godrej consumer products - myirisbreport.myiris.com/es1/godconpr_20150302.pdf · edelweiss...

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We recently met Mr. Vivek Gambhir, MD of Godrej Consumer Products (GCPL). GCPL, with Project FutureNow, is targeting to double its domestic business over next 5 years, at CAGR of ~17%. Project OneRural aims at increasing salience of rural sales to 35% from current 27% over next 3 years. Gauging the rising importance of the e‐commerce platform in FMCG, the company has set up a separate team for its e‐commerce channel. Premiumisation remains key focus area as most of the new launches will be made at the premium end. Success of new launches to premiumise portfolio and progress of entry into premium Hair Colour (HC), hand wash and face wash remain key monitorables. Maintain ‘BUY’.

Robust innovation pipeline, distribution to bolster growth GCPL plans to launch 9‐10 new products in FY16, which will drive growth as ~40% of

incremental growth comes from innovation pipeline. New product launches will not

only help in entering new categories (like face wash), but also up‐trade existing

categories (Neem Low Smoke Coil in coils and Express System in electrical). Going

ahead, the company believes that urban growth trajectory will continue to improve,

while the urban‐rural gulf will reduce. India’s per capita consumption in HI is half that

of China, while in hair colour it is one‐fourth of Thailand.

Margin expansion underway In Q4FY15 and Q1FY16, GCPL expects to better its margins, led by benign raw material

environment, better mix and cost saving initiatives. The company has passed on some

benefits of palm oil correction via promotions, which will help drive volume growth in

the personal wash segment. International business has also started reaping benefits of

calibrated price hikes, which along with cost saving efforts will improve margins.

Outlook and valuations: Positive; maintain ‘BUY’

We like GCPL’s aggression in developing categories through new launches and cross

pollination. Gross margin is also set to benefit from benign raw material prices. At CMP

the stock is trading at 34.2x and 27.1x FY16E and FY17E. We maintain ‘BUY’ and rate it

‘Sector Outperformer’ on relative returns basis.

VISIT NOTE

GODREJ CONSUMER PRODUCTSFuture ready

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 1,126

Target Price : INR 1,331

52‐week range (INR) : 1,204 / 701

Share in issue (mn) : 340.4

M cap (INR bn/USD mn) : 383 / 6,189

Avg. Daily Vol.BSE/NSE(‘000) : 177.0 SHARE HOLDING PATTERN (%)

Current Q2FY15 Q1FY15

Promoters *

63.3 63.3 63.3

MF's, FI's & BK’s 1.9 1.8 1.8

FII's 29.0 29.0 28.5

Others 5.8 5.9 6.4

* Promoters pledged shares (% of share in issue)

: 2.0

PRICE PERFORMANCE (%)

Stock Nifty

EW Consumer Goods Index

1 month 5.1 4.0 5.5

3 months 19.4 6.1 10.5

12 months 50.7 44.6 34.0

Abneesh Roy +91 22 6620 3141

[email protected]

Pooja Lath +91 22 6620 3075

[email protected]

Tanmay Sharma +91 22 4040 7586

[email protected]

India Equity Research| Consumer Goods

March 2, 2015

Financials

Year to March FY13 FY14 FY15E FY16E

Revenues (INR mn) 64,163 76,024 84,572 99,401

Rev. growth (%) 31.9 18.5 11.2 17.5

EBITDA (INR mn) 9,824 11,503 13,701 16,202

Net profit (INR mn) 7,961 7,598 9,214 11,224

Shares outstanding (mn) 340 340 340 340

Diluted EPS (INR) 19.6 22.1 27.1 33.0

EPS growth (%) 21.1 13.0 22.2 21.8

Diluted P/E (x) 57.5 50.8 41.6 34.2

EV/EBITDA (x) 40.8 34.9 29.4 24.7

ROAE (%) 21.8 21.3 22.6 23.7

Consumer Goods

2 Edelweiss Securities Limited

We recently met Mr. Vivek Gambhir, MD, GCPL – key takeaways from the meeting:

Emerging importance of online platform in FMCG

E‐commerce is also becoming an important channel of distribution in the FMCG space. In

line with this, GCPL has already set up a separate e‐commerce team and is in discussion with

online retailers to partner and hawk its products online. As per a recent Google report, mere

0.3% of domestic FMCG sales are carried out via online channels, which is however

expected to touch 5% by 2020. Thus, almost 50x growth in FMCG sales will be achieved

through online channels; USD50bn online sales are expected by 2020.

Chart 1: Strong YoY growth in online searches as of December 2014 in the FMCG

categories

0.0

24.0

48.0

72.0

96.0

120.0 Apparel

Beauty

Foods

Infant Care

Arts &

Entertainment

Travel &

Tourism

Finance

(%)

Source: Google and Bain & Company report

Chart 2: Online FMCG sales to increase as a percentage of total sales to 5% by 2020

0.0

1.2

2.4

3.6

4.8

6.0

2014 2020

(%)

Source: Google and Bain & Company report

“We stand to gain with our distribution strengths and product portfolio skewed towards the urban areas. But we are not ignoring rural altogether. Because our base is low in rural, I think we see decent growth in rural, too. We continue to expand our direct reach across the country. We will also push more premium products across our three categories of operation”.

‐ Vivek Gambhir, MD, GCPL

Godrej Consumer


Domestic business to double over 5 years

GCPL is focusing on domestic operations and targets to double segment revenues from

current ~INR45bn in FY15E to INR100bn by FY20E, implying 17.3% CAGR over next five years.

