Street cheers Godrej's better-than-expected Q2 earnings, margin recovery

Godrej Consumer Products’ (GCPL’s) better-than-expected earnings for the July- September 2019 quarter (second quarter, or Q2), on Wednesday, cheered the Street, with the stock rising 5 per cent before closing the day with 2.7 per cent gains at Rs 741.6.

GCPL’s net profit at Rs 413.9 crore was way ahead of Bloomberg consensus estimate of Rs 388 crore. A 28-per cent year-on-year (YoY) decline in reported net profit was mainly due to one-off gains in the year-ago quarter, and adjusting for the same Q2 profit shows a sharp 31 per cent growth. Profit before tax and exceptional items at Rs 497.9 crore was up 21.7 per cent YoY, and according to the management, there will not be any impact of new lower tax rate in 2019-20.

While top line declined by 1.3 per cent YoY to Rs 2,608 crore — a tad lower than analysts’ estimations of Rs 2,690 crore — it was due to lower sales realisation on account of promotional offers like discounts to garner volumes amid a weak consumption environment.

GCPL clocked 7 per cent growth in domestic volumes, despite a 5 per cent increase in the year-ago quarter. Even in the near term, a volume-focused strategy is likely to continue for GCPL’s domestic business (55 per cent of consolidated sales), according to the management.

Each of the two key segments, household insecticides and soap (around 75 per cent of domestic sales), reported a 7 per cent volume growth in Q2 versus a decline or muted volumes in the April-June quarter.

In value terms, while household insecticides reported around 4 per cent YoY growth in sales in Q2, soap business that saw higher price cuts and consumer offers posted a 4 per cent YoY fall in revenue.

In fact, a strong recovery in household insecticides segment, which had got impacted earlier with rising competition from illegal incense sticks, enthused investors. The management now believes that the competition from such players is now behind for organised players like GCPL, with awareness being created about the harmful health effects of illegal cheaper incense sticks.

Apart from lower sales realisation in the domestic business, a 6 per cent YoY decline in Africa business further pulled down the overall top line performance. However, sales in Indonesia business were up 17 per cent YoY in Q2, and provided some cushion. Indonesia and Africa are two key geographies, accounting for over 80 per cent of GCPL’s international business.

Despite price cuts and lower realisations, GCPL saw a sharp improvement in the operating margin due to benign input costs. Its earnings before interest, tax, depreciation, and amortisation margin was up 345 basis points YoY to 21.7 per cent.

International regions, including Africa, also provided some margin support.

All this indicates an improved earnings outlook for GCPL.

“Improvement in international margin would lead to overall earnings upgrade for GCPL,” says Nitin Gupta, analyst at SBICAP Securities, who, however, believes that sustained top line recovery would be key.

Even going ahead, the input cost trajectory is likely to remain supportive at least for the next four-six months, said the management. This should help GCPL protect margins, while focusing on growing volumes. The latter is also expected to get impetus from a strong new product pipeline aided by marketing investments, according to the management.

Thus, how GCPL manages its volume and margins would be interesting to watch, which would also reflect on its stock valuations. The stock is currently trading at about 40x its 2020-21 estimated earnings, 14 per cent premium to its historical five-year average valuation.

Don't fall for GCPL's valuation, wait for good growth outlook: Analysts

Cheap valuations may not always be the best investment argument and a buying point for a stock unless the future growth outlook of the company is reasonably good. That’s what the current risk-reward matrix of Godrej Consumer Products’ (GCPL) stock suggests.

The company, which is among leading makers of soaps, household insecticides and hair care products, owns consumer brands like Good Knight, Hit, Cinthol, Godrej No. 1, among others. In the past, continued muted performance of international businesses (over 45 per cent of its consolidated revenues) and competitive intensity in key domestic segments, among others has weighed on investor sentiment. Over a year, the stock is down over 24 per cent, versus a nearly flat S&P BSE Sensex and a seven per cent fall in the Nifty FMCG index. The GCPL stock currently trades at 35 times its FY21 estimated earnings. Though the valuation is at par with GCPL’s average 1-year forward valuations in the last five years, and a 27 per cent discount to Hindustan Unilever’s (HUL’s) valuations of 48 times, it may still not be the right time to buy.

