A significant part of the 9.7% rise in Godrej Consumer Products Ltd’s stock on Tuesday can be attributed to its March quarter performance. Sales growth recovered nicely and margins did even better, and the management seems confident that higher margins can be sustained (if not improved) in fiscal year 2018 (FY18). Other factors include a 1:1 bonus issue, which may have generated a feel-good sensation among investors and a Rs12/share dividend.
Godrej Consumer’s consolidated sales rose by 13% in the March quarter, over a year ago, and by 8% in organic constant currency terms (that is ignoring the effect of acquisitions/sales and of currency movements). Its domestic business sales rose by 10% with a 5% growth in volume terms. That is a healthy improvement after the decline seen in the December quarter due to demonetisation, especially as price and volumes have both contributed.
In fact, stand-alone financials show that the company’s material costs have risen by 1% while sales grew by 10%, implying that product mix may have had some role to play (more premium products) but pricing power may be coming back as well. This growth was despite its mainstay of household insecticides growing by a low 4% due to warm weather in north India in March.
Soaps and hair colours did well, with decent volume growth and good value sales growth. The star was the company’s “others” business, which grew by 33% and contributed to 9% of domestic branded sales. A main contributor is the Aer air-freshener range, which is doing well.
Godrej Consumer’s international business was another reason why investors would have been happy. Indonesia continued to see flat growth, while Latin America has done well. Africa sales grew by 61% but due to an acquisition, and sales grew by 16% in constant currency terms. In Indonesia, the problem is restricted to the insecticides business, and the company is hoping that a more favourable seasonal influence will see demand improve.
The 20.8% growth in its Ebitda (earnings before interest, tax, depreciation and amortization) meant that margins rose by 1.7 percentage points over a year ago and by 1.5 percentage points sequentially. The management is confident that margins can sustain at these levels and may even improve. The expectation is that post-demonetisation and GST (goods and services tax), its business will keep expanding, and elevated margins will see earnings grow in FY18. Profit before tax rose by 19% in the March quarter. The share trades at 50 times its FY17 earnings.