GCPL: Not adding too much colour

With around Rs 350 crore of cash on the balance sheet, it’s not surprising that Godrej Consumer Products wants to buy back its shares. But it is spending only Rs 15 crore on the buyback. At an average price of Rs 120 per share, it would be picking up around 1.2 million shares.

That’s just about 0.5 per cent of the company’s equity or around 1.5 per cent of the free float( 31 per cent) and, therefore, will not provide too much support to the share price. The company has decided on a maximum price for the buyback of Rs 150 per share.

The stock has bounced back after a disappointing September 2008 quarter during which net profits for the domestic business fell by about 4 per cent because of a weak operating profit that came off 26 per cent.

However, after three quarters, the company gained market share in soaps—its share is now 9.5 per cent with Cinthol, Fairglow and Godrej No 1, all chipping in. That means revenues should be on track to grow by about 22 per cent, to around Rs 1,350 crore, in 2008-09, a much better rate than the 16 per cent clocked in 2007-08.

While Godrej has taken price increases in the past six to eight months, it wasn’t able to pass on the entire cost of higher raw material prices. So, falling prices of agri-commodities, especially palm oil, will help ease cost pressures.

However, since net profits in the six months to September have been lower by 2 per cent, Godrej will find it hard to grow the bottom line by more than 7-8 per cent in 2008-09 over the Rs 159 crore that it posted last year.

Also, the poor performance of the hair colour business is hurting profitability. Godrej needs to sell more of the higher-margin products---the September quarter saw sales fall by 6 per cent and its market share, which was 40 per cent a couple of years back, is now at 35 per cent. The company is losing out to players such as Garnier and L’Oreal in the premium segment, while Emami is a big competitor at the lower end of the market.