GCPL Drives Solid Sales Growth in 1Q; Shares Slightly Overvalued

Margins for Godrej Consumer Products, however, were muted. Read Morningstar Analyst Suruchi Jain’s Stock Analyst Note update.
By Suruchi Jain |  08-08-12 | 
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About the Author
Suruchi Jain is an equity research analyst on Morningstar's India team, based in Mumbai. She covers consumer, banking and pharmaceutical stocks listed in India.

The Stock Analyst Note is a part of the Stock Analyst Report for Godrej Consumer Products. Click here to go to the truncated version of the Analyst Report on the stock. Registered Morningstar users can read the complete PDF (which includes our take on the firm’s valuation, growth and profitability) here.

With one quarter of results out, Godrej Consumer Products' results are tracking slightly ahead of our internal revenue growth projections, but we aren't convinced this pace is sustainable, and as such, we aren't making any material changes to our full-year forecast at this time.

However, the shares are trading at a slight premium to our INR 535 fair value estimate, and we recommend investors demand a wider margin of safety before building a position in the shares, given the firm relies on acquisitions to expand its business.

The top line grew at a healthy 39% rate year over year to INR 13.9 billion, primarily because of international acquisitions made end of last year. Excluding acquisitions, consolidated organic sales grew 26%, while international markets grew by 31%, and the India business grew at a solid 23%.

From a product category perspective, the soaps segment excelled, generating 42% growth in the quarter, while growth in the home insecticides and hair care businesses was more muted at 27% and 5%, respectively.

However, given that growth in lower-margin soaps was more pronounced in this quarter, profitability was hindered.

As a result, operating margins were stable at 13.1% as compared with the same quarter last year, however, for the full year we expect 16.9% compared with 16.7% in fiscal 2012. From an operating margin perspective, it is a weak quarter and we will see if the year picks up before revising our estimate upward. Adjusted net margins were 298 basis points higher year on year, accounting for foreign exchange losses.

GCPL remains a high uncertainty stock, in our view, as the company is still merging acquired entities and, as management revealed on the quarterly call, GCPL plans to reposition its Cinthol brand of soaps from its current "value for money" appeal to a more premium brand-positioning later this week.

While a premium price point will improve the profitability of its soap segment, we will wait to see how the Indian consumer responds to this change before changing our future fair value estimates.

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