Investor's Eye
[May 03, 2013] | | |
| Summary of Contents
PULSE TRACK RBI's monetary policy 2013-14: Repo rate cut by 25 basis points, back to hawkish stance As expected, the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points to 7.25% while the cash reserve ratio (CRR) remained unchanged at 4% in the monetary policy for 2013-14. After reducing the repo rate by 75 basis points year-till-date (YTD; CY2013), the RBI returned to a hawkish stance and cited macro risks, which could come in the way of further easing. According to the RBI, the inflation has declined but remains above the comfort zone and upward risks to inflation exist due to supply imbalances. However, the central bank seemed more worried about the current account deficit (CAD), which is expected at ~ 5% of gross domestic product (GDP) in FY2014, which is significantly above its comfortable level of 2.5%. The financing of CAD will turn more challenging in case the global liquidity was to tighten. On an overall basis, the RBI expects the economy to show a modest recovery in FY2014, though several other factors are leading to the slower pick-up. Given the cautious stance taken by the RBI with regard to monetary easing, the market expects a 25-basis-point repo rate cut in the remaining part of 2013, unless supported by a revival in the macro aspects and government actions.
STOCK UPDATE Godrej Consumer Products
Recommendation: Hold
Price target: Rs845
Current market price: Rs844 Price target revised to Rs845 Result highlights -
Revenue growth remained strong, margin woes continued: In Q4FY2013 Godrej Consumer Products Ltd (GCPL)'s consolidated revenues grew by 29.7% year on year (YoY) to Rs1,715.5 crore, which is driven by a strong organic growth of close to 20% YoY. The benign prices of inputs (especially palm oil) helped the gross profit margin (GPM) to improve by 157 basis points YoY to 55.1% in Q4FY2013. However, the higher advertisement spending (up 119 basis points YoY) and other expenditures (up 219 basis points YoY) affected the operating profit margin (OPM), which fell by 263 basis points YoY to 16.3%. The company maintained its higher media spending to support its new launches and the existing portfolio of brands. On the other hand, the other expenses rose significantly due to an increase in the promotional spending ( for soap and hair colour brands), and higher contract manufacturing expenses and utility costs spent towards domestic household insecticide business (all together forming three-fourth of the other expenditure) during the quarter. Hence, the operating profit grew by just 11.6% YoY to Rs279.1 crore. However, a higher other income and a lower incidence of tax led to a 16.1 year-on-year (Y-o-Y) growth in the adjusted profit after tax (PAT) to Rs207.1 crore. -
Segmental performance: GCPL's stand-alone (domestic) business registered a strong revenue growth of 18% YoY to Rs925.4 crore in the same quarter driven by a strong growth in the core segments, viz soaps, household insecticides and hair colour. The revenues of the soap segment grew by 17% YoY (a volume growth of 4% YoY); that of the hair colour segment grew by 27% YoY (led by a volume growth in mid to high teens) and the revenues of the household insecticide segment grew by 26% YoY (largely a volume-led growth). The OPM of GCPL's domestic business fell by 100 basis points YoY to 19.7% largely on account higher advertisement and promotional spending. The international businesses registered a strong revenue growth of 48.4% YoY to Rs770.0 crore driven by a strong growth in the key geographies, such as Indonesia (up 35% YoY), Africa (up 39.1% YoY), the UK (up 106.3% YoY) and Latin America (up 72.0% YoY). However, the EBIDTA margin of the international business contracted by 431 basis points YoY to 13.4%. This was largely due to a significant drop in the margin of some of the key geographies, such as Africa and Latin America. -
Outlook and valuation: With sustained focus on innovation and renovation, and expanding the reach in the domestic as well as international markets coupled with cross pollination of brands, we believe GCPL is well poised to achieve a strong revenue compounded annual growth rate (CAGR) of ~23% over FY2013-15. The company will gain the benefit of lower palm oil prices, which will have a positive impact on the GPM in FY2014. However, since the company has maintained its thrust on higher media spends on account of new launches and higher promotional offerings on account of existing product portfolio, we expect the consolidated OPM to stand in the range of 16-17% in the coming years. Overall, we expect GCPL's bottom line to grow at CAGR of 27% over FY2013-15.
We like GCPL on account of its strong focus on driving growth in the domestic and international markets by keeping the balance sheet lean to derive future inorganic growth initiatives. At the current market price, the stock trades at 32.9x its FY2014E earnings per share (EPS) of Rs25.7 and 26.0x its FY2015E EPS of Rs32.5. In view of limited upside from the current level, we maintain our Hold recommendation on the stock with a revised price target of Rs845.
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