Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Godrej Consumer’s (GCPL) Q2FY13 revenue came in line with our estimate, though profit was lower than expectation on back of higher costs (up 223 bps YoY). Key positives include: (1) 20% YoY growth in household insecticides (HI) category (1.5x of category growth); (2) hair colour growth at 10% YoY (5% YoY in Q1FY13; likely to step up due to crème launch); and (3) 32% organic growth in international businesses. Despite gross margin expansion of 19bps YoY, EBITDA margin was lower due to increase in staff costs, ASP and other costs by 149bps, 38bps and 54bps, YoY, respectively. We expect margin to improve in coming quarters due to correction in palm oil prices. Maintain ‘BUY’ on dips. This report also contains Q2FY13 conference call highlights. Household insecticides, soaps continue to grow ahead of market GCPL’s domestic business grew at a healthy 19% YoY to ~INR9.1bn. Household insecticides posted 20% plus YoY growth and personal wash grew at 24% YoY (volume growth at 6%, ahead of category volume growth). The quarter witnessed re‐launch of Cinthol range (entered shower gels category in addition to soaps, talc and deo) and feel & launch of crème based hair colour and Goodknight Advanced Colour Play. CSD, which accounts for 1% of sales, remained flat YoY. International business continues to be robust International sales posted an organic growth of 32% YoY on back of strong 37% YoY surge in Indonesia and organic growth in Africa in high teens. LatAm and Europe posted robust performance with 92% and 29% YoY sales growth, respectively. In Q2FY13 GCPL launched HIT one push aerosol in Indonesia, Goodknight aerosol and coil in Nigeria and “Touch of Silver” (shampoo and conditioner) and “Aapri” (skin care range) in Europe. Outlook and valuations: Bright; maintain ‘BUY’ We like GCPL’s aggression in developing categories via new launches and cross pollination of products across geographies. At CMP, the stock is trading at 34.6x and 28.6x on FY13E and FY14E EPS, respectively. We maintain ‘BUY’ and rate it ‘Sector Outperformer’ on a relative return basis. RESULT UPDATE GODREJ CONSUMER Galloping on the growth trail EDELWEISS 4D RATINGS Absolute Rating BUY Rating Relative to Sector Outperformer Risk Rating Relative to Sector High Sector Relative to Market Underweight MARKET DATA (R: GOCP.BO, B: GCPL IN) CMP : INR 725 Target Price : INR 762 52‐week range (INR) : 745 / 368 Share in issue (mn) : 340.3 M cap (INR bn/USD mn) : 247/ 4,583 Avg. Daily Vol.BSE/NSE(‘000) : 304.5 SHARE HOLDING PATTERN (%) Current Q1FY13 Q4FY12 Promoters * 63.8 64.0 64.0 MF's, FI's & BK’s 1.2 1.0 1.8 FII's 27.4 27.2 25.3 others 7.6 7.8 9.0 * Promoters pledged shares (% of share in issue) : Nil PRICE PERFORMANCE (%) Stock Nifty EW Consumer Goods Index 1 month 6.7 (0.4) 4.9 3 months 14.6 9.0 13.5 12 months 74.7 8.4 45.0 Abneesh Roy +91 22 6620 3141 [email protected]Hemang Gandhi +91 22 6620 3148 [email protected]Pooja Lath +91 22 6620 3075 [email protected]India Equity Research| Consumer Goods November 2, 2012 Financials Year to March Q2FY13 Q2FY12 % Change Q1FY13 % Change FY12 FY13E FY14E Net rev. (INR mn) 16,003 11,911 34.4 13,921 15.0 48,662 63,228 76,668 EBITDA (INR mn) 2,490 2,118 17.5 2,023 23.1 8,554 11,002 13,340 Profit (INR mn) 1,669 1,450 15.1 1,481 12.7 5,266 7,118 8,632 Diluted EPS (INR) 4.7 3.9 18.6 3.8 22.1 15.5 20.9 25.4 Diluted P/E(x) 46.8 34.6 28.6 EV/EBITDA (x) 30.3 23.9 19.7 ROAE (%) 22.1 21.5 22.5
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Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Godrej Consumer’s (GCPL) Q2FY13 revenue came in line with our estimate, though profit was lower than expectation on back of higher costs (up 223 bps YoY). Key positives include: (1) 20% YoY growth in household insecticides (HI) category (1.5x of category growth); (2) hair colour growth at 10% YoY (5% YoY in Q1FY13; likely to step up due to crème launch); and (3) 32% organic growth in international businesses. Despite gross margin expansion of 19bps YoY, EBITDA margin was lower due to increase in staff costs, ASP and other costs by 149bps, 38bps and 54bps, YoY, respectively. We expect margin to improve in coming quarters due to correction in palm oil prices. Maintain ‘BUY’ on dips.
