Sell Godrej Consumer; target of Rs 580: Emkay

Emkay Global Financial Services is bearish on Godrej Consumer Products and has recommended sell rating on the stock with a target of Rs 580 in its November 5, 2012 research report.

“Godrej Consumer Products, Q2FY13 was extremely strong on revenue performance registering jump of 34% yoy to Rs16.0 bn. Though, India operations was on relatively weaker footing with 19% yoy growth in revenues, the international business grew 63% yoy with inherent organic growth of 34%. India operations had just 4% volume growth in Soaps, hit by the ongoing relaunch of Cinthol brand. Whereas, international business saw consolidation of Darling Group spiking overall growth and strong performance in Megasari +37% yoy (Rs3.2 bn), Latin America +93% yoy (Rs1.3 bn) and Other Geographies +29% yoy (Rs0.7 bn).”

“Consolidated Ebidta margins at 15.6% (down 220 bps yoy) take sheen off the strong revenue performance. This is 2nd consecutive quarters of weak margins in international business. Reported Ebidta margins are 110 bps lower then expectation. The hit is largely led by international operations with drop of 330 bps yoy from 16.1% to 12.8%. The consolidation of Darling Group maybe coming at lower then expected margins. Consequently, Ebidta growth at 17.5% yoy to Rs2.5 bn and APAT growth at 24.8% yoy to Rs1.6 bn remains below expectation. HI portfolio continues to deliver strong growth in India and Indonesia markets. The portfolio constitutes around 45% of total consolidated revenues. HI portfolio in India grows 20% yoy to Rs3.2 bn, growing at 1.5X category growth and gaining market share. Whereas, Megasari grows 37% yoy to Rs3.2 bn with inherent constant currency growth at 26% yoy. Megasari operations continue to report healthy margins -circa 19%.”

“Our concerns on (1) retaining pace of growth and (2) detoriation of consolidated return profile comes to fore. This is 2nd consecutive quarter of Ebidta margins disappointment in consolidated operations. With 40% of capital employed and 45% of revenues from acquired businesses (international); risk profile of Godrej Consumer has increased manifold. We continue to value GCPL by giving separate valuations to India business and International business. At CMP, GCPL trades at 28X FY14E earnings – this is richly valued considering weak ROCE profile (25% in FY14E, amongst the lowest in FMCG industry). We downgrade the rating to SELL from HOLD with price target of Rs580/Share,” says Emkay Global Financial Services research report.

Public holding more than 90% in Indian cos

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