Godrej Consumer Products: Homeward bound

As domestic business does well and international operations disappoint, experts predict a fall in margins

Though not comparable year-on-year (y-o-y) due to a number of mergers and acquisitions, the 90 per cent increase in Godrej Consumer Products’ consolidated sales at Rs 986 crore in the December quarter has been above expectations. The pressure on profitability has also been significantly higher than estimates.

Operating profit margins (OPMs) dropped 208 basis points (bps) to 17.6 per cent due to higher other expenditure (as a percentage of sales), excluding employee costs.

The company registered a 435 bps fall in net profit margins to 12.1 per cent, thanks to almost zero other income (Rs 10 crore same quarter last year), close to a 100 bps increase in interest costs as a percentage of sales (at 1.3 per cent) and a 42.5 per cent increase in taxation.

As expected, the domestic business, comprising soaps, hair colours and household insecticides (HI), reported robust growth of 48 per cent and 39 per cent in sales and net profit at Rs 645 crore and Rs 105 crore, respectively. The company saw a substantial improvement in the market share for HI (up 300 bps to 37 per cent), while it maintained its share in soaps and hair colours at 10 per cent and 29.4 per cent, respectively.

The international business (34 per cent of consolidated sales) continued to register an impressive y-o-y performance with sales tripling to Rs 337 crore, but was flat quarter-on-quarter (q-o-q). OPMs came under further pressure by dropping close to 400 bps sequentially to around 12 per cent due to brand-building and acquisitions. Latin American operations surprised on the positive side and the Asian region on the negative. Margin deterioration in the UK and South Africa accelerated.

The March quarter is expected to be stronger for soap and hair colour segments due to the base effect, while the fourth quarter is seasonally the best for household insecticides.

The company has hinted at a price increase in soaps due to soaring palm oil prices (up over 60 per cent y-o-y). Though the company is covered till the end of the fourth quarter, the expectation of a marginal pressure on OPMs in the near term is not ruled out. Synergy in international operations is expected to show a meaningful impact in FY12, though the outlook on OPMs is cautious.