Project FutureNow has been set up to achieve INR100bn organic sales by FY20E, Domestic

operations are being overhauled with changes in management structure and de‐linking the

segment from international operations and spinning it into an independent profit centre. Mr.

Sunil Kataria, COO, Sales and Marketing (who would report to Mr. Vivek Gambhir, MD) will

oversee India and the SAARC region, which will operate as independent zones. Overall,

enhanced distribution and penetration, innovation and new launches and new sales

channels including online, chemists and cosmetic stores will drive domestic business growth,

going ahead.

Chart 3: Domestic business as a % of total revenues

0.0

20.0

40.0

60.0

80.0

100.0

FY13 FY14 9mFY15

(%)

Domestic revenues International revenues

Source: Company, Edelweiss research

Market share gains continue to outpace category

While on‐the‐ground sentiment has seen marked improvement, it has not converted into

actual pickup in demand. As per management, there is at least a two quarter lag between

improvement in confidence on ground and actual improvement in demand. Growth in

FMCG space has slowed down to 8‐9% YoY in FY15E, which the company is optimistic will

improve to 10‐12% YoY in FY16E. However, GCPL’s HPC category continues to outpace

category growth rates — the Indian HPC category logged 5% YoY growth for 9mFY15 while

GCPL grew 1.6x the category growth rates at 8% YoY during the period. Though growth

across categories moderated for GCPL, the company continues to grow ahead of market and

hence gained market share. HPC category growth rates have declined from 15% in FY13 to

8% in FY14. But since Q1FY15, the category logged better growth rates over the consecutive

three quarters. This is encouraging and will bring GCPL back on growth path in the

categories where GCPL is present. In FY16E and FY17E, growth will largely be volume led

than price led and some categories may see price deflation as well.

““India will leapfrog from traditional trade to mobile commerce”.

‐ Vivek Gambhir, MD, GCPL

Consumer Goods


Chart 4: GCPL overall growth continues to outpace HPC growth

4.0

8.0

12.0

16.0

20.0

24.0

FY13 FY14 9mFY15

(%)

India HPC GCPL


GCPL has also garnered market share in the two underpenetrated categories of HI and hair

colour. During 9mFY15, on MAT basis the company enhanced market share by 180bps and

340bps in hair colour and HI, respectively. After 9mFY15, in the personal wash segment the

company lost by 80bps on MAT basis. However, GCPL managed to recoup market share by

50bps YoY thereon. In liquid detergents, the company enjoys market share of ~70%.

Household insecticides, hair colour: Rising penetration to drive growth

These categories are currently underpenetrated in India, particularly in rural areas. Thus,

there exists significant room to drive growth in these categories. Per capita consumption of

the two categories also remains dismal versus other countries.

Chart 5: Penetration of Insecticides and Hair colour still at a low level

0.0

24.0

48.0

72.0

96.0

120.0

Toilet soaps Insecticides Hair Colour

(%)

Penetration (%)


Godrej Consumer


Chart 6: Per capita consumption of Insecticides and Hair colour in India

0.0

0.3

0.6

0.9

1.2

1.5

Thailand Malaysia China Indonesia India

(%)

Hair Colour

0.0

1.0

2.0

3.0

4.0

5.0

Malaysia Thailand Indonesia China India

(%)

Household Insecticides



In HI segment, GoodKnight Fast Card (cross pollinated from Hit Magic, paper based

mosquito repellent (Indonesia)) will help drive penetration, particularly in rural areas

because of its low price points.

GCPL’s INR30 price point in the hair colour space has met with remarkable success. Even the

MNCs have tried to imitate the company’s Godrej Expert Rich Crème and launched products

at lower price points. But, competition failed to replicate GCPL’s success at the low INR30

price point. GCPL has emerged successful in this category because of its cost reduction focus.

Crème is now 1/3rd of the total hair colour market in India with the balance accounted by

Mehendi (Heena) and Powder. Powder is witnessing mid to low‐single digit growth, though

with growing volumes.

Consumer Goods


Chart 7: Rural penetration in HI and HC remains significantly low

0.0

14.0

28.0

42.0

56.0

70.0

Rural Urban

(%)

Hair Colour

0.0

18.0

36.0

54.0

72.0

90.0

Rural Urban

(%)


Source: Source: Company, Edelweiss research

Chart 8: HI (domestic business) ‐ Sales growth

0.0

9.0

18.0

27.0

36.0

45.0

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

Q2FY15

Q3FY15

(%)

HI

Source: Source: Company, Edelweiss research

Godrej Consumer


Chart 9: Hair care (domestic business) ‐ Sales growth

3.0

10.2

17.4

24.6

31.8

39.0

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

Q2FY15

Q3FY15

(%)

Hair care


Soaps: In recovery mode

GCPL logged low to mid‐single digits growth in the personal wash segment over Q2FY14 to

Q1FY15. The segment saw market share erosion (dipped by 30‐40bps) too in past two years.

However, in past two quarters the segment reported double‐digit growth consecutively

along with regaining market share, which is now flattish. Over ensuing 2‐3 quarter, GCPL

remains confident of clocking double‐ digit growth in the soaps segment led by promotions

and new launches. Market share of GCPL’s Cinthol is 4%, while Godrej No.1 enjoys 8%

market share.