This report also contains Q2FY13 conference call highlights. Household insecticides, soaps continue to grow ahead of market
GCPL’s domestic business grew at a healthy 19% YoY to ~INR9.1bn. Household insecticides posted 20% plus YoY growth and personal wash grew at 24% YoY (volume growth at 6%, ahead of category volume growth). The quarter witnessed re‐launch of Cinthol range (entered shower gels category in addition to soaps, talc and deo) and feel & launch of crème based hair colour and Goodknight Advanced Colour Play. CSD, which accounts for 1% of sales, remained flat YoY.
International business continues to be robust International sales posted an organic growth of 32% YoY on back of strong 37% YoY surge in Indonesia and organic growth in Africa in high teens. LatAm and Europe posted robust performance with 92% and 29% YoY sales growth, respectively. In Q2FY13 GCPL launched HIT one push aerosol in Indonesia, Goodknight aerosol and coil in Nigeria and “Touch of Silver” (shampoo and conditioner) and “Aapri” (skin care range) in Europe. Outlook and valuations: Bright; maintain ‘BUY’
We like GCPL’s aggression in developing categories via new launches and cross pollination of products across geographies. At CMP, the stock is trading at 34.6x and 28.6x on FY13E and FY14E EPS, respectively. We maintain ‘BUY’ and rate it ‘Sector Outperformer’ on a relative return basis.
RESULT UPDATE
GODREJ CONSUMERGalloping on the growth trail
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector High
Sector Relative to Market Underweight
MARKET DATA (R: GOCP.BO, B: GCPL IN)
CMP : INR 725
Target Price : INR 762
52‐week range (INR) : 745 / 368
Share in issue (mn) : 340.3
M cap (INR bn/USD mn) : 247/ 4,583
Avg. Daily Vol.BSE/NSE(‘000) : 304.5
SHARE HOLDING PATTERN (%)
Current Q1FY13 Q4FY12
Promoters *
63.8 64.0 64.0
MF's, FI's & BK’s 1.2 1.0 1.8
FII's 27.4 27.2 25.3
others 7.6 7.8 9.0 * Promoters pledged shares (% of share in issue)
Soaps business in India: GCPL’s sales jumped 24% YoY in Q2FY13, with volume growth of 6% YoY (slightly ahead of industry; lower largely due to high base effect; Cinthol impact is not reflected in volumes. Thus we expect better volumes in coming quarters). Gross margin expanded YoY on back of efficient commodity buying and cost saving initiatives and could improve further. Godrej No.1 Rosewater and Almonds soap is gaining good traction owing to its aggressive marketing initiative. The company re‐launched its Cinthol brand with entry into new category of shower gels in addition to soaps, talc and deo; promoted as “Alive is Awesome”, specially targeting the Indian youth. The unified portfolio is available in five variants for all categories‐‐energy, play, intense, splash and original. Each variant has been assigned a specific colour. Earlier the brand was a mix of sub‐popular (40%) and premium (60%). This has now been taken to 100% premium offering in terms of both quality and pricing. The gap between premium and sub‐popular was 20% which has been done away with now. Thus, brands like Lux, Breeze, Santoor and Hamam are no longer a competition for Cinthol. The company is confident of achieving success with its new premium positioning. Hair colour business in India: Growth was back on track at 10% YoY (against 5% YoY in Q1FY13). In a bid to strengthen its roots in the hair colour business, GCPL entered the crèmes hair colour segment (already market leader in powder and mehendi segment). The product is available in two forms—sachet (priced at INR30; no competitor at this price point in this format) and hair colouring kit (priced at INR59). We believe, venturing