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Aarati Krishnan

Mr Adi B. Godrej, Chairman - Back on the growth track.

GODREJ Consumer Products' robust numbers for the June quarter suggest that it may be pulling itself out of the morass that the entire FMCG sector has been mired in for a couple of years now.

But with a significant portion of its sales coming from low-priced soaps, the unsteady progress of the monsoon is worrisome.

At a valuation of about 16 times its trailing 12-month earnings, the Godrej Consumer stock appears fully priced. Shareholders can hold the stock in light of the good numbers and possibility of reasonable profit growth.

Back on track

Sales and profit growth were back on track at Godrej Consumer Products for the quarter ended June 2004. Sales rose 15 per cent on the back of impressive growth in soaps. Godrej No.1, the brand targeted at the mass market, appears to have delivered hefty volume growth.

The soap sales surged 24 per cent this quarter in contrast to sluggish market growth rates of 2 per cent. It is also a good sign that the company has managed to reverse the declining growth trend in its other product categories.

Hair colours and toiletries, the two high potential segments in its product basket, also accelerated healthy growth this quarter, after shrinking last year.

Revenue growth would have been higher than reported, but for the decline in the contribution from contract manufacturing. This, too, is a welcome development and may lead to more stable numbers. Contract manufacture has proved an erratic source of revenues in the past.

Better product mix

Earnings growth for the quarter easily outpaced sales growth. This appears to be on account of two factors:

The company has managed to keep a tight lid on cost, despite rising input prices. For the quarter, Godrej's material cost, as a proportion of sales, has remained flat. This appears to have freed up resources for enhancing marketing support for its brands. Declining tax incidence, as the company sourced a larger portion of its products from its new production line at Baddi, a tax-free zone, appears to have propped up post-tax profits.

Sputtering monsoon

The sputtering monsoon appears to be the only source of concern for earnings. The company has consciously positioned its soap brands as high quality soaps priced for the mass market.

Given the significant rural presence, the company's sales growth may slow, if the ongoing monsoon turns out to be not as good as the earlier one. This could dent any recovery in sales for the soaps business, which appeared to be taking off in the aftermath of 2003's good monsoon.

While sales could be haunted by the monsoon effect, Godrej's profit growth could continue to outpace sales growth. For one, prices of palm oil derivatives, key inputs into soaps, have eased off, after peaking in the first quarter. Though the company tends to lock into its input requirements through forward contracts, this would have a salutary impact on margins in the coming quarters.

Second, with an additional soap line going onstream at Baddi in June 2004, the company can source a larger portion of its output from this tax-free zone, which would generate savings in excise duty and income tax.

Downside protected

At its current price of Rs 199, Godrej Consumer's stock price already appears to factor in reasonable profit growth. The stock trades at a price-earnings multiple of about 16 times its trailing earnings, in line with frontline FMCG stocks and at a premium to other Indian FMCG companies. This could leave limited scope for upside in the stock in the near term.

For those who already hold the stock, the company's policy of continuously running down its swelling cash chest through higher dividend payouts and buyback offers, could provide support against downside in stock price. Based on its 2002-03 dividend payout, the stock offers a dividend yield of about 4.5 per cent.

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