Chart 10: Soaps (domestic business) ‐ Sales growth

0.0

10.0

20.0

30.0

40.0

50.0

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

Q2FY15

Q3FY15

(%)

Personal wash


Rural gallops ahead of urban; but urban close on heels

Historically, rural growth has been outpacing urban growth in the HPC segment. This gap

further widened in past two quarters i.e., Q2FY15 and Q3FY15, as urban growth failed to

witness anticipated revival. Overall, FMCG recorded near 8% YoY growth in Q3FY15 (foods

and HPC posted 9% and 7.4% YoY growth, respectively). In Q3FY15, rural and urban growth

Consumer Goods


stood at 11.4% and 5.2% YoY, respectively. The company mentioned going forward urban

growth trajectory will see improvement, even as the urban‐rural gap reduces. However, for

GCPL though rural growth is ahead of urban (16% YoY growth in rural versus 13% YoY

growth in Q3FY15), the gulf in the rural‐urban growth rates has shrunk. There was 1,000bps

difference between urban and rural growth for the company.

OneRural to drive proportion of rural revenues…

For GCPL, rural growth has surpassed urban growth for many quarters. This growth has

resulted from the measures taken by the company to enhance distribution strength and also

because of the underpenetrated categories in which it operates (HI and hair colour). GCPL

also launched the OneRural project to increase rural salience in overall revenues from

current 27% to 35% over next three years

Even though the company already has vast reach wherein it touches 60,000 villages, it is

looking at driving significant growth from the top‐35,000 villages by catering to the

progressive rural customers residing there. GCPL clarified progressive rural customers were

those who are almost like urban consumers in terms of their consumption habits. To

implement this strategy better, the company is also chalking out plans to launch products

specifically for the rural markets. Plans are also afoot to draw up a market strategy like

increasing service frequency to once a month in the top‐10,000 villages.

Chart 11: Volume growth in different categories in urban and rural areas in 9mFY15

(6.0)

(3.6)

(1.2)

1.2

3.6

6.0

Personal Care Household Care Foods Beverages

(%)

Urban Rural Source: IMRB Data

Godrej Consumer


Chart 12: Value growth in different categories in urban and rural areas in 9mFY15

(2.0)

0.4

2.8

5.2

7.6

10.0

Personal Care Household Care Foods Beverages

(%)

Urban Rural Source: IMRB Data

…but, urban market remains focus area

Urban market however, remains a focus area for the company as still penetration of HI and

HC is still very low in urban areas. Also, in the highly penetrated category like soap it is the

urban market that helps the company drive growth through premiumisation. With 73% of

revenue coming from urban areas helped by strong distribution network and product

portfolio, urban markets will be key to drive the company’s premiumisation strategy.

Innovation pipeline to drive premiumisation

GCPL has always been focused towards driving growth through innovation in its categories.

In FY13, the company launched 7‐8 products, which reduced to 5‐6 in FY14 as the FMCG

category was witnessing slowdown. GCPL has a strong innovation pipeline and plans to

launch 9‐10 new products in FY16. Most of the new launches and innovations will be done

to drive premiumisation in the HPC segment. Premium products fetch prices at least 20%

above the average prevalent rate. For the company, 40% of incremental growth will be

driven by innovations and new product launches.

Personal Wash: GCPL extended the Cinthol franchise of soap to health and wellness

segment and launched Cinthol Confidence + which provided germ protection. The company

is also expanding its Godrej No.1 soap range and has extended it to the glycerin category

(INR6‐7bn in size). GCPL is test marketing a winter soap under Godrej No.1 Nature Soft and

has launched it in Punjab. This product is priced at a 40% discount to Pears. Godrej No.1 has

a very high brand equity in North and Central India.

HI: In HI GCPL launched a new variant of GoodKnight Advanced coil. The company launched

Neem Low Smoke Coil which will help to premiumize the coil franchise.

Hair colour: GCPL will be launching a new innovative product in this segment in FY16 which

will cater to the mass segment in terms of the pricing and positioning. Post 3‐4 quarters of

this launch the company will launch a premium product in this segment.

Facewash: Apart from this GCPL entered a new category of facewash and extended the

Godrej No1 franchise. The product is branded as Godrej No.1 Nature White Fairness Face

Consumer Goods


wash. The product has been launched in innovative packaging. GCPL has also launched a

small pack at a low price of INR10; this pricing will be disruptive in this cluttered but less

penetrated category. This pricing will help in introducing the brand to the customers.

Facewash is a INR16bn category which is growing at 20‐25% CAGR over the last 5 years. The

Top 4 players hold ~80% market share in this category (No.1‐ Himalaya, No.2‐ Garnier, and

No.3‐ Ponds).

Health and wellness: GCPL forayed in to the health and wellness segment by its brand

Godrej Protekt. The company launched a full range of hand washes, hand foam and hand

sanitizers under this brand. GCPL plans to launch a lot more health and wellness products

under this brand going forward.

Fig. 1: Recent Innovations by the company

Source: Company

B Blunt paves way into premium hair care market

GCPL forayed into the premium hair care segment by acquiring stake in B Blunt salon (holds

30% stake). The company has created B System in collaboration with Adhuna Akhtar and her

team which houses world‐ class products, tools and expertise customised for Indian hair.

These products give a salon‐like experience to customers. The products are currently

available only at B Blunt salons (25), which will now reach to multi brand outlets (MBOs).

The products will also be available in retail outlets in 1‐1.5 year’s time. The B System offers 3

solutions: PREP (products like shampoo, conditioners), STYLE (styling products) and

TRANSFORM (hair colour and hair extensions).

Godrej Consumer


Fig.2: B Blunt range of products

Source:Company

Benign commodity prices, mix to aid margin improvement

The decline in palm oil and crude prices will aid margin improvement and will be more

pronounced in Q4FY15 and Q1FY16. The drop in palm oil prices has been captured in the

Q3FY15 inventory, while impact of the drop in crude prices will reflect in Q4FY15.

