Godrej Consumer Products - 4QFY2012 Result Update - Reliance Securities

Results strong, however, upsides for the stock capped

Key highlights of the resultWe would like to highlight that the yoy comparison of the numbers are not valid on account of complete consolidation of the recently acquired Darling Group of companies.

- Yet another quarter of strong sales growth led by both domestic as well as international businesses: GCPL reported a top-line growth of ~31% yoy driven by high growth in the core categories in the domestic business. In terms of domestic business, home care business segment, comprising primarily of household insecticides recorded a sales growth of 28% yoy, aided by distribution synergies, product innovations and investments behind the brand Good Knight, while, soaps and hair colors segment registered sales growth of ~30% yoy (with volume growth of 17% yoy) and 13% yoy respectively. International business for the company registered 27% yoy organic sales growth with high growth recorded from all continents (Asia, Latin America and Europe recorded yoy growth of 30%, 29% and 21% respectively; Africa including Darling group recorded revenue of Rs128cr).

- Margin expansion aided by gross margin expansion and savings in other expenses: Savings in the gross margins (down 249bp yoy) and other expenses (down 207bp yoy) on the back of favorable category sales mix and cost efficiencies achieved on account of integration, aided operating margin performance. Operating margins were up by 173bp yoy to 18.8% for 4QFY2012. In terms of other expenses, staff cost (up 197bp yoy) and advertisement expense (up 86bp yoy) came in higher.

- Margin expansion aids recurring earnings: GCPL registered earnings growth of 21.9% yoy aided by strong top-line growth and trickle–down effect of the margin expansion. Depreciation expense came in higher on yoy basis on account of increase in the gross block, while, interest expense came in higher on account of increased debt in the books of the company.

Outlook and Valuation

We are enthused with the quarterly performance of the company, and the numbers reported were largely in-line with our estimates. Reporting a strong performance in terms of revenue recognition, and achieving cost synergies amongst the acquired companies spanning geographies pose uncertainty in terms of exchange rate fluctuation, and political environment, however, GCPL has been able to deliver stellar results so far. Hence, we believe, while downside to the stock is limited, upside to the stock price from hereon is also capped. On comparison with the FMCG portfolio that we track, we believe that GCPL will be an underperformer; we would rather prefer HUL (target price of Rs466) or Marico (target price of Rs190) over GCPL at the current juncture. Hence, at the CMP, we recommend a Reduce on the stock with a target price of Rs533.

Risks to the view

- We have not factored the Chile acquisition into our model yet. Strong revenue recognition from Chile pose an upside to our estimates

- Better cost synergies accruing from integration of acquisitions than estimated, pose an upside risk.

Source : Equity Bulls

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