Godrej Consumer

A diverse product range, value for money strategy and enhanced distribution reach will help Godrej Consumer sustain growth rates

An economic slowdown and down-trading by consumers meant better sales for its valuefor-money products like Godrej No.1. Superior quality positioning (relatively higher total fat content of 76 per cent) with minimal price hikes helped sustain its position as the largest selling ‘Grade-1’ soap in the country. Periodical launch of new variants like Aleo Vera and Lime under the Godrej No.1 brand also boosted brand visibility. On the back of Godrej No.1, its soap business has grown faster than the industry for the last five years. Besides Godrej No.1, another key soap brand, Cinthol, helped it soaps business register a 27 per cent y-o-y growth in revenues in June 2009 quarter, wherein volume growth was a robust 15 per cent. On the whole, the management expects to increase its market share by one per cent in 2009-10 from 9.4 per cent in the previous year.

HAIR CARE: Holding ground For GCPL, the hair colour segment is the second biggest business making up 22 per cent of its net sales. Even though it is a leader in the category, GCPL has lost market share in three out of the last four fiscals. Increasing popularity of premium segment hair colour over black hair dye segment is the reason for this slippage. The premium segment of hair colorants is growing faster (at 20-25 per cent) than the overall market on account of the changing lifestyle and higher disposable incomes, wherein multinationals like L’Oreal and Garnier have gained a strong foothold. For now, while the company’s market share (in value terms) had slipped in the past to a low of 33.7 per cent in the month of March 2009, it increased to 34.8 per cent at the end of June 2009. This was aided by higher volumes from Godrej
Nupur Mehendi and from higher value derived from Godrej Expert.

Going ahead, the company believes that it will be able to sustain its value-based market 50,000 across the country over the next six months) are an indication. This tie-up could help GCPL to penetrate into smaller towns and rural areas besides, enable it to cross-sell its other products. Greater volumes from the mass hair colour segment would ensure it outperforms the industry volume growth in the future also.

Investment rationale A spurt in input costs, especially palm oils (for soaps business), saw the proportion of raw material costs to sales increase to as high as 57 per cent during 2008-09 as against 50 per cent in 200708. Nevertheless, the pressure on margins has decreased and considering its forward cover on inputs for the full year, 2009-10 should be better— in June 2009 quarter margins were up 470 basis points to 19.8 per cent. With volume growth in soaps and hair care likely to be good, aided by focus on low price points (Rs 5 and Rs 10) and expansion in distribution reach, expect the performance of GCPL’s domestic business (about 80 per cent of consolidated sales) to be healthy in 2009-10.

Godrej Sara Lee is estimated to have reported sales of Rs 750 crore and net profit of Rs 100 crore (both up 25 per cent y-o-y) for 2008-09. Adjusted for the issue of shares for acquiring the stake, the acquisition is likely to add around 5 per cent to GCPL’s consolidated earnings. GCPL’s international business grew relatively slower and this is expected to continue in the future.
GCPL is expected to report a CAGR of 15 per cent and 25 per cent in sales and net profit, respectively between FY09-FY11. This is assuming weak monsoons (near term) and rising competition in the soaps business. The stock, which has run up 30 per cent since mid-July, is trading at 20.3 times its 2010-11 estimated earnings, and could be considered on dips.
Godrej Consumer Products

Increasing rural prosperity has driven many companies into these areas helping them grow at robust pace. A beneficiay of this growth is Godrej Consumer Products (GCPL). The company intends to double its network in towns and triple its reach in villages in the next three years. Consequently, the share of rural markets in overall sales is expected to increase from 38 per cent now to about half in the next three years. Besides rural reach, its varied product range in soap, hair colour, toiletries, fabric care and hygiene categories supported by constant re-invention would add solidity to revenues. Notably, GCPL’s move to acquire 49 per cent stake in Godrej Sara Lee has indirectly extended its product basket to include mosquito repellents and air care (perfumes for cars). The company’s product as well as geographical diversification, with business interests in nearly 50 countries, makes for a stable revenue model.

SOAPS: On a growth momentum The company lost market share in the second half of 2007-08 a time which saw a sharp rise in the cost of raw materials, primarily palm oil. In fact, GCPL’s market share made a recent low of 9.1 per cent when palm oil prices were at the highest in the March 2008 quarter.

Nevertheless, the company was able to consolidate its position in the recent quarters on the back of robust volume growth. This was possible as the company’s price hikes due to increases in input costs were relatively lower compared to its peers. As a case in point, analysts say, HUL is estimated to have lost market share in soaps as it focused on profitability compared to players like GCPL that preferred volumes over margins. As a result of GCPL’s effort to boost volumes and expand its rural reach, it has gained market share in four of the last five quarters. Its market share for the month of June 2009 stood at 10.1 per cent, a shade below its threeyear peak of 10.2 per cent.

Stock Views on Bharti Airtel, Dishman Pharma, Godrej Consumer

Emkay Global on Bharti Airtel - Target of Rs 952

Emkay Global Financial Services has recommended a buy rating on Bharti Airtel with a price target of Rs 952 in its report.