GCPL is not taking any price cuts due to favourable commodity prices instead it is passing on

some benefits by way of promotions (in soaps). This will help drive volumes, especially of

the personal wash category. However, some benefits of favourable commodity prices will be

retained by the company, which will help margins.

The company’s margins are also well poised to improve as the mix will become favourable.

This will be driven by higher growth in the high‐margin HI and hair colour segments. The

costs initiatives taken by the company like Project Pie will also be margin accretive.

Consumer Goods


Chart 13: Palm oil prices

1,500

2,000

2,500

3,000

3,500

4,000

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Feb‐12

Aug‐12

Feb‐13

Aug‐13

Feb‐14

Aug‐14

Feb‐15

(MYR/M

T)

Source: Edelweiss research

GST: A key positive

GST is an important reform, which will benefit the entire economy (GDP growth will

increase by 2% if GST is implemented). As for GCPL, the company expects to save close to

15% in logistics costs on account of GST. Pertinently, GST might not necessarily lead to

reduction in warehouses but it might lead to reduction in secondary freight costs, which is

4‐5x expensive than primary freight costs. However, GST will hold higher indirect benefits,

which cannot be quantified.

GCPL Q3FY15 conference call | Key takeaways

Household and personal care (HPC): GCPL’s HPC division posted moderate 7.3% YoY growth

(4.5% YoY in Q2FY15) and grew 1.6x the overall HPC category. This is the third consecutive

quarter of improvement in the HPC segment. The company expects demand to pick up in

FY16 as the economy further improves. As per Nielsen, category volume growth came in at

1% YoY (‐1.6% YoY in Q2FY15 and ‐3.3% YoY in Q1FY15).

Rural‐urban: Rural growth was faster than urban, though urban segment is witnessing

strong signs of pick up, albeit on low base. The company believes rural growth will continue

to outpace urban growth at least for the next 2‐3 years.

Domestic business: The India business grew 12% YoY with EBITDA growth of 18% YoY.

EBITDA margins increased by 98bps YoY, while gross margin expanded by 359bps YoY.

Overall India business volume growth stood at 8% YoY.

Gross margins: India business logged ~350bps YoY in gross margin on favourable mix (high

gross margin household insecticide (HI) segment higher growth versus other segments) and

benign commodity prices. Gross margins of international business fell by ~300bps YoY due

to mix (salience of Darling business was higher, which fetches low gross margin, A&P is low

but has high staff costs) and delay in price hikes due to increase in commodity prices.

Overall, gross margin of the segment is expected to further improve in ensuing quarters.

Household insecticides (HI): The segment witnessed recovery and logged 16% YoY growth.

The company’s division surged ahead of the category and expanded market share, which

Godrej Consumer


now stands at their highest‐ever levels. With a view to premiumise the coil market, GCPL

launched GoodKnight Neem Low Smoke Coil in Q3FY15. Good Knight Fast Card demand

remains strong. More than 3/4th of segment growth was volume driven.

Hair colour (HC): Registered volume‐led growth of 10% YoY, despite high base of 37% YoY in

Q3FY15. Rich Crème continues to gain market share.

Personal wash: GCPL’s division witnessed second consecutive quarter of double‐digit

growth at 11% YoY, while the category growth rate stood at lower single digits. Lower palm

oil prices aided gross margin expansion. To premiumise this portfolio, GCPL is test marketing

new winter soap in select markets in North India under the Godrej No. 1 brand (test

launched in Punjab). Most players are aggressive on promotions in this segment. GCPL has

been focusing on consumer offers and fixed the execution challenges in the system.

Liquid detergents: Clocked 13% YoY growth despite delayed winters.

International business: Reported ~12% YoY growth. However, organic CCG stood at 20%

YoY as the company posted strong growth in majority of its geographies. EBITDA margins

expanded by ~260bps YoY as the company logged margin improvement in Indonesia, UK and

LatAM (EBITDA growth at 35% YoY).

Asia: Indonesia business saw CCG of 19% YoY and margin expansion of 330bps YoY. Margin

improvement was led by price hikes, cost efficiencies and judicious marketing spends.

Margins were driven by pricing (half of the value growth came from price hikes),

rationalisation of A&P spend and operating leverage.

Africa: Posted robust CCG of 36% YoY (inorganic component 3‐4%), driven by Darling

business though margins were flat for the company in Q3FY15. EBITDA margins however

recorded QoQ improvement of 670bps YoY due to better growth and cost initiatives. In

January, GCPL acquired Frika Hair, a premium hair extension brand in South Africa. Darling

business posted 42% growth in constant currency terms.

Nigeria and Southern Africa (South Africa and Mozambique) did well. Nigeria growth came

on low base and due to some up‐stocking by distributors as there are elections in February

in Nigeria. Weakness in Rand resulted in gains for domestic players in Southern Africa. GCPL

is confident of sustaining growth momentum in Africa.

HI will see traction in Africa only in FY17, as the company is reworking and doing pilot

projects on the same. GCPL is getting the registration in place.

LatAM: The business posted CCG of 25% YoY with 270bps YoY expansion in margins. This

geography saw its highest‐ever third quarter margin in Q3FY15. Implementation of Project

Iceberg was primarily responsible for growth.

Europe: The geography logged 13% YoY decline in CCG. Margins however, expanded by

230bps YoY on better mix and cost saving initiatives. The company’s main brand in this

geography continues to face issues due to counterfeit products. The FMCG market in UK is

witnessing pressure. Though the company’s own brands, Cuticura, and Soft & Gentle

recorded good growth, its distributed brands are witnessing short‐term pressures.

