Investor's Eye: Update - Godrej Consumer Products (Annual report review; price target revised to Rs726)

 

Investor's Eye [September 04, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   Godrej Consumer Products Cluster: Apple Green Recommendation: Hold Price target: Rs726 Current market price: Rs677 Annual report review; price target revised to Rs726  Key points Strong consolidated performance in FY2012: Godrej Consumer Products Ltd (GCPL) registered a strong revenue growth of 32.0% year on year (YoY) to Rs4,866.2 crore in FY2012. The revenue growth was driven by a strong revenue growth of over 20% YoY in the domestic business and a stronger revenue growth of over 50% YoY in the international business. With the revenue mix of the company improving on the back of some of the recent acquisitions, the operating profit margin (OPM) of the company stood at 18%. The operating profit grew by 34.0% YoY to Rs875.1 crore. However, higher both interest cost and tax arrested the growth in the bottom line, which increased by just over 20% YoY.  The highlight of the fiscal was the strong performance of the domestic soap and household insecticide (HI) businesses. The soap and HI businesses grew by 27% and 31% YoY respectively, ahead of the growth recorded by their respective industries. The international business' revenues grew by 54% YoY driven by both organic and inorganic growth activities.  Focusing on reducing debt on consolidated books: For the past couple of years GCPL has been in an acquisition mode acquiring brands and companies in focused segments and geographies, such as Latin America, Africa and South East Asia. The company funded these acquisitions by mobilising debt on the consolidated books. However, with improving operating cash flows the company expects to repay a substantial amount of these debts in the coming years. Its debt/equity ratio in FY2012 stood at 0.6x. The company raised Rs685 crore in FY2012 by making a preferential allotment to Baytree Investments (Mauritius). This will be largely utilised to reduce the debt on the books and to fund the gradual stake hike in the Darling Group. Also, the operating cash flows of the company are expected to improve with the improving supply chain in the coming years. The company has set a target of reducing approximately Rs330 crore of its foreign currency debt in FY2013. Overall, we expect the debt/equity ratio to improve to 0.4x in FY2013. Operating cash cycle improved: The cash generated from operations improved significantly to Rs1,102.2 crore in FY2012 from Rs307 crore in FY2011. The operating cash cycle has improved to 24 days in FY2012 from 42 days in FY2011. This was largely on account of an increase in the creditor days to 70 days in FY2012 from 40 days in FY2011. We expect the cash generation from operations to further improve in the coming years.  Return ratios stood above 20% in FY2012: The return ratios stood lower on a year-on-year (Y-o-Y) basis largely on account of an increase in the capital employed due to the mobilising of funds (through a mix of debt and equity) to fund the recent acquisitions. The return on equity (RoE) and the return on capital employed (RoCE) declined to 26.3% and 20.6% in FY2012 from 36.0% and 28.8% in FY2011 (and 44.5% and 43.6% in FY2010) respectively. We expect the return ratios to improve substantially going ahead once the recent acquisitions start contributing significantly to the bottom line of the company. Outlook and valuation: Over the next ten years GCPL aims to grow its business ten times bigger than it is now. This growth will be driven by a mix of both organic and inorganic growth activities. Innovation and renovation in the product portfolio, expansion in the domestic and international markets, and cross-pollinations amongst the recent acquisitions would be the key growth drivers in the long run. The company is also aiming for a stable balance sheet by reducing the debt on the books in the coming years. At the current market price the stock trades at 29.7x its FY2013E earnings per share (EPS) of Rs23.6 and 23.3x its FY2014E EPS of Rs29.0. We have revised our price target to Rs726 (valuing the stock 25x its FY2014E EPS of Rs29). However, in view of the limited upside from the current level we maintain our Hold recommendation on the stock. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

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