Operationally, Godrej Consumer Products Ltd appears to be well positioned, as both revenue growth and margins are showing an improvement, despite a stressed external environment. But other factors—exchange rate fluctuation and interest costs—have resulted in a flat net profit year-on-year.
Godrej Consumer reported a 23.3% year-on-year (y-o-y) growth in consolidated sales to Rs 1,186 crore, and operating profit rose 24.4%. But net profit, at Rs 131 crore, was flat.
A file photo
Though profitability improved, material costs were not a contributing reason as they rose 25.5% to Rs 568 crore, two percentage points more than sales did. But Godrej Consumer benefited from better scale and integration as employee costs rose by just 2% and advertising costs by 19%.
Thus, margins improved by around 17 basis points (bps). One basis point is one-hundredth of a percentage point. By itself, it is a small increase; but when sales are growing at a fast pace, it adds up to a lot. Due to the rupee’s depreciation against the dollar, there was a mark-to-market charge of Rs 16.5 crore. Interest costs rose 171%, and all these factors together resulted in flat profit growth.
The domestic business has done well. Sales of soaps rose 32%, with volume growth of 20%. New product launches, advertising and price hikes were some of the reasons for this. Though a low base effect (sales had dipped 10% in the year-ago period) is also a reason, adjusting for this factor, too, growth is healthy. The insecticides and hair colours businesses, too, did well. But competition and inflation are ensuring that input costs are still running ahead of sales growth. Margins in its domestic business fell by 220 bps y-o-y.
If overall margins were still flat, credit must go to its international business, where sales rose 19% on a comparable basis, and by 24%, including the impact of acquisitions. Ebitda rose 72%. Ebitda, a key measure of profitability, stands for earnings before interest, tax, depreciation and amortization.
The company is benefiting by an expansion in its distribution reach, launch of new products, and deriving integration benefits of its various acquisitions in some geographies.
Also See | Improved Performance (PDF)
In future, in the international business, as the impact of acquisitions wanes, reported growth will come to more normal levels. What investors would want to see is organic growth, with improving profit margins.
Another big acquisition may give its sales growth zing, but it could strain its balance sheet further.
In the domestic business, Godrej Consumer has got back its rhythm in the soaps business. Again, as the base effect tapers off, second half growth may moderate. Still, growth in fiscal 2012 in soaps, and even its other businesses, should be healthy compared with the previous year. The benefits of merging Godrej Household Products Ltd with itself are becoming evident.
Its stock fell by 1.5% on Friday after the results were announced, perhaps, due to flat earnings growth. Its operating results are not disappointing, but external factors such as foreign exchange fluctuations and interest costs are worrying factors.
Given that the underlying reasons may not go away too soon, the uncertainty may remain for some more time. A further easing in commodity prices may, however, give it the cushion it needs.
Graphics by Sandeep Bhatnagar/Mint
We welcome your comments at email@example.com