Consumer Goods


Frika acquisition: Distribution of Frika is complimentary to the Darling business. It has

strong presence in the Eastern Cape area where Darling is not strong. It is a premium brand

while Darling caters to the mass market. From manufacturing perspective too, it is

synergistic to Darling business.

New launch contribution: Innovation, as a % of sales, is in early double digits. New products

include products launched in the span of past 3 years including the current year.

Distribution: GCPL has been increasing its direct reach at the rate of 10‐15% every year. The

area of focus is improving the quality of production and the distribution system. GCPL’s sales

force is equipped with handheld devices and the company has also invested in sophisticated

business solutions to get better results and efficiencies. GCPL is extending this strategy to

Indonesia, Africa and parts of South Africa. In India, the company has direct reach to 55,000

villages. It is not looking at further expansion in terms of villages, but wants to expands

within its current base. In India, 10% of the states contribute to 70% of the FMCG

consumptions.

E‐commerce: GCPL has set up a separate ecommerce team and is in discussion with online

retailers to partner with them to sell its products online.

Modern trade: Modern trade posted robust 28% YoY growth. Industry growth was 6%.

Good growth in modern trade was due to slight pickup witnessed in the premium market,

urban pick up and new launches that are more for the modern trade.

Project pie: Savings from this project is expected to be INR2.5bn on annualised basis in FY16.

Further, 60% of savings will reflect in the gross margins with the balance showing in

operating margins line. Savings will also accrue from strategic sourcing, lower in

manufacturing costs, packaging costs, optimisation of marketing spends, etc.

GST: GST is expected to be implemented from April 1, 2016. GDP growth will increase by 2%

if GST is implemented. For GCPL, in terms of direct benefits, it will save INR300‐400mn by

way of freight and distribution costs. Indirect benefits will be much higher for the company.

Working capital: Consolidated level working capital stood at ~3 weeks. Debtors were higher

in international business due to higher percentage of modern trade.

Outlook and valuations: Positive; maintain ‘BUY’

GCPL continues to surpass category growth along with garnering market share across

segments. Benign commodity prices led by palm oil will not only support growth due to

higher consumer offers, but also improve margins as full benefits will not be passed on. We

also like the company’s aggression in developing categories via new launches (Protekt,

Cinthol Confidence+, Good Knight Xpress liquid vapouriser, Fast card, etc) and cross

pollination of products across geographies. Its success in entering new emerging categories

like premium hair and face wash, which continues to be dominated by the MNCs, remains to

be seen. However, GCPL’s success in new launches instills some confidence here. Apart from

benign commodity prices, domestic margins are also expected to benefit from supply chain

efficiencies coming from Project Pie (annualised benefit of ~INR2.5bn in FY16E). The

international business has started witnessing improved performance, led by cost saving

initiatives and pricing action. GCPL also stands to benefit from likely recovery in demand in

Godrej Consumer


FY16E, led by strong distribution, underpenetrated categories and innovative pipeline. We

maintain our target multiple of 32x FY17E with a target price of INR1,331. We maintain

‘BUY’ recommendation and rate it ‘Sector Outperformer’ on relative return basis.

Table 1: Financial snapshot‐ Standalone (INR mn)

Year to March Q3FY15 Q3FY14 % Change Q2FY15 % change

Net sales 11,671 10,447 11.7 10,912 7.0

Other operating income 168 133 26.4 148 13.6

Net operating income 11,839 10,580 11.9 11,060 7.0

COGS 5,235 5,058 3.5 5,264 (0.5)

Staff costs 785 457 71.7 642 22.3

Advt and publicity 1,230 1,172 4.9 1,039 18.3

Other expenditure 2,312 1,961 17.9 1,940 19.1

Total expenditure 9,562 8,649 10.6 8,886 7.6

EBITDA 2,277 1,931 17.9 2,174 4.7

Interest 91 109 (15.8) 97 (5.9)

Depreciation 102 88 15.0 106 (4.1)

Other income 77 109 (29.8) 227 (66.2)

Forex gain/(loss) 2 (4) NM 9 NM

PBT 2,163 1,840 17.5 2,207 (2.0)

Tax 445 360 23.5 469 (5.3)

PAT before exceptionals 1,718 1,480 16.1 1,738 (1.1)

Extra ordinary items (net of tax) ‐ ‐ NM ‐ NM

Reported profit 1,718 1,480 16.1 1,738 (1.1)

Equity capital (FV INR 1) 340 340 0.0 340 ‐

No. of shares (mn) 340 340 0.0 340 ‐

EPS (INR) 5.05 4.35 16.0 5.10 (1.1)

As % of sales

Gross margin 55.8 52.2 359 52.4 337

Staff costs 6.6 4.3 231 5.8 83

Advt and publicity 10.4 11.1 (69) 9.4 99

Other expenditure 19.5 18.5 100 17.5 198

EBITDA margin 19.2 18.3 98 19.7 (43) Source: Company, Edelweiss research

Table 2: Segmental revenue % YoY growth in INR terms

Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13 Q2FY13

Net sales ‐ domestic 11.7 6.5 5.9 11.4 12.7 14.3 18.7 19.8 22.5 18.2

‐ Personal wash 11.0 13.0 2.0 1.0 6.0 3.0 13.0 19.8 20.2 24.0

‐ Hair care 10.0 9.0 14.0 16.0 37.0 24.0 32.0 31.8 17.1 10.0

‐ Home care 16.0 2.0 9.0 17.0 8.0 25.0 24.0 22.4 28.0 20.0

‐ Others 1.3 5.2 0.7 10.6 28.0 (7.3) 89.0 29.0 14.9 33.0

Net sales ‐ consol 11.7 5.0 9.5 12.2 16.7 22.5 24.0 29.8 25.8 34.5

International 11.9 2.6 13.7 12.0 22.7 33.0 30.5 44.8 32.9 63.4

Asia (Megasari) 13.7 1.4 9.4 0.3 5.9 14.2 17.7 34.5 29.6 37.4

Africa (Tura, Rapidol, Kinky, DGH) 30.2 9.6 16.8 38.2 28.8 53.0 48.6 39.1 21.5 150.8

