GODREJ CONSUMER PRODUCTS FY13
Our analysis of Godrej Consumer Products' (GCPL) FY13 annual
report provides answers on why the company's consolidated tax
rate fell to 17% in FY13 from 23% in FY12 and how these tax rates
are likely to pan out, going forward. We also note that GCPL amortizes
expenses of ~INR776m (8.3% of FY13 PBT) directly through reserves,
partly on account of amortization of brands (5.9% of PBT) and partly
as premium on redemption of debentures (2.4% of PBT).
the
ART
of annual report analysis
A
NNUAL
R
EPORT
T
HREADBARE
21 March 2014
ART #1: Accounting/Auditing issues
Consolidated tax rate declined to 17% in FY13 from 23% in FY12,
due to subsidiaries (derived) tax rate going down to 15% in FY13
(FY12: 33%). Subsidiaries tax rate declined due to tax savings on
royalty income on products sold in Indonesia increasing from
1.8% in FY12 to 7.9% in FY13.
Subsidiaries (derived) tax rate reduced
from 33% in FY12 to 15% in FY13 pulling
down the consolidated tax rate to 17%
in FY13 from 23% in FY12
Expenses of INR776m (8.3% of FY13 PBT)
routed through the reserves
Employee cost at the subsidiary level on
the rise
Stock Info
Bloomberg
CMP (INR)
Equity Shares (m)
M.Cap. (INR b)/(USD b)
52-Week Range (INR)
1,6,12 Rel.Perf.(%)
GCPL IN
770
340.3
262/4.3
977/672
-4/-11/-15
Indovest Capital, subsidiary in Labuan, Malaysia royalty transaction structuring
Tax Rate: 0%
Tax Rate: 30%
Royalty Income
PT Intrasari Raya,
Indovest Capital, Labuan, Malaysia
FY13 Turnover: INR1.8b, PBT/PAT: INR1.7b
Witholding
PT Megasari Makmur
Trademarks for brands sold in Indonesia
Indonesia
tax of 10%
Also, Nigerian and Mozambican subsidiaries enjoy corporate tax
holidays and so does Lebanese subsidiary, resulting in lower
subsidiaries tax rate. Tax rate is low in domestic business due to
certain manufacturing units being eligible for tax exemptions,
which led to standalone tax rate of 19% in FY13 (FY12: 20%). These
benefits are likely to continue for a couple of years.
HIT and Good Knight brands are being amortized over 20 years
directly through reserves. Accordingly, INR527.5m (5.9% of FY13
PBT) is being routed through the general reserve every year.
Premium on redemption of 0% debentures stood at INR248.2m
for FY13 (2.4% of PBT), which has been adjusted directly against
the securities premium as permitted by the Companies Act. Also,
foreign exchange loss and amalgamation expenses, on
amalgamation of Dutch subsidiaries, totaling to ~INR385m (3.8%
of FY13 PBT) were adjusted against the reserves instead of routing
them through the P/L.
Financial summary (INR b)
Y/E Mar
2014E
Sales
77.1
EBITDA
11.3
Adj. PAT
7.3
Adj. EPS (INR)
21.6
EPS Gr. (%)
10.0
BV/Sh.(INR)
103.6
RoE (%)
20.8
RoCE (%)
25.7
Payout (%)
46.4
E: MOSL Estimates
2015E
90.1
13.8
9.2
27.0
25.3
119.0
22.7
28.1
37.0
2016E
106.3
16.5
11.3
33.3
23.2
140.6
23.7
29.8
30.0
Shareholding pattern (%)
As on
Promoter
Domestic Inst
Foreign
Others
Dec-13
63.3
1.4
28.9
6.5
Sep-13
63.3
1.2
28.7
6.8
Dec-12
63.5
1.4
27.6
7.6
ART #2: Key financial insights
Employee costs are increasing consistently at the subsidiary level
due to acquisitions outside India. Subsidiaries employee costs
were 7.7% of consolidated revenue in 1HFY14 (FY13: 6.6%).
Bill discounting charges on account of debtors and invoice
discounting increased from INR119.8m in FY12 to INR170.6m in
FY13 on account of domestic operations.
