gross profit at INR4.4b increased 19%. EBITDA margins declined 120bp YoY at 16.3% led by higher adspends. Adj PAT increased 17% on account of INR8m forex gain (INR85m loss in base) and 150bp lower tax rate, despite a steep increase in interest cost from INR26mn to INR47mn. which was far ahead of category growth rates (1.5x category growth), though lower than its own impressive track record of 9 consecutive quarters of 25% growth. New media campaigns of Good Knight and HIT and distribution gains due to GCPL's rural network continued to drive performance. As per industry data, GCPL has gained 310bp market share in HI in YTD CY12 (till August).”

“We note GCPL's continued market share gains in HI category led by distribution synergies between GCPL and GHPL, and the accelerated investments behind marketing and innovative products. However, we believe most of the low hanging fruits have been plucked and thus incremental share gains will be gradual. Decline in PFAD prices augurs well for 2H gross margins. However, it raises the risk of higher competitive intensity from unbranded and regional players who have lost market shares in the past 24 months due to unfavorable operating dynamics arising from higher RM costs. We lower our estimate by ~2% to incorporate the EBITDA miss for the quarter. The stock trades at 32.8x FY13 EPS of INR22 and 26x FY14 EPS of INR27.8. Valuations reflect positives after strong outperformance in CY12 (stock up 88%). Maintain neutral,” says Motilal Oswal research report.

Institutional holding more than 40% in Indian cos

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