Godrej Consumer: lots to prove in second half

Godrej Consumer: lots to prove in second half

Soap prices have risen sharply due to rising input costs and that may be affecting growth too

There are some worries in Godrej Consumer Products Ltd’s domestic market performance that are for now balanced by its fast-growing international business. If these niggles are temporary, investors will look past them. The company has launched several new products and their success can play a crucial role in determining both growth and investor sentiment.

Godrej Consumer’s domestic business saw its soaps business driven by price increases, as sales volume rose by only 6% while sales by value rose by 20%. The firm said sales volume growth was ahead of the category, but it was the case even in the June quarter, when volumes rose by 24% compared with 5% for the category. The decline in volume growth is quite steep and it remains to be seen if the re-launch of Cinthol soaps aids a revival. Soap prices have risen sharply due to rising input costs and that may be affecting growth too. Declining palm oil prices hold some hope of a reversal.

The company’s household insecticides business did well, with sales growing by 20%, which the company said was 1.5 times category growth. But this outperformance too is lower than the June quarter, when it grew at 3 times the category growth. In its hair colour business, sales rose by 10%, improving on the 5% growth seen in the June quarter. It has launched a new cream-based hair colour with technology from its business in Argentina. A key factor to watch out for is if its new launches do succeed in improving growth rates in the second half.

Godrej Consumer’s international business has done quite well, again with a series of launches across locations. It has also entered new categories, stepping up its presence with the help of its many acquisitions. While sales rose by 64% year-on-year, organic sales growth was 32% and profitability rose by 33%. Currency movements too played a role. For example, sales in its Indonesian Megasari business grew by 37% but only 26% in constant currency terms growth.

On a sequential basis, gross margins have declined by a bit both for its standalone and consolidated operations. That implies input cost pressures continue. At the same time, costs have increased, partly due to a higher headcount in its international business and rising expenses on advertising and sales promotion.

Godrej Consumer’s consolidated sales rose by 34.4%, but operating profit rose by only 17.5% and operating profit margin declined by 2.2 percentage points. On a sequential basis, the margin rose by nearly 1 percentage point. A lower forex-related loss enabled it to post a 24.5% annual increase in net profit, after adjusting for minority interests.

The share trades at 32 times forecast 2012-13 earnings per share, based on consensus estimates polled by Thomson Reuters, which may make it seem relatively expensive. But Godrej Consumer’s second half performance can change that perception. It can expect international business growth to continue as the second phase of its acquisition of Africa’s Darling Group will take effect in the third quarter. On the domestic front, sales growth and profitability trends are key factors to watch out for.