Godrej Consumer’s (GCPL) consolidated revenues increased by 11.4% at R21.2 bn; Ebitda growth was 13.7% at R4.6 bn and Adjusted PAT growth was 7% at R3.18 bn. India business sales were up 7.5% with a 9% volume growth.
Household insecticides (HI) revenues increased by 18%, Hair colours sales were flat while Soaps sales declined by 10%. Standalone gross margins declined 70 bp. A&P spends were up 22%; staff cost and other expenses declined by 16% and 1.5% respectively. Resultant Ebitda increased by 12% with a margin expansion of 90 bps. International revenues increased 16% to R11.5 bn, with organic constant currency growth at 6% led by Africa and Latam, which grew 75% and 20% respectively. Ebitda was up 17% with margin expansion of 10 bps to 16% led by improvement in Africa, Latam and Europe.
Key positives: Healthy domestic volume growth with recovery in HI.
Key negatives: Muted performance in Soaps and lower gross margins.
Impact on financials: Factoring higher depreciation and lower other income, we have reduced FY17E and FY18E earnings by 6% each.
Valuations & view
The strong rebound in HI growth has resulted in GCPL posting volume growth significantly ahead of its HPC peers. With HI continuing to perform well, soaps value growth already looking up and hair colours now on a low base, we expect double digit volume growth for GCPL from Q3 onwards. Further, with price increases taken in soaps, gross margin uptick should also be visible sequentially. GCPL’s international business continues to perform well in spite of challenges of demand and currency. With currency issues coming into the base and innovation led growth likely in key markets, we expect the international business performance to only improve from current levels. The company remains one of our preferred FMCG picks given its strong category presence and robust innovation and distribution trajectory. Maintain Outperformer.
Strong HI performance drives domestic volume growth
India business sales were up 7.5%, ahead of HPC category growth of ~2-3%, with a 9% volume growth. HI sales were led by double digit volume growth as company continued to focus on innovation and driving penetration. Hair colours sales were flat impacted by high base (17% growth in 2QFY16). Soap sales declined by 10% with a mid-single digit volume decline on account of withdrawal of promotions which should stabilise by Q4FY17. While the price deflation during the quarter was 5%, management expects price led growth in Soaps from Q3FY17. Urban markets have grown at 8% while rural markets have seen 6-7% growth. The management expects rural growth to recover going forward led by good harvest, benefit of pension scheme and recent increase in MSP.
Higher input costs impact domestic gross margins
Standalone gross margins declined by 70 bps to 55.5% impacted by higher input costs during the quarter. While A&P spends were 22% on account of investment behind brands, Staff cost and other expenses declined by 16% and 1.5% respectively. Resultant Ebitda increased by 12% with a margin expansion of 90 bps.
International revenues driven by Africa and Latam
International business sales grew by 16% (constant currency growth of 25%) to R11.5 bn; however excluding inorganic sales of R1.85 bn from SON and Canon acquisitions, net sales declined by 2% (Organic constant currency growth of 6%). The growth was led by Africa (including SON & Canon) and Latam which grew by 75% and 20% in constant currency terms. However, adverse currency movement resulted in reported growth being lower at 60% for Africa while Latam declined by 12%. Indonesia sales declined by 2% in constant currency terms; however, favourable currency led to 6% growth in reported sales. Ebitda grew by 17% (constant currency growth of 26%) with a margin expansion of 10 bps to 16% led by margin improvements in Africa, Latam and Europe.
Indonesia revenues sales grew by 6% (2% decline in constant currency) impacted by weak macro and adverse weather impact in HI (ex-HI CC growth was 13%). Ebitda margin declined by 220 bps on the back of upfront marketing investments.The company expects sales growth to improve in H2FY17. Africa revenues grew 60%, with constant currency growth at 75% (2/3rd is volume growth) led by inorganic sales of R1.85 bn (from SON and Canon Chemicals) and organic constant currency sales growth of 18% in Africa business. Ebitda margin improved 130 bps driven by effective cost control and favourable mix. The company would continue to leverage SON acquisition to ramp up growth in wet hair care category in its key markets.
Latin America performance improved, in a challenging environment, with a revenue growth of 20% in constant currency terms; however, adverse currency movement led to a 12% decline in reported sales. Ebitda margin increased by 360 bps led by price hikes and stringent cost control measures. Europe business reported revenue decline of 15% (constant currency decline of 2%) due to weak demand post Brexit, rising competitive intensity in deodorants and counterfeit issues in Bio-Oil. Ebitda margins were up 80 bps aided by cost control and low A&P spends.