Stock performance (1 year)
ART
will present a threadbare portrait of annual reports - statistical, strategic and structured. We believe
ART's
wide canvas - from accounting and auditing issues to
operating performance to management insights to governance matters - will help readers paint a clearer picture of the stock's investment worthiness.
Ashish Gupta
(Ashish.Gupta@MotilalOswal.com); +91 22 3982 5544
Chaitanya Arora
(Chaitanya.Arora@MotilalOswal.com); +91 22 3982 4927
Investors are advised to refer through disclosures made at the end of the Research Report.
1
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
ART #1
ACCOUNTING / AUDITING ISSUES
Tax structure in subsidiaries, exemptions in domestic units result in lower
tax rate on consolidated basis
GCPL has a consolidated tax rate of 17% in FY13 (FY12: 23%), primarily due to
exemptions in standalone and lower tax rate in subsidiaries.
Standalone tax exemptions
Standalone tax rate stood at 19% in FY13 (FY12: 20%) due to certain
manufacturing units of the company located in specified areas being eligible for
income-tax exemptions.
These exemptions are likely to continue for a few more years resulting in lower
tax rates at the standalone level (MAT rate as guided by the management).
Subsidiaries tax structure
Indovest Capital, a subsidiary incorporated in Labuan, Malaysia, had a turnover
of INR1.8b with PBT/PAT of INR1.7b in FY13. This has increased from PAT of
INR304m in FY12.
As explained by management, Indovest Capital owns the trademarks for brands
sold in Indonesia, and Indovest’s turnover pertains to royalty income from other
Indonesian subsidiaries.
GCPL’s Indonesian subsidiaries are having a tax rate of 30%, while Indovest is a
tax-free entity. However, as stated by management, Indonesian subsidiaries are
paying a withholding tax @ 10% on royalty payment.
We also note that rate of royalty as a percentage of aggregate Indonesian
subsidiaries turnover increased from 1.8% in FY12 to ~8% in FY13.
Since the above royalty transaction is between two subsidiaries, the transaction
is eliminated on consolidation. Reporting currency of Indovest Capital is USD.
Consolidated tax rate
declined to 17% for FY13
from 23% in FY12
Standalone tax rate stands
at 19% in FY13 (FY12: 20%)
due to tax exemptions in
certain manufacturing units
Subsidiaries (derived) tax
rate dipped from 33% in
FY12 to 15% in FY13
No taxes on royalty income
of Indovest Capital,
Malaysian subsidiary; rate
of royalty increased to 7.9%
of Indonesian revenue in
FY13 (FY12: 1.8%)
Consolidated tax rate dips from 23% in FY12 to 17% in FY13 due to lower subsidiary taxes
Source: Company annual report, MOSL
Indovest Capital, subsidiary in Labuan, Malaysia royalty transaction structuring
Source: Company, MOSL
21 March 2014
2
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Royalty income as % of turnover of Indonesian subsidiaries jumped to ~8% in FY13
Source: Company annual report, MOSL
Tax holidays for African
subsidiaries in Nigeria and
Mozambique and 0% tax
rate for Lebanese subsidiary
results in lower tax rate
An
African subsidiary, Lorna Nigeria
had a PBT of INR35m for FY13. The PAT
figure, however, was INR200m. As explained by management, subsidiary has
received tax refund for previous years resulting in higher PAT. The subsidiary has
a pioneer tax status, resulting in 0% corporate income tax for 5 years. Standard
corporate tax rate in Nigeria is 30%.
Hair Trading (offshore) S. A. L incorporated in Lebanon
has profits of ~INR400m
in FY13 (FY12: INR11m) with 0% tax. Standard corporate tax rate in Lebanon is
15%.
In addition to this, the company also has
tax exemptions in the Mozambican
subsidiary, Weave Mozambique Limitada.
Thus, increase in rate of royalty for Indovest Capital and tax credit in Africa
results in tax rate for the subsidiaries coming down from 33% in FY12 to 15% in
FY13.
21 March 2014
3
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Lower tax rate for certain subsidiaries result in consolidated tax rate being lower (INR m)
Name of subsidiaries
Turnover
PT Intrasari Raya
PT Megasari Makmur
Laboratoria Cuenca
Keyline Brands Limited
(UK)
Subinite (Pty) Ltd.
