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| Rich lather |
| Sarath Chelluri / Mumbai Aug 24, 2009, 00:25 IST |
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 A diverse product range, value for money strategy and enhanced distribution reach will help Godrej Consumer sustain growth rates,.
Increasing rural prosperity has driven many companies into these areas helping them grow at robust pace. A beneficiay of this growth is Godrej Consumer Products (GCPL). The company intends to double its network in towns and triple its reach in villages in the next three years. Consequently, the share of rural markets in overall sales is expected to increase from 38 per cent now to about half in the next three years. Besides rural reach, its varied product range in soap, hair colour, toiletries, fabric care and hygiene categories supported by constant re-invention would add solidity to revenues. Notably, GCPL’s move to acquire 49 per cent stake in Godrej Sara Lee has indirectly extended its product basket to include mosquito repellents and air care (perfumes for cars). The company’s product as well as geographical diversification, with business interests in nearly 50 countries, makes for a stable revenue model.
Soaps: On a growth momentum
The company lost market share in the second half of 2007-08 a time which saw a sharp rise in the cost of raw materials, primarily palm oil. In fact, GCPL’s market share made a recent low of 9.1 per cent when palm oil prices were at the highest in the March 2008 quarter.
Nevertheless, the company was able to consolidate its position in the recent quarters on the back of robust volume growth. This was possible as the company’s price hikes due to increases in input costs were relatively lower compared to its peers. As a case in point, analysts say, HUL is estimated to have lost market share in soaps as it focused on profitability compared to players like GCPL that preferred volumes over margins. As a result of GCPL’s effort to boost volumes and expand its rural reach, it has gained market share in four of the last five quarters. Its market share for the month of June 2009 stood at 10.1 per cent, a shade below its three-year peak of 10.2 per cent.
An economic slowdown and down-trading by consumers meant better sales for its value-for-money products like Godrej No.1. Superior quality positioning (relatively higher total fat content of 76 per cent) with minimal price hikes helped sustain its position as the largest selling ‘Grade-1’ soap in the country. Periodical launch of new variants like Aleo Vera and Lime under the Godrej No.1 brand also boosted brand visibility. On the back of Godrej No.1, its soap business has grown faster than the industry for the last five years. Besides Godrej No.1, another key soap brand, Cinthol, helped it soaps business register a 27 per cent y-o-y growth in revenues in June 2009 quarter, wherein volume growth was a robust 15 per cent. On the whole, the management expects to increase its market share by one per cent in 2009-10 from 9.4 per cent in the previous year.
Hair care: Holding ground
For GCPL, the hair colour segment is the second biggest business making up 22 per cent of its net sales. Even though it is a leader in the category, GCPL has lost market share in three out of the last four fiscals. Increasing popularity of premium segment hair colour over black hair dye segment is the reason for this slippage. The premium segment of hair colorants is growing faster (at 20-25 per cent) than the overall market on account of the changing lifestyle and higher disposable incomes, wherein multinationals like L’Oreal and Garnier have gained a strong foothold. For now, while the company’s market share (in value terms) had slipped in the past to a low of 33.7 per cent in the month of March 2009, it increased to 34.8 per cent at the end of June 2009. This was aided by higher volumes from Godrej Nupur Mehendi and from higher value derived from Godrej Expert.
Going ahead, the company believes that it will be able to sustain its value-based market share in the business. However, going by history and the stiff completion that prevails, it may not be easy for GCPL to crack the premium-end of the market. Thus, it could lay greater thrust on volume growth. Recent initiatives like tying up with barbers (up to 50,000 across the country over the next six months) are an indication. This tie-up could help GCPL to penetrate into smaller towns and rural areas besides, enable it to cross-sell its other products. Greater volumes from the mass hair colour segment would ensure it outperforms the industry volume growth in the future also.
| VOLUME BOOST |
| in Rs crore |
FY09 |
FY10E |
FY11E |
| Net sales |
1,393 |
1,609 |
1,837 |
| EBITDA (%) |
14.60 |
18.5 |
18.6 |
| Net profit |
Jun-00 |
242 |
277 |
| EPS (Rs) |
6.70 |
9.4 |
10.7 |
| PE (x) |
– |
23.3 |
20.3 |
| E: Analysts’ estimates |
Investment rationale
A spurt in input costs, especially palm oils (for soaps business), saw the proportion of raw material costs to sales increase to as high as 57 per cent during 2008-09 as against 50 per cent in 2007-08. Nevertheless, the pressure on margins has decreased and considering its forward cover on inputs for the full year, 2009-10 should be better— in June 2009 quarter margins were up 470 basis points to 19.8 per cent. With volume growth in soaps and hair care likely to be good, aided by focus on low price points (Rs 5 and Rs 10) and expansion in distribution reach, expect the performance of GCPL’s domestic business (about 80 per cent of consolidated sales) to be healthy in 2009-10.
Godrej Sara Lee is estimated to have reported sales of Rs 750 crore and net profit of Rs 100 crore (both up 25 per cent y-o-y) for 2008-09. Adjusted for the issue of shares for acquiring the stake, the acquisition is likely to add around 5 per cent to GCPL’s consolidated earnings. GCPL’s international business grew relatively slower and this is expected to continue in the future.
GCPL is expected to report a CAGR of 15 per cent and 25 per cent in sales and net profit, respectively between FY09-FY11. This is assuming weak monsoons (near term) and rising competition in the soaps business. The stock, which has run up 30 per cent since mid-July, is trading at 20.3 times its 2010-11 estimated earnings, and could be considered on dips.
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