into a new hair colour segment will help the company improve its market leadership in the category through market share gain from competitors, upgradation of consumers from powders to cream and growth from attraction of first time users. The product has done well; demand has been more than supply. Margins of crème segment are lower compared to powder. Household insecticides: Sales surged by a strong 20% YoY in Q2FY13 (post nine consecutive quarters of 25%+ YoY growth; largely volume led); growing at 1.5x the category, aided by innovative marketing initiatives and distribution synergies. GCPL continues to gain and enjoy market leadership across all three formats of coils, aerosols and electrics. Post the merger of GHPL with GCPL, the former is benefitting from distribution synergies of GCPL which is strong in North India (GHPL in South). GCPL launched ‘Goodknight Advanced colour play’. Debt: GCPL’s net debt position as on September 30, 2012, is INR11.4bn (lower on sequential basis from INR15bn due to expansion of Darling business in Kenya funded entirely by debt). Cost pressure: In Q2FY13, though COGS pressure reduced 19bps YoY, staff costs, ASP and other costs increased 149bps, 38bps and 54bps YoY, respectively. Other costs increased due to higher sales promotion (largely domestic) while staff cost increase was due to expansion in Africa (Darling phase II which is man power intensive) and Chile (South America has high cost structure). CSD impact: Canteen store sales contribute only 1% to total sales, which remained flat YoY. Minority interest: Was significantly down QoQ as Q1FY13 had backward area benefit resulting in higher profits which flowed down to minority interest (INR213mn in Q1FY13 vs INR83mn in Q2FY13).
Godrej Consumer
3 Edelweiss Securities Limited
International businesses
International sales grew 32% YoY organically, on back of strong performance across all major geographies. Asia excluding India (Megasari): This subsidiary contributed 45% to international sales. Sales were at INR3.16bn, up 37% YoY. EBITDA margin was at 19% before payment of technical fees to GCPL, up 140bps YoY. The company gained market share with highest market share in HIT aerosol and Stella aerosol. HIT magic paper continued to post high growth and gained 8‐9% market share. The company launched HIT one push aerosol in Q2FY13. Africa (Rapidol, Kinky, Tura and Darling Group): This business contributes 24% to international revenue; with organic growth in high teens. Sales were at INR1.63bn. EBITDA margin stood at 16.0%, up 850bps; margins are likely to be in 17‐19% range. Phase II of Darling acquisition will be consolidated from Q3FY13 (two months of consolidation). Rapidol grew strongly led by growth in Renew hair colours, doubling its market share and became the third largest brand in volume terms. In Q2FY13 the company launched Goodknight aerosol and coil in Nigeria where the overall household insecticide market is ~INR5bn with share of aerosol and coil being 55% and 30%, respectively; key competitors in the market include SC Johnson, Rambo (local player) and some competition from Chinese imports. Latin America (Issue and Argencos businesses): Latin America contributes 18% to international revenue. Sales at INR1.27bn grew 76% YoY. EBITDA margin stood at 4%, expanded 140bps YoY. Chilean business integration is well on track. UK: UK contributes 12% to international business revenue. Revenue stood at INR680mn, up 29% YoY. EBDITA margin was at 9%, down 100bps YoY. Q1FY13 also saw launch of new range of shampoo and conditioner under “Touch of Silver” and skin care range under “Aapri”.