Latin America (Issue Group, Argencos) 0.6 (4.5) (3.1) 7.1 12.0 21.0 20.4 72.0 82.9 92.4

UK (Keyline) (18.0) (3.6) 42.6 16.2 122.0 102.0 57.5 106.3 16.3 28.3 Source: Company, Edelweiss research

Consumer Goods


Table 3: International business snapshot (INR mn)

International revenue Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13

Asia (Megasari) 3,900 3,660 3,490 3,440 3,430 3,610 3,190 3,430 3,240

UK (Keyline) 910 1,330 1,640 1,150 1,110 1,380 1,150 990 500

Africa (Tura, Rapidol, Kinky, Darling) 3,790 2,740 2,500 2,460 2,910 2,500 2,140 1,780 2,260

Latin America (Issue Group, Argencos) 1,690 1,470 1,260 1,510 1,680 1,540 1,300 1,410 1,500

International EBITDA Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13

Asia (Megasari) 741 659 524 619 583 614 479 652 648

UK (Keyline) 73 120 148 104 67 138 104 129 25

Africa (Tura, Rapidol, Kinky, Darling) 682 301 350 369 524 350 278 125 452

Latin America (Issue Group, Argencos) 220 191 50 302 151 108 39 127 120

EBITDA margins Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13

Asia (Megasari) 19.0 18.0 15.0 18.0 17.0 17.0 15.0 19.0 20.0

UK (Keyline) 8.0 9.0 9.0 9.0 6.0 10.0 9.0 13.0 5.0

Africa (Tura, Rapidol, Kinky, Darling) 18.0 11.0 14.0 15.0 18.0 14.0 13.0 7.0 20.0

Latin America (Issue Group, Argencos) 13.0 13.0 4.0 20.0 9.0 7.0 3.0 9.0 8.0 Source: Company, Edelweiss research

Table 4: Constant currency YoY sales growth

Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13

Net sales ‐ consol 12.0 5.0 10.0 13.0 12.0 14.0 27.0 19.0 19.0

International 13.0 12.0 17.0 15.0 11.0 14.0 19.0 23.0 16.0

Asia (Megasari) 19.0 15.0 21.0 8.0 12.0 13.0 21.0 35.0 31.0

Africa (Tura, Rapidol, Kinky, DGH) 36.0 15.0 12.0 33.0 21.0 53.0 58.0 40.0 23.0

Latin America (Issue Group, Argencos) 25.0 31.0 26.0 28.0 15.0 23.0 31.0 81.0 91.0

UK (Keyline) (13.0) (9.0) 21.0 (4.0) 107.0 88.0 59.0 100.0 9.0 Source: Company, Edelweiss research

Chart 14: 1‐year forward PE

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Mar

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-11

Sep

-11

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Godrej Consumer


Company Description

GCPL is a major player in the toilet soap, household insecticide 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 Expert Rich Hair Crème,

Godrej Hair Dye (liquid and powder), Godrej Kesh Kala oil and Nupur hair dyes in the mass

end and Renew and Coloursoft in the mass premium segment. 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. GCPL is the leader

in the household insecticides category across all the formats.

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. It acquired Kinky, one of the leaders in the South African hair business for South

African Rand 265 mn. Tura and Megasari are among recent purchases that helped extend its

presence in Africa and Indonesia respectively. With acquisition of Darling Group Holding,

leader in hair extension in Africa, in Africa GCPL further strengthened its stronghold in the

continent. It also entered Chile, with acquisition of 60% stake in Cosmetica Nacional. GCPL

acquired 30% stake in B:Blunt salon services.

Investment Theme

GCPL boasts of patented technology for PHDs that has helped it drive usage of hair colours

at the lower end of the market. Recently with disruptive launch of crème based hair color at

low price point GCPL has raised competitive intensity in the segment and gained market

share form MNCs. In soaps, the company provides high‐quality value‐for‐money soaps with

its Godrej No1 which has helped it garner larger market share and plays the premiumisation

strategy with its Cinthol range. GCPL is the undisputed leader in the household insecticides

space across three categories and continues to expand the market with innovations. GCPL’s

international acquisitions are driving benefits from cross pollination of products and

technology. 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.

Depreciating INR, Indonesian rupiah and Argentine Peso can impact profitability.

GCPL’s ability to gain market share in its soap segment could be adversely affected by the

aggression of HUL, ITC, Wipro, etc.


Consumer Goods

Financial Statements

Income statement (INR mn)


Net revenue 76,024 84,572 99,401 118,863

Materials costs 35,547 39,749 46,122 55,033

Employee costs 7,489 8,119 9,542 11,292

Other Expenses 9,072 9,895 11,630 14,026

Advertisement & sales costs 12,413 13,109 15,904 18,899

EBITDA 11,503 13,701 16,202 19,612

Depreciation & Amortization 819 903 972 1,007

EBIT 10,685 12,798 15,231 18,606

Other income 627 925 1,113 1,481

Interest expenses 1,074 1,045 1,067 1,019

Profit before tax 10,238 12,678 15,277 19,068

Provision for tax 2,104 2,662 3,208 4,004

Extraordinary items (net of tax) 59 ‐ ‐ ‐

Net profit 8,134 10,015 12,069 15,064

Minority interest (595) (801) (845) (904)