Hair Trading (offshore)
S. A. L
9,770
7,606
1,979
2,220
1,139
34
FY12
PBT
20
678
165
168
128
11
PAT
14
461
103
110
92
11
FY13
Tax
rate Turnover PBT
(%)
28.6 12,454
50
31.9 10,197 1,156
37.5 3,074
162
34.7
28.0
-
2,793
2,048
1,939
215
68
399
PAT
58
804
100
155
49
399
Tax
Country of Standard corporate tax rates for
rate
incorporation countries / Remarks
(%)
-17.1 Indonesia Corporate tax rate is 25%
30.5
Indonesia Corporate tax rate is 25%
38.2 Argentina Corporate tax rate is 35%
28.0
28.1
0.0
U.K.
Corporate tax rate reduced from 26%
in FY12 to 24% in FY13. It will be
further reduced to 23% in FY14, 21%
in FY15 and 20% thereafter
South Africa Corporate tax rate is 28%
Tax rate @15%. Various incentives
Lebanon
are granted for eligible investments
Company has received tax credit for
prior year's tax in FY13. Pioneer tax
status, resulting in 0% corporate
income tax for 5 years. Standard
corporate tax rate is 30%.
Corporate tax rate is 20%
Profit includes royalty income from
other subsidiar(y)/(ies) which gets
eliminated on consolidation
Lorna Nigeria
1,194
476
317
33.3
1,912
35
200 -478.6
Nigeria
Cosmetica Nacional
Indovest Capital
Weave Mozambique
Limitada
Godrej South Africa
(Pty) (earlier known as
Rapidol (Pty))
Style Industries
Limited
Argencos SA
Godrej Household
Products (Bangladesh)
Pvt. Ltd.
Godrej Nigeria Ltd.
-
311
-
304
-
304
-
0.1
1,836
1,800
80
1,691
60
1,691
25.3
0.0
Chile
Malaysia
536
226
152
32.7
1,444
398
390
Corporate tax rate is 32%. However,
2.0 Mozambique the company operates in a free-
trade zone resulting in lower taxes
28.0
South Africa Corporate tax rate is 28%
Corporate tax rate @ 30%. For
branches @ 37.5%. However, there
are several exemptions available
subject to certain conditions
1,057
255
183
28.0
1,083
248
178
-
852
474
470
-
46
-36
29
-
40
-39
25
14.1
Loss
15.4
1,043
731
600
137
-24
-33
90
-17
-36
33.8
Loss
Loss
Kenya
Argentina Corporate tax rate is 35%
Bangladesh Loss-making company, hence no tax
488
24
16
34.8
Nigeria
Corporate tax rate is 30%
Source: Company annual report, KPMG guidance for global corporate tax rates, MOSL
Amortization of trademarks/brands over 20 years; HIT and Good Knight
amortization routed through general reserve
Amortisation of INR527.5m
(5.9% of FY13 PBT) routed
through reserves every year
for Good Knight and HIT,
due to High court
scheme approval
Trademarks and brands for HIT and Good Knight, acquired under a Scheme of
Amalgamation with the erstwhile Godrej Household Products Limited (GHPL),
are being amortized over a period of 20 years directly through the reserves.
Accordingly, GCPL amortizes INR527.5m (5.9% of FY13 PBT) directly through the
general reserve every year instead of P&L, based on the High court scheme
approval.
Further, other trademarks/brands are amortized over a period of ten years
through the P&L, except Kinky and Soft & Gentle brand, which are amortized
over a period of 20 years.
The company added INR861m under trademarks and brands during FY13 which
is primarily for the Soft and Gentle brand.
4
21 March 2014
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Redemption premium on NCDs directly routed through reserves; adjusted
PBT higher by 2.4%
Redemption premium of
INR248.2m in FY13 (2.4% of
PBT) adjusted directly
against reserves
During FY13, GCPL has issued 2,500 0% redeemable NCDs of INR2.5b with YTM
of 9.4%p.a.
As permitted under the Companies Act, GCPL amortizes the finance cost directly
through the reserves (Securities Premium) instead of P&L.
Premium on redemption of debentures stood at INR248.2m in FY13 (FY12:
INR272.3m). Had the company accounted for the same through P&L, its profits
would have been lower by 2.4% of FY13 PBT (FY12: 2.8%).