Outlook and valuations: Bright; maintain ‘BUY’
We like GCPL’s aggression in developing categories via new launches and cross pollination of products across geographies. We are revising our sales assumptions upwards primarily due to expansion in Kenya business (Darling phase II) and growth from new launches (both domestic and international). We also expect correction in palm oil to benefit gross margin in coming quarters. Hence we tweak our EPS upwards by 3% for both FY13 and FY14 to INR20.9 and 25.4 respectively. Assigning a higher multiple of 30x (as against 28x earlier) we arrive at target price of INR762. At CMP, the stock is trading at 34.6x and 28.6x on FY13E and FY14E EPS, respectively. We maintain ‘BUY’ and rate it ‘Sector Outperformer’ on a relative return basis.
Consumer Goods
4 Edelweiss Securities Limited
Chart 1: Category contribution in terms of sales
Source: Company, Edelweiss research
Table 1: Revenue split (INR mn)
Source: Company, Edelweiss research
Home care45%
Hair care23%
Personal wash22%
others10%
Consolidated
Year to March Q2FY13 Q2FY12 % Change YoY Q1FY13 % Change QoQNet sales ‐ domestic 8,963 7,581 18.2 7,896 13.5‐ Personal wash 3,137 2,653 18.2 2,843 10.4‐ Hair care 986 834 18.2 869 13.5‐ Home Care 4,033 3,487 15.7 2,843 41.9‐ Others 807 607 33.0 711 13.5Net sales ‐ consol 15,953 11,860 34.5 13,921 14.6International 6,991 4,279 63.4 6,025 16.0‐ as a % of consol sales 44 36 43 Asia (Megasari) 3,160 2,300 37.4 2,710 16.6Middle East 251 50 401.2 65 286.1Africa (Tura, Rapidol, Kinky, *DGH) 1,630 650 150.8 1,440 13.2Latin America (Issue Group, Argencos) 1,270 660 92.4 1,080 17.6UK (Keyline) 680 530 28.3 730 (6.8)
Home care45%
Hair care11%
Personal wash35%
others5%
Exports4%
Standalone
Godrej Consumer
5 Edelweiss Securities Limited
Table 2: Financial Snapshot‐ Standalone (INR mn)
Source: Company, Edelweiss research
Table 3: Segmental revenue % YoY growth
Source: Company, Edelweiss research
Table 4: International business (INR mn)
Source: Company, Edelweiss research
Year to March Q2FY13 Q2FY12 % Change Q1FY13 % changeNet sales 8,963 7,581 18.2 7,777 15.3 Other operating income 149 115 29.8 120 24.6 Net operating income 9,112 7,696 18.4 7,896 15.4 COGS 4,557 3,870 17.8 3,960 15.1 Staff costs 360 301 19.4 363 (0.8) Advt and publicity 751 564 33.1 774 (2.9) Other expenditure 1,833 1,523 20.4 1,523 20.3 Total expenditure 7,501 6,258 19.9 6,620 13.3 EBITDA 1,610 1,438 12.0 1,276 26.2 Interest 47 26 80.8 30 58.9 Depreciation 83 67 24.4 83 0.1 Other income 92 117 (21.5) 112 (17.7) Forex gain/(loss) 8 (85) NM (110) NMPBT 1,579 1,377 14.7 1,165 35.6 Tax 313 294 6.5 246 27.4 PAT before exceptionals 1,267 1,083 17.0 919 37.8 Extra ordinary items (net of tax) ‐ ‐ NM ‐ NMReported profit 1,267 1,083 17.0 919 37.8 EPS (INR) 3.72 3.35 11.2 2.70 37.8
Company Description GCPL is a major player in the toilet soap and hair colour categories in the Indian FMCG market. It is a leader in the hair colour category and has a vast product range across various price points. Major brands include Godrej Hair Dye (liquid and powder), Godrej Kesh Kala oil and Nupur hair dyes in the lower end and Renew and Coloursoft in the higher segment. It has also entered the crème hair colouring segment recently. It is the second‐largest toilet soap marketer after Hindustan Unilever (HUL) with a ~12% market share and primary brands such as Godrej No. 1, Cinthol and FairGlow. In 2012, GCPL completed the acquisition of 51% stake in Godrej Sara Lee Limited which had several leading brands such as GoodKnight, JET, HIT, Brylcreem