After disappointing results from Dabur, Godrej Consumer Products Limited (GCPL) took the markets by surprise. Re-bound in domestic sales from note ban, continued growth in global business (48 per cent of revenues), and robust expansion of margin, helped GCPL post better-than-expected profit for the March quarter (Q4). Equally interesting, the road ahead looks good, barring bumps such as implementation of goods and services tax (GST).
GCPL's volume growth in domestic sales of branded products stood at five per cent in Q4 as against a decline of three per cent in the December 2016 quarter (Q3). In fact, the company's hair colour portfolio registered double-digit volume growth in Q4 even as its other key business of soaps posted mid-single-digit growth. Among other businesses, GCPL's household insecticides (Good Knight, Hit, others) have been witnessing higher volatility in recent quarters. January and February were strong months, but hot climate in March impacted this business, which saw four per cent revenue growth in Q4. Nonetheless, the company has managed to maintain its leadership in this segment and intends to launch new variants at
different price points. Its new launches, Hit gel sticks and personal repellents, have received a good response from consumers.
Growth in international business was driven by acquisition of Strength of Nature, which boosted the performance of GCPL's largest international market of Africa, besides Latin America. In fact, excluding numbers from acquisition, Africa registered growth of 16 per cent in constant currency in the quarter.
The big surprise was margins. Focus on cost efficiencies aided margin expansion in both India and international markets. The fact that GCPL continued to scale back promotions and offers while implementing select price hikes shows it enjoys pricing power, particularly in soaps, 27 per cent of GCPL's India sales in Q4. This was also reflected in the strong 200-basis-point rise in India's operating profit margin to 25.8 per cent in the quarter, compared to a year ago. This, coupled with improving operating profit margin in most international markets aided a 150-basis-point jump from a year ago in consolidated operating profit margin to 22.2 per cent.
Consolidated sales grew 11.8 per cent from a year ago to Rs 2,380 crore. Those lagged Bloomberg consensus estimate of Rs 2,495 crore, largely due to unfavourable currency movement. Nonetheless, strong improvement in profitability, coupled with a lower tax rate, aided a 21.7 per cent growth in net profit (excluding exceptional or one-off items) to Rs 381 crore, which was six per cent ahead of Bloomberg consensus estimate of Rs 358 crore.
Going forward, the management remains confident of sustaining this growth as well as maintaining margins at such high levels.
It is implementing cost improvement programmes and is looking at premium products to sustain margins. Though implementation of GST will be a long-term positive for organised players such as GCPL, the management did not rule out some volatility in trading channels temporarily. It is also awaiting clarity on the quantum of excise exemptions under GST, which it enjoys at its facilities in Himachal Pradesh, north-east, and others.
Overall, company expects strong growth, particularly in the second half of this financial year.
The strong show and equally good management commentary on the outlook led to as much as 11 per cent surge in GCPL's stock price on Tuesday. The stock made an all-time high of Rs 1,956 on Tuesday and now trades at 43 times the company's FY18 estimated earnings, which is higher than its own historical average valuations as well as that of peers in the consumer staples sector. These high valuations could restrict significant gains.
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