The March quarter consolidated results of Godrej Consumer Products Ltd (GCPL) were boosted by its overseas operations, the addition of Godrej Sara Lee Ltd’s
(GSLL) sales and lower costs, although its stand-alone sales were flat. GCPL’s stand-alone performance mainly reflects its domestic businesses of soaps, hair colour, toiletries and liquid detergents. Sales grew by just 2% to Rs282 crore compared with the 16% growth in the December quarter.
Soaps contributed about two-thirds of stand-alone sales in fiscal 2010. A slowdown in the consumer market and the need to protect share appears to have affected value growth. Market leader Hindustan Unilever Ltd has taken an aggressive stance to regain volume growth and market share in the soaps segment, with a combination of re-launches, price cuts and volume discounts. While the market may have slowed, GCPL has retained its market share, a positive sign.
Despite slower sales growth, GCPL’s stand-alone net profit rose by 14% during the March quarter, over the year ago period. Its operating profit margin improved, thanks to a 21% drop in material costs, attributable to lower vegetable oil prices and a sharp increase in inventory. Lower employee costs, down by 39%, too helped in its operating profit margin rising by nearly 5 percentage points. This was despite advertising costs rising by 145%. A higher tax rate caused its net profit growth to lag the 20% profit increase at the pre-tax level. GCPL’s stand-alone performance will continue to be affected by developments in the soap market, but as long as it sustains or expands market share, the situation will improve eventually. A key highlight in fiscal 2010 is that its rural sales have risen by 30% and its share of this market is trending up too.
GCPL’s consolidated performance is another story altogether, with sales rising by 48% to Rs509 crore and its net profit rising by 56% to Rs92 crore over the year-ago period. A key contributor is GSLL, in which GCPL acquired a 49% stake in June 2009. Excluding GCPL’s share of this joint venture, sales growth would have been 6% and net profit growth 17%. GCPL’s international business did well during fiscal 2010, with sales rising by 21% while net profit nearly doubled. The key reason for lower growth is its stand-alone business, which contributes 55% of consolidated sales.
At the consolidated level, in the March quarter, the operating margin improvement was much lower at around 75 basis points. Advertising costs in general are growing ahead of sales growth, reflecting competitive activity across the board. While vegetable oil prices are lower year-on-year, sequentially, prices are rising. An increase in crude oil prices too is a cause for some concern. The bump from the GSLL acquisition will cease after the June quarter. That’s where its recent international acquisitions will come in, keeping up the sales growth momentum. In the near term, the acquisition of the remaining 51% stake in GSLL and a recovery in domestic consumer markets will be key triggers.