Godrej Consumer: Losing colour

In the near term down trading by consumers may actually boost sales of Godrej Consumer’s soaps since they are positioned in the sub-premium segments. There is already evidence of that in the December 2008 quarter — volumes were up 19 per cent whereas Hindustan Unilever saw volumes fall. However, the lack of momentum in the company’s hair colour business as also the less profitable international operations are cause for concern.
That’s why although GCPL’s revenues are tipped to grow 25-26 per cent in the current year, the momentum could taper off sharply to less than 15 per cent in 2009-10. What’s also worrying is that despite strong top line numbers, net profits are likely to be flat this year over the Rs 159 crore posted in 2007-08. For sure, they will bounce back in 2009-10 on a low base but, at a price-earnings multiple of 15 times estimated 2009-10 earnings, the stock prices in that uptick in profits.
The improvement in profits will be driven by better operating profit margins, which during the December 2008 quarter came off by 680 basis points y-o-y. The company hasn’t yet benefitted fully from falling prices of commodities and should do so in the coming quarters. However, it should be mentioned that the margins fell despite the company spending less on advertising and other overheads.
While GCPL should be able to maintain or even grow its market share in soaps, currently at around 10 per cent, it has been losing market share in hair colours. The company hasn’t really been able to take on the competition from the likes of L’Oreal and others which operate at the premium end. Although the market has hardly been penetrated—30 per cent compared with 85 per cent for developed markets—GCPL needs to rethink its strategies so as to ensure for itself a stable market share over the longer term. Moreover, since revenues from overseas now account for about a fifth of the top line, they need to start contributing meaningfully to profits.
Source: BS