Godrej Consumer: Q2 drop only a blip

Godrej Consumer Products Ltd (GCPL) posted lower-than-expected earnings for the September 2012 quarter, led by weak margins on higher ads and staff costs. This triggered a few earnings and rating cuts, dragging the stock down five per cent on Monday to Rs 688.30 against a flat Sensex. Analysts have trimmed earnings estimates by 8-10 per cent for FY13. While analysts see margin pressure sustaining in the near-term, many remain bullish on its long-term prospects and expect margins to rebound in two-three quarters.

The stock is trading at rich valuations of 34.6 times FY13 estimated earnings. So, analysts say long-term investors can buy the stock on dips.

GCPL witnessed strong growth in its topline driven by consolidation of its international acquisitions of Cosmetica and Darling during the quarter. Nevertheless, organic growth in revenues was still a healthy 24 per cent year-on-year. Its international revenues grew 63 per cent to Rs 690 crore.

The growth in domestic business, though, remained relatively lower at 19 per cent at Rs 910 crore.

While domestic household insecticides portfolio grew at a robust 1.5 times industry growth rate, soaps grew 24 per cent largely due to price hikes. During the quarter, it revamped the Cinthol range which could boost December quarter numbers. Its hair colour business grew at a muted 10 per cent. GCPL has pegged its hopes of growth in the segment on the newly-launched crème-based hair colours. Analysts expect revenues to grow at over 30 per cent in FY13.

While the Darling group aided GCPL’s topline growth in the quarter, it came at the cost of margins which fell on higher employee costs. Going forward, the management expects Africa margins to scale up from 16 per cent to 17-19 per cent with Darling’s margins a tad higher. Lower palm oil prices will also aid domestic margins.