Premium on redemption of debentures routed through reserves instead of P&L (INR m)
Particulars
Premium on redemption of debentures
Profit before tax
Premium as a % of PBT (%)
FY11
FY12
FY13
231
272
248
6,529
9,773
10,246
3.5
2.8
2.4
Source: Company annual report, MOSL
Forex differences on amalgamation and long term loans capitalised
Forex loss of INR385m
(3.8% of FY13 PBT) on
merger of Dutch
subsidiaries adjusted
against reserves
Forex differences arising on
long-term loans, taken for
investment in subsidiaries,
amortized over period
of loan
Forex differences on merger:
GCPL amalgamated two of its Dutch subsidiaries
w.e.f. Sept 30, 2013 and adjusted foreign exchange loss and amalgamation
expenses of INR382.8m and INR1.9m respectively directly against reserves. Had
these items been routed through P&L, profits would have been lower by
~INR385m (3.8% of FY13 PBT).
Forex differences arising on long-term loan:
Further, GCPL had earlier exercised
the option of amortizing foreign exchange differences arising on long-term
foreign currency loan through P&L over the life of the loan (if taken for other
than fixed assets) and in the form of depreciation through fixed assets (if taken
for fixed assets). The unamortized amount of forex differences was INR112.1m
and INR37.4m at the FY12 & FY13 end respectively. This had increased to
INR61.1m as at 1HFY14 end.
Forex loss in P&L:
Loss on foreign currency transactions and translation for FY13
is INR327.8m (FY12: INR205m); 3.2% of FY13 PBT (FY12: 2.1%).
Loan to ESOP trust stands at INR503m
GCPL operates its ESOP
scheme through GCPL ESOP
trust which purchases
shares from secondary
market
GCPL operates its ESOP scheme through GCPL ESOP Trust, which is granted a
loan by the company to purchase shares from the secondary market. The Trust
pays interest on the loan at least at the bank rate.
The loan will be repaid by the Trust out of the exercise price received from the
employees exercising the options (Exercise price = Market price on date of grant
of options + Interest at least at the bank rate). Based on the number of options
exercised, the amount recovered from employees will be remitted to the
company.
However, a SEBI circular has forbidden any further secondary market purchases
by ESOP Trusts w.e.f. January 17, 2013. All outstanding shares in ESOP Trust
(acquired prior to Jan 17, 2013) will have to comply with the SEBI guidelines or
be disposed off before June 30, 2014.
21 March 2014
5
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Loans to GCPL ESOP trust
stands at INR503m
As explained by the management, the company is in compliance of the SEBI
norms currently and no shares need to be disposed off. Loans to ESOP Trust
stood at INR503m at the end of FY13 (FY12: INR874.9m).
Modification in terms of GIL ESOS scheme; no interest on ESOP price post
June 2012
GCPL had altered ESOS
scheme during FY13 (GIL
shares are allotted in this
scheme). No options have
been exercised in this
scheme till FY13.
The Employee Stock Option Scheme (ESOS) allowed employees of Godrej
Household Products Limited (GHPL) to subscribe to equity shares of Godrej
Industries Limited (GIL).
The exercise price of each share was equal to market price on date of grant plus
interest at a rate not less than bank rate from date of grant till date of exercise.
However, during the year, the company modified the terms to charge interest
only till 30
th
June, 2012.
1.1m options are outstanding at the end of FY13 (FY11 end: 2.1m options) with
exercise period available till December 31, 2014. No options have been
exercised as at the end of FY13. The company has sold ~1m shares from the
ESOP Trust (options forfeited) during FY13 and the Trust has 1.1m shares in the
Trust as on Sept 30, 2013.
1.1m options are
outstanding at FY13 end
and 1m GIL shares
have been sold as the
options lapsed
1.1m shares pending with the ESOP Trust; no options exercised in the scheme (m)
Particulars
Options granted
Options lapsed/forfeited, pending sale
Options lapsed/forfeited and sold
Total number of options outstanding
FY11
2.13
-0.21
-
1.92
FY12
FY13
2.13
2.13
-0.67
-0.06
-
-0.95
1.46
1.12
Source: Company annual report, MOSL
Foreign currency translation reserve negative in INR depreciating scenario
Cross-currency movement
led to foreign currency
translation reserve being
negative in FY13
Foreign currency translation reserve stands at negative INR504.8m in FY13
(FY12: negative INR297.5m), despite INR depreciating by 14% against USD
during the year.
