>GODREJ CONSUMER PRODUCTS

Recommendation: Hold (SHAREKHAN)
Price target: Rs665
Current market price: Rs631

Downgraded to Hold; price target revised to Rs665

Result highlights

• Q1FY2013 results-strong growth momentum sustained: The Q1FY2013 results of Godrej Consumer Products Ltd (GCPL) are in line with our expectations largely on account of a higher than expected revenue growth during the quarter. The strong growth momentum of the previous quarters was sustained with the revenues growing by 39.2% year on year (YoY) and the adjusted profit after tax (PAT) growing by 47.9% YoY during the quarter. Q1FY2013 is the fourth consecutive quarter of a strong double-digit volume growth in the company's domestic soap segment, an above 20% growth in its domestic household insecticide (HI) business, and a more than 25% year-on-year (Y-o-Y) revenue growth in its Indonesian business. The strong growth could be attributed to adequate media spends as well as innovations and renovation in the respective portfolios.
• Results snapshot: In Q1FY2013 the consolidated net sales of GCPL grew by 39.2% YoY to Rs1,388.6 crore. The robust revenue growth was largely driven by a 24.3% Y-o-Y growth in the domestic business and a 67.5% Y-o-Y growth in the international business (an organic growth of 31% YoY). The consolidated gross profit margin (GPM) improved by 64 basis points YoY to 52.2% while the operating profit margin (OPM) stood flat at 14.7%, largely on account of it being a weak quarter for the HI business in India and seasonally the weakest quarter for the Latin American business. Thus, the operating profit grew by 38.2% YoY to Rs202.3 crore (the growth is in line with the revenue growth). This along with a lower incidence of tax resulted in a 48% Y-o-Y growth in the adjusted PAT (before the minority Interest) to Rs151.8 crore. The foreign exchange (forex) loss stood at Rs17.6 crore in Q1FY2013 as against a forex gain Rs2.4 crore recorded in Q1FY2012.
• Upward revision in earnings estimates: We have revised upwards our earnings estimates for FY2013 and FY2014 by 5.5% and 7.9% respectively to factor in the higher than expected revenue growth in Q1FY2013 and the lower tax rate indicated by GCPL's management in its commentary. 
• Outlook and valuation: Q1FY2013 was yet another quarter of a strong operating performance and a strong start to the fiscal year 2013. According to the management, there are no signs of a slowdown in the categories in which GCPL has a strong presence in the domestic market. It has maintained its thrust on innovation-led and distribution-led growth in the domestic and international markets. We expect GCPL's top line and bottom line to grow at compounded annual growth rate (CAGR) of 22.8% and 32.1% over FY2012-14.
  We have revised our price target for the stock upwards to Rs665 (based on 23x its FY2014 earnings of Rs28.9 per share). However, due a limited upside (of 5.3%) from the current level we have downgraded our recommendation on the stock from Buy to Hold. At the current market price the stock trades at 26.7x its FY2013E earnings per share (EPS) of Rs23.7 and 21.8x its FY2014E EPS of Rs28.9.

RISH TRADER