Godrej Consumer Products Ltd’s international business dragged down sales and profitability growth during the December quarter. The domestic business did relatively better, but was hit by a deflationary environment. Since these factors are continuing, the risk that they may affect performance in future quarters remains.
In the December quarter, the company’s sales grew by only 5.7%. Domestic sales rose by 8%, with volume growth higher at 9%. The star of the quarter was the 15% growth in household insecticide sales, which compensated for a slow 2% expansion in soaps and a 1% decline in hair colours. Soap sales grew in mid-single digits in volume, but sales growth was hit by price cuts to pass on lower input costs. Hair colour sales are expected to recover in the current quarter.
The international business’s organic sales growth (excluding the impact of acquisitions) was 2%, but excluding the impact of currency movements, it was 9%. Forex volatility affected Godrej Consumer’s reported profitability, which came in at an operating margin of 11% compared with a constant currency figure of 20%. Among its various markets, Latin America, Africa and Europe did well, whereas growth in Indonesia suffered because of difficult economic conditions.
Although overall reported sales growth was low, lower input costs allowed it to absorb sharp increases in employee costs, and advertising and other expenses. That allowed operating profit to increase by a smart 15%, with operating profit margins rising over a year and sequentially as well.
Now, net profit growth at 22.6% may seem healthy, but this was helped by lower profits being attributed to minority interests. This can be explained by the fact that the company increased its stakes in joint ventures. Profit before tax growth was more modest at 18.9%.
The main factors affecting Godrej Consumer’s performance are external. Its efforts to improve growth, through new products and better distribution reach and cost-cutting, are yielding results, but have been overshadowed by the external factors.
The company’s management says its markets retain good potential and will do well in the medium term.
Godrej Consumer’s shares lost 0.2% on Wednesday after the results were posted. Operating profit growth is not bad at all, considering the circumstances. Investors may recognize that fact, but may be wary as most consumer stocks trade at rich valuations. If growth is going to remain subdued, whatever be the reason, they are right to be sceptical about how long these valuations can hold.
The writer does not own shares in the above-mentioned companies.