Ideally, INR depreciation should lead to positive foreign currency translation
reserve for positive net worth companies.
As explained by the management, there are more than 10 other currencies
which are involved due to multi-geographical presence, and the exchange
movement of all such currencies resulted in negative foreign currency
translation reserve.
21 March 2014
6
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
ART #2
KEY FINANCIAL INSIGHTS
Discounting charges on debtors at INR170.6m; majority pertains to
domestic business
Bill discounting charges of
INR138m in FY13 pertains
to domestic business
Bill discounting charges increased from INR119.8m in FY12 to INR170.6m in
FY13, with a bulk of these expenses forming part of the domestic business.
These charges arise on debtors discounting and invoice discounting and form
part of the finance cost of the company.
As explained by management, the discounting is without recourse.
Standalone debtors (net) stood at INR1.2b in FY13 with mere 11 days of
receivables. However, the receivable days would be higher if debtors were to be
grossed up.
Bill discounting charges increased in FY13 (INR m)
Particulars
Standalone
Subsidiaries (derived)
Consolidated
Debtors (Standalone)
FY12
FY13
120
138
0
33
120
171
943
1,221
Source: Company annual report, MOSL
Employee costs on the rise due to overseas acquisitions
Employee costs have jumped from INR4.0b in FY12 to INR5.9b in FY13; 9.1% of
FY13 revenue (FY12: 7.6%). For 1HFY14, employee cost stood at INR3.8b (10.3%
of 1HFY14 revenue).
Employee costs have
jumped from INR4.0b in
FY12 to INR5.9b in FY13
Employee costs as a percentage of revenue continuously on the rise (INR b)
Source: Company annual report, Half yearly results, MOSL
Subsidiary (derived)
employee costs were 7.7%
of consolidated revenue for
1HFY14 (FY13: 6.6%)
leading to rise in overall
employee cost
Further, increase in employee costs is mainly attributable to higher costs at the
subsidiary level. Employee costs at the subsidiary level as a percentage of total
employee costs increased from 32% in FY09 to 72% in FY13 mainly due to
acquisitions made by company outside India.
Subsidiary (derived) employee costs were 2% of the consolidated revenues in
FY09. This figure has increased to 7.7% during 1HFY14.
21 March 2014
7
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Subsidiaries are the major drivers to increase in employee costs (INR b)
Source: Company annual report, Half yearly results, MOSL
Divestment of non-core business to Creador for USD35m; profit of INR1.3b
on the transaction
Indonesian food business
under Simba brand sold for
a profit INR1.3b
During FY13, the company divested its food business in Indonesia (non-core
business) for an enterprise value of USD35m (includes USD6-7m debt) to
Creador.
This business was operated by an Indonesian subsidiary of the company viz PT
Simba Indosnack Makmur. Consequently, PT Simba Indosnack Makmur has
ceased to be a subsidiary.
Cash received in FY13 was INR880.2m as part consideration, while the balance
deferred consideration is shown as a part of other current assets.
Disposals in trademarks and brands (intangible assets) stood at INR1.1b, which
appear primarily due to sale of the food business. The total profit recorded on
divestment of this business is INR1.3b.
However, as per the sale agreement, the company will continue the distribution
of the Simba brand on a break-even basis for one year which has had an impact
on EBITDA margins of the subsidiaries business for 1HFY14.
Cash flow from operations supported by current liabilities and provisions
Increase in current liabilities
due to inorganic additions
and working capital
optimization across
geographies
Cash flow from operations during FY13 stood lower at INR8.3b (FY12: INR11.0b)
aided by current liabilities and provisions of INR4.6b in FY13 (FY12: INR7.0b).
Increase in current liabilities and provisions was mainly due to other current
payables jumping from INR2.5b in FY12 to INR4.4b in FY13. As per management,
the increase is mainly due to inorganic additions and working capital
optimization across geographies.
Debtors more than six months from due date of payment has jumped from
INR58.6m in FY12 to INR329.6m in FY13; 5.5% of FY13 outstanding debtors
(FY12: 2.2%).
