• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Aarati Krishnan

It is the soap segment which continues to drive growth.

THE financials of Godrej Consumer Products for the half-year and quarter ended September 2003 reiterate that the company is vulnerable to the challenging business environment for FMCGs, despite a good showing from some of its brands.

The 45 per cent appreciation in the company's stock price since the beginning of 2003 has helped push up the stock's price-earnings multiple to levels comparable to other Indian FMCG companies.

But the current valuation of 15 times its trailing 12-month earnings appears rich and may not leave much scope for further appreciation. In light of the sober earnings prospects, investors can book profits on the stock.

The company has closed the half-year period with just a 2.5 per cent growth in net sales to Rs 239.4 crore. Rising input costs have shrunk the company's operating profit margins, putting paid to profit growth. The company's net profits inched up by just 3.3 per cent in the first half of 2003-04.

Toilet soaps, the largest revenue-driver, fared well, delivering a 12 per cent sales growth, even as the underlying market shrank. Godrej No.1, Godrej's brand in the sub-popular segment was the key growth driver. Positioned as a good quality soap with a low price tag, the marketing strategy for the brand has revolved around competitive pricing and giveaways. This has helped the brand notch up high volume growth even in a sluggish market.

While the mature soaps business has delivered reasonable growth, the high-potential segments of Godrej's FMCG business delivered poor growth in the first half of 2003-04. Hair color, the most promising category in Godrej's FMCG portfolio, grew by 16 per cent in 2002-03. But it has noticeably decelerated in the first half of 2003-04, its growth rate dwindling to 1 per cent.

Godrej Consumer has actually ceded market share to its competitors in this segment over the past six months, despite a couple of product launches.

Liquid detergents (comprising the Ezee brand), which grew by 7 per cent in 2002-03, has shrunk in value in the first half of 2003-04. And toiletries (FairGlow, Godrej shaving cream) continued to lose value, with Godrej's brands in this category shrinking by 19 per cent in the first half of 2003-04.

Going forward, the lag effect from a good monsoon may lead to a pick up in demand for categories such as toilet soaps and cosmetics (around a third of Godrej's sales depend on the rural market). If this happens, Godrej No.1 may be a key beneficiary.

However, escalating input prices could continue to trim the scope for profit growth. In the first half of 2003-04,

Godrej Consumer's operating profit margins fell to 15.7 per cent from 18.3 per cent in the corresponding previous period, mainly due to the sharp spike in palm oil prices (a key soap input).

Though oil prices have receded from their peaks in mid-2003, an expected further softening in their prices has not materialised. Recent downward revisions in US soybean output have revived the bullish tendencies in palm oil prices.

This may continue to exert pressure on Godrej Consumer's margins. As Godrej's marketing success stems from a high TFM (total fatty acid) content and competitive pricing for its soaps, the pressure on its margins may be quite intense.

Cutbacks in advertising expenditure and lower tax incidence (Godrej is commissioning yet another facility in a tax-free zone by end of 2003), may help salvage profit growth to some extent in the coming quarters. But earnings growth is still likely to be sedate.

This may act as a damper to the valuation for the stock, at a time when quite a few cyclical companies are delivering scorching double-digit growth in earnings.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Large-caps: From a bang to a whimper

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line