Godrej Consumer Products Ltd has addicted shareholders to a growth high, partly due to acquisitions that contribute to inorganic growth.
In the June quarter, which has seen most consumer companies benefit from good revenue growth, its revenue rose 39% year-on-year (y-o-y), mirroring the growth seen in the June 2011 quarter. Some of this was due to the currency effect in its international operations, and acquisition-related growth, but its businesses did visibly well, too.
A surprise factor was a sharper than expected increase in operating costs. The company’s advertising and publicity costs rose 30%, stepping up as a percentage of sales to 11%, against 8.3% in the March quarter. But the main spoilsport was employee cost, which rose 61.4%, and other expenses that rose 39.7%. But input costs did not increase as much as sales did and, as a result, operating profit margin declined by only 9 basis points y-o-y. One basis point is 0.01%.
Adi Godrej chairman Godrej Group. Photo: HT
Godrej Consumer’s domestic business has done well as the sales of soaps increased 42% y-o-y with volume growth at 24%, while the sales of household insecticides business grew 27%. Both the businesses have continued their past trend of healthy growth. Hair colours underperformed with 5% growth.
In its international business, sales rose 68% y-o-y, partly due to the growth in existing operations, and as contribution from acquisitions were not there in the base. The company said the margins in Indonesia and Africa expanded y-o-y but declined in Europe and Latin America.
After making several acquisitions abroad, Godrej has made progress in using its growing scale and portfolio to cut costs and cross-sell products. That should be a sustainable trend in its international business. While the effect of acquisitions in sales growth will wane once the high base effect kicks in, if organic growth remains healthy, it should compensate.
In its domestic business, too, it has benefited from the integration of the home and personal care businesses. In the longer run, if history is any indication, it may turn again to acquisitions to sustain higher growth levels.
Godrej Consumer’s net profit, after minority interest, declined 45%; but that is attributable to a non-recurring income of Rs 175 crore in the year-ago period.
Operating profits rose by a solid 38.2%, while profit before tax and exceptional items expanded 24%, with the gap explained by forex-related charges and higher finance costs.
If it can also hold on and improve profitability levels—the June quarter is a seasonally weak one—then it should be able to deliver the kind of results investors expect from it.
The stock trades at a price-to-earnings multiple of 28 times its forecasted 2012-13 consensus earnings per share, based on estimates compiled by Thomson Reuters.
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