Godrej Consumer: Stable performance

While the trend is likely to continue, the stock seems fairly valued for now

Godrej Consumer Products Ltd (GCPL) posted in-line results for the March quarter on revenues and earnings. All-round growth in domestic (53 per cent of revenues) and international markets (47 per cent) drove GCPL's top line in the quarter. Its revenues grew 8.8 per cent year-on-year to Rs 2,266 crore while net profit grew 16.8 per cent to Rs 310 crore. Expansion in Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin and lower tax rate resulted in earnings growth outpacing revenue growth in the quarter. Lower input costs as well as savings in advertising and publicity spends aided an 87-basis-point expansion in consolidated Ebitda margin to 19.6 per cent.

Recovery in hair care segment, which grew seven per cent in the quarter, was a key highlight of domestic business this quarter. This, along with continued healthy growth in the household insecticides business, fuelled a nine per cent (including offers) volume growth in the domestic market. High price deflation offset the gains from double-digit volume growth in domestic soaps business, leading to a six per cent fall in soap revenues to Rs 327 crore in the quarter. Due to lower input costs and thereby higher competition, company believes this price deflationary trend could continue for another couple of quarters.

While rural and urban sales grew at similar rates in the quarter, the management indicated continued slowdown in the former. However, an above average monsoon could boost some of its businesses. Sachin Bobade, analyst, HDFC Securities, says, "GCPL's domestic soaps and household insecticides business will benefit directly from a good monsoon." However, he has downgraded the stock to neutral from buy, citing that most positives are built into the current valuations.

On Tuesday, the GCPL stock closed 0.6 per cent lower at Rs 1,355, where it trades at 34 times FY17 estimated earnings, higher than its historical average one-year forward price/earnings ratio of about 31 times. Against this backdrop, though most analysts are positive on the company's business prospects, their average target price means upsides of only 5.5 per cent from current levels.

Though margins continued to rise in the quarter, the key question is whether this metric is sustainable at current levels? As crude oil prices have started firming up, the gains could start bottoming out over the next couple of quarters, believe analysts.

Strong show in Latin America and Africa aided performance of international business in the quarter. This business posted healthy 11 per cent organic growth in revenues to Rs 1,075 crore.

Even though overall margins expanded, higher marketing spends in Chile and Argentina pulled down margins of Latin America. The overall outlook for international business remains healthy.