and KIWI. Godrej Sara Lee’s portfolio offers significant synergies to GCPL’s portfolio and all the brands are performing well. To expand its geographical presence, GCPL had made few acquisitions in the past few years. In FY06, it acquired Keyline brands in the UK with brands such as Cuticura and Erasmic. In FY07, it took over Rapidol, a South African company with presence across ten countries in Africa. Recently it acquired Kinky, one of the leaders in the South African hair business for South African Rand 265 mn. Kinky offers a variety of products viz. hair braids, hair pieces, wigs and wefted pieces. Tura and Megasari are among recent purchases that would boost its presence in Africa and Indonesia respectively. Its recent acquisition of 51% stake in Darling Group Holding, leader in hair extension in Africa, would further strength its position in Africa. It also entered Chile, with acquisition of 60% stake in Cosmetica Nacional.
Investment Theme GCPL boasts of a patented technology for PHDs that has helped it drive usage of hair colours at the lower end of the market. The company also provides high‐quality value‐for‐money soaps which helped it garner larger market share. GCPL’s aggressive stance to take its operations to the international platform has resulted in several acquisitions in past three years. The company can be expected to benefit from its new ventures, increasing consumer spending and inorganic growth going forward.
Key Risks A slowdown in rural demand due to lower government spending or a monsoon failure could impact GCPL’s revenues significantly. Some of the recent international acquisitions are still at the integration stage. GCPL needs to successfully integrate these businesses to prove its execution capabilities. Depreciating INR can yield to rise in cost of dollar denominated debt. GCPL’s ability to gain market share in its soap segment could be adversely affected by the aggression of HUL, ITC, Wipro, etc. The entry of players such as L’oreal and Schwarzkopf has put pressure on GCPL’s hair colour business because of which it has been losing market share at the top end of the market. Entry of local players in lower end could worsen the situation.
8 Edelweiss Securities Limited
Consumer Goods
Financial Statements
Key Assumptions Year to March FY10 FY11 FY12 FY13E FY14EMacro ‐ GDP(Y‐o‐Y %) 8.4 8.4 6.5 5.8 6.5 Inflation (Avg) 3.6 9.9 8.8 7.8 6.0 Repo rate (exit rate) 5.0 6.8 8.5 7.5 6.8 USD/INR (Avg) 47.4 45.6 47.9 53.5 52.0 Company ‐ Domestic volume gr (% YoY) 14.4 5.0 3.4 3.8 3.1 Domestic pricing gr (% YoY) 11.1 586.1 13.3 3.0 5.6 Int. business growth (% YoY) ‐ ‐ 33.3 25.4 21.2 ASP % of sales 9.9 9.6 9.2 9.3 9.3
Coverage group(s) of stocks by primary analyst(s): Consumer Goods Asian Paints, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, GlaxoSmithKline Consumer Healthcare, United Spirits
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 113 53 19 186* 1 stocks under review
Market Cap (INR) 114 58 14
Date Company Title Price (INR) Recos
Recent Research
02‐Nov‐12 Marico Packing a punch; Result Update
204 Buy
02‐Nov‐12 GSK Consumer
Margin BOOST; Result Update
3,020 Buy
30‐Oct‐12 ColgatePalmolive
Bites more into the toothpaste market; Result Update
1,237 Hold
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12‐month period
Hold appreciate up to 15% over a 12‐month period
Reduce depreciate more than 5% over a 12‐month period
Rating Expected to
13 Edelweiss Securities Limited
Godrej Consumer
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