21 March 2014
8
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Cash flow from operations post interest/EBITDA ratio dips sharply (INR m)
Particulars
FY12
FY13
EBITDA (A)
8,554
9,824
Add: Non-cash adjustments (mainly due to foreign exchange)
289
482
Less: Direct taxes paid
2,100
2,066
Operating profit before working capital changes
6,742
8,240
Inventories
-3,445
-2,632
Trade receivables
-936
-2,177
Loans and advances
-400
-598
Other current assets
-6
19
Current liabilities and provisions
7,028
4,550
Cash generated from operations after tax before exceptional items
8,983
7,403
Add: Exceptional items
2,002
880
Cash generated from operations
10,985
8,283
Less: Financial cost
422
843
Cash flow from operations post interest (B)
10,563
7,440
Less: Capital expenditure
1,565
2,636
Less: Investment in subsidiaries
5,791
6,911
Free cash flows post interest
3,207
-2,107
Cash flow from operations post interest/EBITDA (C = B/A*100) (%)
123%
76%
Source: Company annual report, MOSL
Working capital supported
by increase in current
liabilities and provisions
Cash conversion cycle improves driven by standalone operations;
subsidiaries cycle increases marginally
Consolidated cash
conversion cycle improves
to 35 days in FY13 due to
standalone business
improving to -14 days while
subsidiaries cycle increases
to 101 days
Average cash conversion cycle has improved to 35 days in FY13 from 50 days in
FY11.
The standalone cash conversion cycle has a huge improvement in the number of
days from 30 in FY11 to negative 14 in FY13.
On the other hand, subsidiary operating cycle is consistently increasing on a
yearly basis. From 88 days in FY11, it has now crossed the 100 day mark in FY13.
Cash conversion cycle stable due to negative cycle at standalone
Particulars
Standalone
Inventory days
Receivable days
Payable days
Subsidiaries
Inventory days
Receivable days
Payable days
Consolidated
Inventory days
Receivable days
Payable days
FY11
30
76
10
56
88
73
54
39
50
75
25
50
FY12
FY13
7
-14
91
104
12
11
96
129
99
101
105
125
64
64
70
88
41
35
96
113
32
34
87
112
Source: Company annual report, MOSL
21 March 2014
9
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Bulk of the working capital is being blocked at subsidiary level
Source: Company annual report, MOSL
Other financial highlights
Total intangible assets (including goodwill on consolidation) stood at ~INR40b
(FY12: INR33b); 1.2x of FY13 net worth (FY12: 1.2x).
Intangible assets at 1.2x of networth primarily due to goodwill and trademarks (INR b)
Particulars
Intangible assets - acquired
Goodwill on consolidation
Total intangible assets
Net worth
Intangible assets as % of net worth (%)
FY11
11.8
15.4
27.2
17.3
158
FY12
FY13
11.5
10.9
21.5
29.1
33.0
39.9
28.0
33.1
118
121
Source: Company annual report, MOSL
Debt increased from
INR18.8b in FY12 to
INR24.6b in FY13 for
acquisitions in Africa &
Latin America
During FY13, the company purchased a capital asset from Godrej Vikhroli
Properties LLP (promoter group company) for INR1.0b, which is forming part of
CWIP.
Debt increased from INR18.8b in FY12 to INR24.6b in FY13 primarily taken for
acquisition of Cosmetica Nacional, Chile and Darling group. Debt equity ratio
remained stable at 0.7x in FY13.
Cash balance of the company has increased significantly from INR6.4b in FY12 to
INR8.7b in FY13.
Hedged exposure (USD m)
Particulars
FY12
FY13
Forward
22.78
0.83
contract
Source: Company annual
report, MOSL
Majority of the forex exposure is unhedged at the end of FY13 end (INR m)
Nature of outgo
Payables
Payables
Loan and interest payable
Bank borrowings
Receivables
Receivables
Cash and cash equivalents
Cash and cash equivalents
Net unhedged payables
Currency
USD
EUR, SGD, JPY, GBP
USD
USD
USD
ZAR, GBP, EUR
USD
EUR, ZAR
FY12
FY13
1,389
3,937
23
37
2,410
1,345
47
-
-528
-1,060
-
-161
-359
-496
-3
-61
2,979
3,540
Source: Company annual report, MOSL
21 March 2014
10
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
ART #3
MANAGEMENT SPEAK/KEY PLANS
“3x3” strategy:
GCPL has continued to reiterate its commitment to the “3x3”
strategy it has in place for a few years now. The 3x3 strategy focuses on 3 core
product segments-
Hair Care, Home Care and Personal Care
and the
establishment of the company as the market leader in these segments across
3
continents- Asia, Africa & Latin America.
