Reduce Godrej Consumer Products Ltd. - Kotak

- Strong 4QFY12 Results, Beats Estimates: GCPL reported strong 4QFY12 financials - revenues grew 30%, EBITDA grew 39.7%, and adjusted PAT grew 21%. The company beat our estimates on all counts. Revenue growth across geographies has been strong in the quarter, with the exception of Africa (likely a seasonality impact). Margins have been stronger (y/y), reflecting improving pricing, which has enabled growth in profits.

- Changes in Estimates, Price target: Our estimates are revised upwards to account for: 1/ stronger growth in FY13, 2/ acquisition of CosmeticaNacional, 3/ dilution of equity (affected in 4QFY12). Our revised FY13 EPS estimate is 5% above prior estimates. We see FY12-FY14E EPS CAGR at 20%, implying that we see continued strength in GCPL financials. On account of reduced balance sheet concerns and greater stability in HI business, we raise our target multiple to 25x PER FY13E, and our price target stands revised to Rs 549.

- Base Affect adverse in key domestic categories: In FY12, GCPL has benefited from GCPL-GHPL synergies, perhaps the key determinant on category - outperformance in soaps and household insecticides (HI). We believe a strong base would limit category out-performance going forward. With no visibility on strong growth in the hair color segment, we think domestic growth is likely to be around 15% for the next two years. While various avenues of growth may exist (hair color in India, cross-pollination of technologies, distribution synergies in Africa/ Latin American operations), we believe the most visible ones have had their best run.

- Earnings triggers likely to weaken, valuations rich: GCPL has surprised us positively in FY12 on the back of strong domestic as well as international operations. We believe that domestic growth shall weaken going forward, and have little visibility in international operations, with the exception of Megasari. Although GCPL continues to possess growth levers (cross-pollination of technologies, distribution synergies in Africa/ Latin America), there is little visibility/ understanding of timing on these; we believe some of these benefits are included in our estimates (22% EBITDA growth through FY12-FY14). Valuations are rich, at 24.6x PERFY13E. We downgrade GCPL to REDUCE, as we would look for better price points for entry.

- Risks to our investment view include realization of stronger synergies in domestic/ international operations than envisaged, declines in raw material prices, and stronger than expected consumption trends.

Source : Equity Bulls

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