Profit after minority interest 7,598 9,214 11,224 14,160

Shares outstanding (mn) 340 340 340 340

Diluted EPS (INR) 22.1 27.1 33.0 41.6

Dividend per share (INR) 5.0 8.1 9.9 12.5

Common size metrics


Materials costs 46.8 47.0 46.4 46.3

Advertising & sales costs 16.3 15.5 16.0 15.9

EBITDA margins 15.1 16.2 16.3 16.5

Net profit margins 10.7 10.9 11.3 11.9

Growth ratios (%)


Revenues 18.5 11.2 17.5 19.6

EBITDA 17.1 19.1 18.3 21.0

Net profit 13.5 23.1 20.5 24.8

EPS 13.0 22.2 21.8 26.2

Key Assumptions

Year to March FY14 FY15E FY16E FY17E

Macro

GDP(Y‐o‐Y %) 4.7 5.4 6.3 7.3

Inflation (Avg) 9.5 6.8 5.5 5.5

Repo rate (exit rate) 8.0 7.8 6.8 6.3

USD/INR (Avg) 60.5 61.0 62.0 62.0

Company

Revenue growth (Y‐o‐Y %)

Personal wash growth (domestic) 6.3 5.9 9.2 11.2

Hair color growth (domestic) 30.5 8.9 21.0 23.2

Home care growth (domestic) 16.4 11.4 18.8 21.0

International business growth 21.1 14.9 18.0 19.6

Asia sales growth 10.2 12.0 20.0 22.0

Africa sales growth 28.0 10.2 18.2 17.7

Europe sales growth 77.9 8.0 12.0 15.0

LatAm sales growth (15.7) 8.0 12.5 15.0

EBITDA margin assumptions

COGS as % of sales (Consol) 46.8 47.0 46.4 46.3

Oils and Fats (Domestic) as % of COGS 14.0 22.0 21.0 21.0

Chemicals, perfumes, colours, catalyst (Domestic) 10.4 11.6 11.5 11.5

Packing Materials (Domestic) as % of COGS 11.0 12.0 12.0 12.0

Staff costs as % of sales (Consol) 9.9 9.6 9.6 9.5

A&P as % of sales (Consol) 16.3 15.5 16.0 15.9

Financial assumptions

Tax rate (Consol) 20.5 21.0 21.0 21.0

Capex (INR mn) 935 2,550 2,550 2,550

Debtor days 35 35 35 35

Inventory days 109 70 70 70

Payable days 117 117 117 117

Cash conversion cycle (days) 27 (12) (12) (12)

Interest rate on o/standing debt (%) 4.4 4.5 4.8 4.8

Depreciation as % of gross block 3.7 3.8 3.7 3.5

Dividend as % of net profit 22.4 30.0 30.0 30.0

Yield on cash 7.5 11.0 17.0 15.0


Godrej Consumer

Peer comparison valuation

Market cap Diluted Price to Earnings EV/EBITDA (X) Return on Average Equity

Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E

Godrej Consumer 6,189 41.6 34.2 29.4 24.7 22.6 23.7

Colgate 4,334 48.4 41.0 33.6 27.4 101.9 103.4

Dabur 7,442 44.2 35.2 34.2 26.5 34.8 34.9

Emami 3,534 45.8 38.6 39.4 32.2 44.5 41.0

GlaxoSmithKline Consumer Healthcare 3,920 41.4 34.4 30.1 24.2 29.8 30.5

Hindustan Unilever 32,671 49.2 41.5 36.2 30.0 105.1 103.6

ITC 44,339 27.8 24.8 17.9 16.1 34.3 34.6


Cash flow metrics


Operating cash flow 11,286 5,966 11,884 14,347

Investing cash flow (4,948) (2,550) (2,550) (2,550)

Financing cash flow (6,333) (5,279) (6,006) (6,989)

Net cash flow 6 (1,863) 3,328 4,808

Capex (935) (2,550) (2,550) (2,550)

Dividends paid (1,991) (3,234) (3,939) (4,970)

Profitability and efficiency ratios


Return on Average Equity (ROE) 21.3 22.6 23.7 25.5

Pre‐tax Return on Capital 17.7 19.7 21.3 23.4

Inventory days 109 70 70 70

Debtors days 35 35 35 35

Payable days 117 117 117 117

Cash conversion cycle (days) 27 (12) (12) (12)

Current ratio (x) 1.5 1.7 1.9 2.1

Debt/EBITDA (x) 2.1 1.7 1.3 1.1

Debt/Equity (x) 0.6 0.5 0.4 0.3

Adjusted debt/equity 0.6 0.5 0.4 0.3

Interest coverage ratio 10.0 12.2 14.3 18.3

Operating ratios


Total asset turnover 1.2 1.3 1.4 1.5

Fixed asset turnover 4.8 5.1 5.5 6.1

Equity turnover 2.1 2.1 2.1 2.1

Valuation parameters


Diluted EPS (INR) 22.1 27.1 33.0 41.6

Y‐o‐Y growth (%) 13.0 22.2 21.8 26.2

CEPS (INR) 26.3 32.1 38.3 47.2

Diluted Price to Earnings Ratio 50.8 41.6 34.2 27.1

Price to Book Ratio (P/B) (x) 10.2 8.8 7.5 6.4

EV/Sales (x) 5.3 4.8 4.0 3.3

EV/EBITDA (x) 34.9 29.4 24.7 20.1

Dividend yield (%) 0.4 0.7 0.9 1.1

Balance sheet (INR mn)

