Despite the economic downturn, Godrej Consumer Products Ltd (GCPL) registered a strong growth of 26.3% year on year (y-o-y) to Rs1,393 crore in FY2009.
The robust growth is attributable to the buoyancy in rural demand and downgrading by consumers to low-priced products.
The surge in the price of palm oil and other raw materials resulted in a 471-basis-point decline in the operating profit margin (OPM) to 14.8% in FY2009.
However, with the softening in the raw material prices and the cost-cutting initiatives implemented by the company, we expect the OPM to substantially improve in FY2010.
The weak currency coupled with the inflationary scenario in the international markets affected the results of the company’s international subsidiaries.
While Rapidol Pty Ltd (a South African subsidiary) registered a moderate growth of 3.6% y-o-y to Rs48.8 crore, Godrej Netherlands BV (includes the performance of Godrej Netherlands BV, Godrej Consumer Products (UK), Keyline Brands and Inecto Manufacturing) achieved a growth of 19.4% y-o-y in FY2009.
Godrej Netherlands BV’s better performance was on the back of its strong performance in the first half of FY2009.
At the beginning of the year the company made a right issue of 3.2 crore equity shares of Re1 each at a premium of Rs122 per share. The company raised Rs396.5 crore through this right issue.
The company also bought back 0.11 equity shares of Re1 each at an average price of Rs133 per share (aggregating to Rs14.9 crore).
After the right issue and the buy-back the company’s paid-up capital stood at Rs25.7 crore (as against Rs22.6 crore in FY2008).
Following the issue, the share premium of the company has gone up to Rs393.2crore. With this the return on equity (RoE) and return on capital employed (RoCE) of the company stood at 46.9% and 31.6% respectively (as against 108.5% and 59.6% respectively in FY2008).
We believe the focus on increase in penetration in rural markets will help it to drive a good growth in the top line of its domestic business at least for a couple of years.
With inflationary concerns receding in South Africa and the company entering the neighbouring African countries, the performance of its African operations will be good.
However, the economic slowdown in Europe would affect the performance of Keyline Brands and Inecto Manufacturing. In the near term, apart from the healthy growth in the top line the company will witness a considerable improvement in its profitability due to the sharp drop in the price of its raw materials.
Consequently, we expect the company’s top line and bottom line to grow at a compounded annual growth rate (CAGR) of 12.5% and 23.9% respectively over FY2009-11.
At the current market price the stock trades at attractive valuations of 18.8x its FY2010E earnings of Rs9.0 and 16.3x its FY2011E earnings of Rs10.3 compared with its peers.
We maintain our BUY recommendation on the stock with the price target of Rs185.