Category-wise sales break-up
Source: Company annual report, MOSL
Household Insecticides
Personal Wash
Growth of Category (%)
27%
20%
Growth of GCPL (%)
26%
10%
FY12
Source: Company annual report, MOSL
FY13
Source: Company annual report, MOSL
Hair Care
Domestic net sales growth
Source: Company annual report, MOSL
Source: Company annual report, MOSL
21 March 2014
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 Motilal Oswal Financial Services
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Godrej Consumer Products FY13
International markets
Overseas business
increased share to 44% of
total revenue in FY13
(FY12: 39%)
On the international front, the company is the market leader in air fresheners
and wet tissues in Indonesia, hair colors across several countries in Africa and
Latin America and hair extensions in Africa, while also being the number two
player in home insecticides in Indonesia.
The company is pegging its growth on the expansion of the emerging economies
like Indonesia in South East Asia and South Africa.
In terms of net revenue, the subsidiaries business contributed 44% of the net
consolidated revenue of the group in FY13 (39% in FY12).
Geographical growth and profitability
Geographical sales breakup
Source: Company annual report, MOSL
Source: Company annual report, MOSL
Subsidiaries revenue increasing consistently as proportion of net revenue
Source: Company annual report, MOSL
Update on acquisitions during the period
Darling acquisition steady:
GCPL has seen a steady stream of strategic
acquisitions in the past few years. The company is still in the process of
completing the integration of the Darling Group it has acquired in Africa. The
second phase of the incorporation from November, 2012 has extended the
reach of the company to the sizable Kenyan market in East Africa. The company
hopes to promote new products in the wet hair color market in Kenya under the
Darling brand.
21 March 2014
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 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Soft & Gentle acquired in
UK; 4th largest female
deodorant brand in the
British market in terms of
market share
Acquisition of Soft & Gentle brand:
GCPL has also tried to establish a toe hold in
the well-developed UK personal care market on the back of acquisition of Soft &
Gentle brand by Keyline Brands, a subsidiary of GCPL, during FY13. Soft & Gentle
is the 4th largest female deodorant brand in the British market in terms of
market share.
Acquired 60% stake in Cosmetica Nacional:
The company acquired 60% in
Cosmetica Nacional in Chile in FY13 and has launched many new products in the
Latin American market through the Ilicit brand.
Hair care acquisition:
During FY14, the company has acquired a 30% stake in
b:blunt, a premium salon chain with 17 outlets and 4 academies across India.
The company does not believe the acquisition to be strategically important but
is looking at it as a learning investment in terms of hair color and care product
preferences among the premium clientele these salons enjoy.
Other highlights
58% hike in the minimum
wages for the Indonesian
business and a 33% increase
in fuel costs likely to impact
EBITDA margins for FY14
Production facilities centralized in Mozambique:
Production for South Africa
and Mozambique has been centralized at the facilities in Mozambique, which
are in a declared tax free zone resulting in lower indirect and corporate taxes.
Even Nigeria has a 5 year corporate tax holiday thereby reducing the tax
incidence in the country.
Merger of subsidiaries:
During the year, Godrej Nigeria Holdings Ltd merged
with Godrej Consumer Products Mauritius Ltd (both wholly owned subsidiaries
of GCPL) with effect from April 1, 2012.
EBITDA margins guidance:
During 1HFY14, there has been a 58% hike in the
minimum wages for the Indonesian business and a 33% increase in fuel costs.
Though there have been price hikes to counter the cost enhancements, its
remains to be seen what impact they will have on the overall EBITDA margins of
the company.
Cross-pollination and its benefits:
Due to its expansion and presence in diverse
markets across 3 continents, the company is also looking at introducing new
products to different sets of consumers by way of cross-pollination. Example:
Introduction of Aer range of car and home air fresheners in India, after the
product was originally a part of the Indonesian line-up under the Stella brand.