"Street has raised concerns on large equity issuance (57%) and subsequent EPS dilution of 8-10% in FY10/FY11 (post consolidation of 49% in MTN) which has resulted in stock price correction of 11-12%. We believe that Bharti would offer MTN, an economic interest (equity participation) of 25% in the form of 15% direct stake in Bharti Airtel and remaining through the parent resulting in equity dilution in Bharti Airtel being limited to 38% and EPS dilution to just 4.6% and 1.6% for FY10E and FY11 v/s 8-10% estimated by the street assuming 58% equity dilution. With lower EPS dilution than that expected by street, together with strong long term positives and synergies arriving out of the deal, we continue to rate 'BUY' on Bharti Airtel with target price Rs 952. We recommend investors to use the current overhang as an opportunity to buy into the stock," says Emkay Global Financial Services' report.

Hem Securities on Dishman Pharma - Target of Rs 230

Hem Securities has recommended a buy rating on Dishman Pharmaceuticals & Chemicals with price target of Rs 230 in its research report.

"The company is a leader in CRAM business amongst the largest Indian pharmaceutical companies. Moreover, in global crisis and weak economy outlook, the company performance for the financial year ended March 2009 is quite strong. Though promoters have pledged 10.60% share of their holding and 6.44% of total equity capital, the company seems to continue its growth momentum through its high revenue generating base business and seems to be extremely attractive investment opportunity in the Indian Pharmaceutical space."

"Presently, the stock is trading at Rs 184.35 which is at 10.14 times to its earnings of FY09 of Rs 18.18 and 2.65 times to its book value of Rs 69.59. Since the stock offers good investment opportunity, we ini-tiate a ‘BUY’ signal on the stock with a target price of Rs 230 in medium to long term investment horizon expecting an appreciation of about 25% from the current level of Rs 184.35," says Hem's research report."

Sharekhan on Godrej Consumer - Target of Rs 185

Sharekhan has maintained its buy rating on Godrej Consumer Products, GCPL with a target of Rs 185 in its research report.

"We believe the deal is taking place at attractive valuations for GCPL considering that the same will expand the limited product portfolio of GCPL, improve the growth profile of GSL’s products and result in higher EPS for GCPL’s shareholders. At the current market price of Rs 176 the stock trades at 19.3x its FY2010 earnings and 17.1x its FY2011 earnings (excluding GSL’s financials). We maintain our price target at Rs 185, as we await further information from the management on GSL’s operations. However, the earnings accretive nature of the deal could potentially result in a 4-5% increase in the price target to Rs 192-195. We maintain our 'Buy' recommendation on the stock," says Sharekhan's research report."

LKP Shares on Kennametal, Godrej Consumer, Dhampur Sugar Mills

LKP Shares on Kennametal - Target Rs 225

LKP Shares has recommended a buy rating on Kennametal India (KIL) with a target of Rs 225, in its research report. " Kennametal India Ltd (KIL) being the largest player in the listed space derives 80% of its annual revenues from the Hard Metal and Products space and 20% from Machine Tools. The business continues to be India Centric with exports accounting for only 5% of its revenues.First half of the current fiscal witnessed a 4% drop in revenues at Rs 1795 mn and PBT dropping 16% to Rs 310 million (Rs 370 mn) led by margin compression in the hard metal division."


"Despite the projected de-growth in earnings this fiscal and the fact that KIL would likely report an EPS of Rs 20 during FY'09, given the resilience of the company arising out of the support of its parent and competitive strengths relative to its peers within the industry we believe that KIL trading at 7xFY'09E earnings can be accumulated with a one-year price target of Rs 225. BUY" says LKP Shares' research report.


LKP Shares on Godrej Consumer - Target Rs 165

LKP Shares has recommend a buy rating on Godrej Consumer Products with a price target of Rs 165, in its research report. "Godrej Consumer Products Ltd had enjoyed double digit volume growth in a benign cost environment during the period FY' 05-FY' 07 and post its overseas brand acquisitions and the subsequent integration issues and impact of leverage on consolidation it witnessed a deviation from the linear trend in earnings growth due to rising input costs in its soaps business."


"We believe that the company could explore international acquisitions in the hair care segment going forward. Q3 witnessed robust volume growth of 19% in soaps when industry growth was 5% and as price increases are ruled out for some time we do see volume growth in soaps converging towards value growth which was 20% for GCPL in the first nine months of the current fiscal. We recommend a BUY on the stock with a one-year price target of Rs 165," says LKP Shares' research report


LKP Shares on Dhampur Sugar Mills - Target Rs 45

LKP Shares is bullish on Dhampur Sugar Mills and has recommended a buy rating on the stock with a target of Rs 45, in its research report. “We recommend a BUY on Dhampur Sugar Mills Ltd - DSM based on improved prospects for the sugar business on account of buoyancy in sugar prices arising due to low production in India, increased traction from the co-generation business and savings in interests costs due to swapping of high cost loans (total debt of Rs 6 billion) with low cost loans from the sugar development fund.”

“With a stock of 1.35 lac tons at the end of Q1-FY'09 we expect DSM to crush up to a maximum of 2.8 million tons this fiscal by operating for 115 days. DSM sells refined sugar under the brand - Dhampure. Q1-FY'09 witnessed sugar realizations of Rs17.9 per kg as compared to Rs14.3 per kg in the same period last fiscal and after accounting for the notional foreign exchange loss of Rs 50mn, DSM posted a net profit of Rs137mn for the quarter and expanded power capacities now at 145mw with an exportable surplus of 80mw contributed to the earnings during the quarter. We expect DSM to post a net profit of Rs 300mn this fiscal and Rs 550 million next fiscal after accounting for foreign exchange losses and the stock trading at 3xFY'10E earnings can be accumulated by investors with a one-year price target of Rs 45. We recommend a BUY,” says LKP Shares' research report.