Nitin Gupta, analyst at SBICAP Securities believes that the external environment is challenging for GCPL’s domestic business, while the company’s key international markets are also facing pressure. “Unless the overall growth picks up structurally, the stock may not get higher valuations,” Gupta says.

While hygiene awareness is improving among people, presence of unorganised players (mainly in incense sticks category) has weighed on GCPL’s household insecticides business. A report by Dolat Capital of August 29, says that in a short time, the unorganised sector captured a 13 per cent market share in the incense sticks category. To counter this, GCPL launched Godrej Neem (a natural product) in Andhra Pradesh and Telangana in the first phase, which helped it to regain 6-7 per cent market share in these states. While GCPL has launched the product in four more states and is regaining market share, margins are likely to remain under pressure given the products’ low profitability, say the analysts.

In soaps too, strong push from market leaders like HUL could keep growth of GCPL, which had gained market share in the past 12-18 months, under check. “HUL has taken relatively higher price cuts for its soaps in the current dismal economic environment,” said an analysts at a domestic brokerage. This could hurt overall business prospects of GCPL given that household insecticides and soaps account for 75 per cent of GCPL’s domestic revenues.

Positively, apart from GCPL’s successful response in natural incense sticks segment, benign input costs could help to some extent. The management, too, expects mid to high single digit volume growth in the domestic business in FY20 as against around 5 per cent growth last fiscal. However, the jury is out on this.

Further worries stem from the outlook for international businesses. In the near term, though the Indonesia-based business is likely to perform better, Africa (over 50 per cent of international revenues) could see some pressure as a few markets, such as Angola and Kenya, remain weak, say analysts at Dolat Capital, which has a ‘reduce’ rating on the stock.

In FY19, lower profitability of Africa business impacted the overall return ratios of GCPL. This can also be gauged from the sharp contraction of return of equity (RoE) at consolidated level as compared to the standalone metric. While standalone RoE contracted by 300 basis points to 65 per cent in FY19, it was down by 700 basis points at consolidated levels. RoE, which shows the profitability of a business in relation to the equity, is a key measure of shareholders’ return.

Overall, as per Bloomberg poll of analysts, GCPL’s earnings are expected to decline in FY20 (over FY19) before inching up in the next fiscal. Currently, only 12 of the 40 analysts have a ‘Buy’, while 19 have ‘Hold’ and another 9 ‘Sell’ rating on the stock. Their average one-year target price of Rs 669 is not far from current price of Rs 649. Investors thus, are recommended to wait until some signs of growth emerge.

Adi Godrej's FY19 remuneration 114-time higher than median employee pay

Godrej Consumer Products Ltd (GCPL) Chairman Emeritus Adi Godrej's total remuneration in 2018-19 was 114.18 times higher than the median pay of the company's employees, while that of MD and CEO Vivek Gambhir was 311.26 times more, according to the company's Annual Report.

As per the report, Godrej's total remuneration in FY19 stood at Rs 6.07 crore, down 20 per cent from the previous year.

Gambhir's total remuneration in 2018-19 was Rs 13.1 crore, which was down 33 per cent from the previous fiscal.

According to GCPL, the median remuneration of all its employees for the fiscal year 2018-19 was Rs 4.21 lakh. The percentage decrease in the median remuneration of employees during the year was 6.23 per cent.

The number of permanent employees on the payrolls of the company as on March 31, 2019 was 2,781, the report said.

GCPL Executive Chairperson Nisaba Godrej received a total remuneration of Rs 5.2 crore during 2018-19, which was 123.47 times more than the median remuneration of the employees.

Her remuneration declined by 19 per cent during the year, it added.

According to the company, its Non-Executive Director Jamshyd Godrej received a total remuneration of Rs 23 lakh during the year under review, while those of other Non-Executive Directors Nadir Godrej, Tanya Dubash and Pirojsha Godrej stood at Rs 24 lakh each.

On the other hand, GCPL said its independent directors Aman Mehta, Ndidi Nwuneli, Bharat Doshi and Pippa Armerding received total remunerations of Rs 40 lakh each in FY19.

Independent director Narendra Ambwani's remuneration for the year stood at Rs 41 lakh, while those of other independent directors Omkar Goswami and Ireena Vittal were at Rs 33 lakh and Rs 38 lakh respectively.