Godrej Consumer: core performance healthy

Sheetal Agarwal, Business Standard, 28 April 2015

Godrej Consumer Products Ltd (GCPL) reported lower-than-expected earnings for the quarter ended March this year, with consolidated sales of Rs 2,083 crore (up eight per cent year-on-year) and a net profit of Rs 266 crore (up 12 per cent) falling short of Bloomberg consensus estimates of Rs 2,165 crore and Rs 274 crore, respectively. The results were hit by softness in international business (45.5 per cent of consolidated revenue), primarily due to unfavourable currency moves.

Its international business’s organic net sales grew only six per cent year-on-year to Rs 956 crore, while organic earnings before interest, tax, depreciation and amortisation (Ebitda) grew 11 per cent year-on-year to Rs 135 crore. In constant currency terms, however, international organic sales growth stood at a healthy 14 per cent, led by good traction in Africa and Latin America (growth of about 20 per cent).

Indonesia sales were hit by a one-off de-stocking by modern trade retailers and floods. But in constant currency terms, sales grew 12 per cent (ex-foods business) and operating margins increased 200 basis points, driven by price rises and cost savings. European operations recovered strongly, posting constant currency sales growth of seven per cent. However, margin gains were capped, as currency depreciation hit margins in Africa, while higher investments in brands led to an 80-basis-point contraction in European operations’ margins. These, however, were offset by Latin America’s margins, which expanded 130 basis points to 21 per cent, led by price increases. Overall, the international business’s Ebitda increased faster by 20 per cent.

In the domestic business, organic revenue increase 12 per cent. Here, the household insecticides business grew a healthy 11 per cent, led by strong demand for the ‘Good Knight Fast Card’, while the soaps business (Cinthol and Godrej No.1) grew ahead of the category, at 15 per cent. Lower palm oil prices aided gross margins in this category. The hair colours segment posted volume-led growth of 12 per cent, as the Godrej Expert Rich Crème division grew at a robust pace. Aer, GCPL’s air freshener brand, along with health and wellness products also saw good growth.

GCPL’s consolidated Ebitda margin expanded 80 basis points to 18.6 per cent, owing to a strong 330-basis-point gross margin expansion at 55.3 per cent, the highest in at least 12 quarters. The margin gains would have been more, but for increased ad spends (up 348 basis points to 11.1 per cent). The bottom line was partially supported by foreign exchange gains of Rs 2 crore, against an equivalent foreign exchange loss a year earlier.