Godrej Consumer Products Equity Research

Date of Research – 14 January 2016

Price – Rs. 1,283.05

About the Company

Godrej Consumer Products Limited (“Godrej Consumer” or the “Company”) is a Fast Moving Consumer Goods (“FMCG”) company, engaged in the manufacture of personal and household care products. It operates in three categories – Home Care, Personal Wash and Hair Care. In addition to India, the Company has a strong and emerging presence in markets outside India.

Its international businesses include Rapidol, Kinky, Darling Group and Tura in the African continent; Godrej Global Mideast FZE in United Arab Emirates, Megasari Makmur Group in Indonesia, Issue Group and Argencos in Argentina, and Keyline Brands in the United Kingdom. Most of these markets are emerging and hold immense promise of growth for an FMCG company. As part of increasing its global footprint, Godrej Consumer acquired 51 % rights in the Darling group in Africa and 60 % interest in Cosmetica Nacional, a hair colorant and cosmetics company in Chile in 2012.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations6,407.447,602.418,276.368,967.81 9,608.80 
Expenses5,425.066,452.106,911.057,328.58  7,711.08  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)982.381,150.311,365.311,639.23  1,897.72  
Depreciation77.0081.8590.78103.11141.57  
Finance Costs77.45107.37100.15100.17  145.22  
Other income67.7862.7191.5166.87  75.30  
Exceptional items(128.90)(5.87)17.1726.83  (0.08) 
PBT1,024.611,029.671,248.721,475.99  1,686.31  
Tax179.18210.37272.29317.10  379.16  
Extraordinary items– – 
PAT (before Minority Interest and share of Associates)845.43819.30976.431,158.89  1,307.15  
Profit/ (loss) attributable to Minority Interest49.3359.5269.3539.58  – 
Share of profit / (loss) of Associates0.05(0.04)(0.10) (0.82) 
Consolidated Profit / (Loss) for the year796.10759.73907.121,119.41  1,307.97  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio15.3315.1316.5018.28  19.75 
Net Profit Margin Ratio13.1910.7811.8012.92  13.60 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital34.0334.0334.0434.0434.05 
Reserves & Surplus2,781.153,279.013,741.364,276.655,063.63 
Net worth (shareholders funds)2,815.183,313.043,775.404,310.695,097.68 
Minority Interest88.23209.51225.10162.0484.19 
Long term borrowings1,528.121,866.151,590.252,023.032,449.03 
Current liabilities1,556.302,279.092,699.942,612.592,485.37 
Other long term liabilities and provisions26.7127.2829.4030.4634.76 
Deferred Tax Liabilities11.055.964.653.132.42 
Total Liabilities6,028.297,701.038,324.749,141.9410,153.45 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets1,583.961,728.461,735.981,731.511,779.96 
Noncurrent Investments14.1619.9834.2734.3134.42 
Current assets2,026.862,848.372,818.263,089.563,547.03 
Long term advances and other noncurrent assets257.90195.77158.81208.17174.30 
Goodwill on consolidation (net)2,145.412,908.453,552.454,044.054,574.06 
Total assets6,028.297,701.038,324.749,141.9410,153.45  

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE19.7718.2320.5821.0221.48 
ROE / RONW25.8124.0320.1221.0422.73 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)6,407.447,602.418,276.368,967.81 9,608.80 
Growth (%)31.67 %18.65 %8.86 %8.35 % 7.15 % 
PAT (Rs. Cr.)845.43819.30976.431,158.89  1,307.15  
Growth (%)12.54 %(3.09 %)19.18 %18.69 % 12.79 % 
Earnings Per Share – Basic (Rs. )23.3922.3226.6532.87 38.29 
Earning Per Share – Diluted (Rs. )23.3922.3226.6432.86 38.28 
Price to Earnings33.3235.0939.4241.98 49.15 

Dividend History

The Company has maintained an average dividend yield of 1.64 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Godrej Consumer’s average current ratio over the last 5 financial years has been 1.15 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Godrej Consumer’s average long term debt to equity ratio over the last 5 financial years has been 0.61 times which indicates that the Company operates with considerate level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Godrej Consumer’s average interest coverage ratio over the last 5 financial years has been 12.54 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Godrej Consumer reported a promoter holding of 63.27 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.
 
At the same time, institutional holding in the Company stood at 30.44 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.