As on 31st March FY14 FY15 FY16E FY17E

Equity capital 340 340 340 340

Reserves & surplus 37,414 43,394 50,678 59,868

Shareholders funds 37,754 43,734 51,018 60,208

Minority interest (BS) 2,251 3,052 3,897 4,801

Short term debt 1,115 1,068 1,021 974

Long term debt 15,903 15,232 14,562 13,892

Current maturity of long term 6,711 6,428 6,145 5,863

Total Borrowings 23,728 22,728 21,728 20,728

Deferred tax liability (net) (203) (203) (203) (203)

Sources of funds 63,530 69,312 76,441 85,534

Tangible assets 5,224 6,821 8,350 9,843

Intangible assets 10,465 10,465 10,465 10,465

CWIP (incl. intangible) 1,671 1,721 1,771 1,821

Total net fixed assets 17,360 19,007 20,585 22,129

Goodwill on consolidation 35,525 35,525 35,525 35,525

Non current investments 343 343 343 343

Current Investments 1,020 1,020 1,020 1,020

Cash and equivalents 7,048 5,184 8,512 13,321

Inventories 10,821 16,219 19,063 22,796

Sundry debtors 7,113 8,110 9,532 11,398

Loans and advances 3,744 3,744 3,744 3,744

Other assets 25 25 25 25

Total current assets (ex cash) 21,703 28,098 32,363 37,962

Trade payable 12,344 12,741 14,784 17,641

Other current liabilities and 7,123 7,123 7,123 7,123

Total current liabilities & 19,468 19,865 21,908 24,764

Net current assets (ex cash) 2,235 8,233 10,456 13,198

Uses of funds 63,530 69,312 76,441 85,534

Book value per share (INR) 110.9 128.5 149.9 176.9

Free cash flow (INR mn)


Reported Profit 7,598 9,214 11,224 14,160

Add : Non cash charge 2,429 2,749 2,883 2,929

Gross cash flow 10,027 11,964 14,107 17,089

Less: Changes in WC (1,821) 5,998 2,223 2,742

Operating cash flow 11,847 5,966 11,884 14,347

Less: Capex 935 2,550 2,550 2,550

Free cash flow 10,912 3,416 9,334 11,797


Consumer Goods

Holding – Top10

Perc. Holding Perc. Holding

Aberdeen Asset Management Asia 5.6 Baytree Investments (Mauritius) 3.7

First State Investments Icvc 3.0 Arisaig Partners Asia Pte Ltd 2.7

Life Insurance Corp Of India 1.3 Vanguard Group Inc 1.1

First State Investments 1.0 Blackstone Asia Advisors Llc 0.7

Blackrock Fund Advisors 0.6 Invesco Asset Management Ltd Id 0.3

*as per last available data

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

24 Dec 2014 Godrej Industries Limited Buy 626000.00

24 Dec 2014 Godrej & Boyce Mfg. Co. Ltd. Sell 626000.00

17 Dec 2014 A MAHENDRAN Sell 24080.00

17 Dec 2014 Godrej Industries Limited Buy 835000.00

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Additional Data

Directors Data Mr. Adi Godrej Promoter/ Chairman/ Whole‐time Director Mr. Jamshyd Godrej Promoter/ Non‐Executive Director

Mr. Nadir Godrej Promoter/ Non‐Executive Director Ms. Tanya Dubash Promoter/ Non‐Executive Director

Ms. Nisaba Godrej Promoter/ Executive Director Mr. Narendra Ambwani Non‐Executive/ Independent Director

Mr. Bala Balachandran Non‐Executive/ Independent Director Mr. Bharat Doshi Non‐Executive/ Independent Director

Dr. Omkar Goswami Non‐Executive/ Independent Director Mr. A. Mahendran Non‐Executive Director

Mr. Aman Mehta Non‐Executive /Independent Director Mr. D. Shivakumar Non‐Executive /Independent Director

Mr. Vivek Gambhir Managing Director Ms. Ireena Vittal Non‐Executive /Independent Director

Auditors ‐ Kalyaniwalla & Mistry ‐ Chartered Accountants

*as per last annual report


Company Absolute

reco Relative

reco Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Asian Paints BUY SO M Bajaj Corp HOLD SP H

Colgate HOLD SP M Dabur BUY SO M

Emami BUY SO H GlaxoSmithKline Consumer

Healthcare

HOLD SP M

Godrej Consumer BUY SO H Hindustan Unilever HOLD SP L

ITC BUY SU M Marico BUY SO M

Nestle Ltd HOLD SP L Pidilite Industries BUY SO M

United Spirits BUY SO H

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


Consumer Goods

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91‐22) 4009 4400, Email: [email protected]

Nischal Maheshwari

Head Research

[email protected]

Coverage group(s) of stocks by primary analyst(s): Consumer Goods

Asian Paints, Bajaj Corp, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, Pidilite Industries, GlaxoSmithKline Consumer Healthcare, United Spirits

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 152 45 8 205 * stocks under review

Market Cap (INR) 151 51 3

Date Company Title Price (INR) Recos

Recent Research

28‐Feb‐15 ITC Overhang to remain; Company Update

361 Buy

13‐Feb‐15 Nestle India Quality gains; Result Update

7,034 Hold

06‐Feb‐15 Godrej Consumer Products

Gaining ground; Result Update

1,123 Buy

> 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

One year price chart

566

736

905

1,075

1,244

1,414

Feb‐14

Mar‐14

Apr‐14

May‐14

Jun‐14

Jul‐14

Aug‐14

Sep‐14

Oct‐14

Nov‐14

Dec‐14

Jan‐15

Feb‐15

(INR)

Godrej Consumer


Godrej Consumer

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Consumer Goods

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