Buy Godrej Consumer; target of Rs 625: Ventura

Ventura is bullish on Godrej Consumer Products and has recommended buy rating on the stock with a target of Rs 625 in its May 07, 2012 research report.

“GCPL continued its strong growth momentum during Q4FY12 by recording 30.9% YoY growth in revenues to Rs 1,323 crore led by robust 20.6% YoY growth in its domestic business (HI – 28% YoY; Soaps- 30% YoY with volume growth of 17% and Hair Colors- 13% YoY), which contributes ~60% to the consolidated revenues. Despite inflationary pressures, GCPL’s EBITDA margins expanded by 160 bps YoY to 18.9% on the back of price hikes, prudent cost management and efficiencies through strategic commodities sourcing.”

“As stated earlier, domestic business grew by 20.6% led by robust growth in its key segments - Home Insecticides (+28% YoY v/s 9% category growth) and Soaps (30% YoY v/s 20% category growth). Household Insecticides segment witnessed growth on the back of innovative marketing campaigns leading to growth in consumption and penetration. On the other hand, GCPL’s soaps segment witnessed growth on account of healthy ~17% volume growth against category volume growth of ~4%. Hair colors segment reported dismal performance during the quarter recording mere 13% YoY revenue growth led by Godrej Expert powder hair colors and Nupur Natural Mehendi. Domestic business margins expanded 130 bps YoY to 20.7% and grew by 28.2% YoY to Rs 165.3 crore, primarily led by efficient commodity sourcing and price hikes in soaps segment. International business grew 49% YoY to Rs 518 crore during the quarter driven by distribution expansion (120,000 direct outlets, +20% YoY) and healthy performance of new product launches. Moreover, its international operations witnessed expansions in EBITDA margins by ~412 bps to 16.8% on account of prudent cost management.”

“Indonesia (Megasari) business (contributing ~50% to international business revenues) grew by 30.7% YoY to Rs 255 crore on the back of strong marketing investments, distribution expansion and healthy performance of newly launched products. Management indicated that ~5% growth during FY12 was lead by innovations viz HIT Non-Stop Extra power, HIT magic paper and Stella Car freshener. Moreover, through successful launch of HIT magic paper, GCPL has increased its market share in coils segment to 9% (Feb’12) from mere 1% (Mar’11). Operating margins were at 20.7% v/s 16.9% (+380 bps YoY). Africa business (contributing ~25% to international business revenues) witnessed 31% QoQ decline in revenues to Rs 128 crore which was despite the consolidation of Darling acquisition in the quarter. It is attributed to seasonality in the business. Africa business margins were at 19.3% v/s 31% during the previous quarter. However, management has indicated that low cost raw material inventory, favorable mix and seasonality in the Darling Group’s hair extensions business cushioned operating margins. Also, these margins are unlikely to sustain and the business would trend towards Darling Group’s historical average margins of ~20-22%."

"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 more than 15% due to its superior product profile especially in toilet soaps, hair colors and insecticide segment. We believe that GCPL has ample downside protection due to high margins it already has with wide distribution network in India and global market with a healthy product portfolio. We await the launch of HIT Magic paper, the innovative paper form of mosquito repellant, in India which we believe can be a game changer in the category. In the international business, integration of respective Africa and Argentina operations 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 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."

"During FY12, GCPL has also reduced its D/E ratio from 0.96 to 0.43 which reflects the strength of the financial position and also reduce the pressure on net profit margins. Moreover, GCPL have staggered its debt payment (O/S as on FY12 - ~$305 mn; payments of $15mn every quarter for FY13), thus reducing the risk of volatile currency movements. At a CMP of Rs 554, GCPL trades at a PE multiple of 25.2x and 20.4x its estimated earnings for FY13 and FY14. We have re-rated the stock (20x v/s 23x) with a revised price target of Rs 625 (as against earlier target of Rs 589) representing a potential upside of 12.9% and recommend a BUY on the stock,” says Ventura research report.    

Non-Institutions holding more than 90% in Indian cos

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