Premiumization benefits:
The company is also looking at premiumization of its
brands to attract a younger, more brand conscious target base. The revamp of
Cinthol, with a new brand ambassador and advertising campaign seems to be
paying dividends in terms of enhancing the image of the brand and its customer
perception.
Rural penetration:
The company is looking at the potential in the value for
money segment which it believes will help in creating rural demand and set the
pace of growth in penetration. This has prompted the company to strengthen
rural distribution which has resulted in expanding reach by 10% in FY13.
ERP system update:
The company is deploying SAP in most of the subsidiary
units and is currently in the process of integrating them into a single ERP system.
21 March 2014
13
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
ART #4
GOVERNANCE MATTERS
Composition of Board of Directors and change in management
Vivek Gambhir appointed as
MD after retirement of
A. Mahendran in June, 2013
The Board of Directors of GCPL consists of 14 directors, of which 7 are
independent directors.
Ms. Nisaba Godrej has been appointed as a Whole-time Director designated as
Executive Director, Innovation w.e.f 1
st
July, 2013 for a period of 3 years.
Mr. A Mahendran retired as Managing Director of the company on 30
th
June,
2013 and has been appointed as Non-Executive Additional Director w.e.f 1
st
July,
2013.
Mr. Vivek Gambhir, the Chief Strategy Officer of Godrej Industries has been
appointed by the company as an Additional Director w.e.f 30
th
April, 2013 and is
also the Managing Director of the company w.e.f 1
st
July, 2013 for a period of 3
years, following the retirement of Mr. A Mahendran.
Ms. Ireena Vittal has been appointed as an Additional Director w.e.f 30
th
April,
2013.
Board meetings and attendance
5 Board Meetings were held during the year, as against the minimum
requirement of 4 meetings.
Attendance of Directors in Board Meetings and AGM
Name of the Director
Mr. Adi Godrej
Mr. Jamshyd Godrej
Mr. Nadir Godrej
Ms. Tanya Dubash
Ms. Nisaba Godrej
Mr. A. Mahendran
Mr. Narendra Ambwani
Prof. Bala Balachandran
Mr. Bharat Doshi
Dr. Omkar Goswami
Mr. Aman Mehta
Mr. D. Shivakumar
Board meetings
Attendance at
attended
last AGM
5
Yes
5
Yes
4
Yes
4
Yes
5
Yes
5
Yes
5
Yes
3 (1)
Yes
4 (1)
Yes
4
Yes
4 (1)
Yes
3
Yes
Note: Figures in brackets indicate attendance through teleconference
Source: Company annual report, MOSL
Outgoing Managing Director A Mahendran receives 1m shares under ESPP
Under the Employee Stock Purchase Plan (ESPP), eligible employees of the cadre
Vice President and above are to compulsorily subscribe to a maximum of 1m
equity shares. The scheme is administered through a Trust set up for this
purpose.
The company has extended the scheme to Mr. A Mahendran, who was the
Managing Director of the company till 30
th
June, 2013. The shares have been
subscribed by Mr. Mahendran at an exercise price equal to market price on the
date of grant along with interest till date of exercise.
21 March 2014
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 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Current ESOP scheme with exercise price of INR1
29,464 shares issued under
Employee Stock Grant
Scheme in FY13 at exercise
price of INR1 (same as
face value)
GCPL also has in a place an Employee Stock Grant Scheme. The scheme
envisages issue of up to 2.5m equity shares to eligible employees at an exercise
price of INR1 each (same as face value of the shares).
29,464 shares have been issued during the year under this scheme. As at the
end of FY13, 0.13m grants are outstanding.
Transfer of GCPL shares between promoters
Promoter shareholding of GCPL stood at 63.3% at the end of 3QFY14.
Of this, shareholding of GIL has increased from 21.15% in 1QFY13 to 22.3%
(increase by ~115bp) in 3QFY14. The change in shareholding is primarily due to
inter-se transfer of promoter stake.
GIL has acquired shares from different individual promoters of the company at
various prices resulting in total outflow of ~INR3.9b over the last six quarters.
Increasing stake of GIL over the period
Godrej Consumer Products Limited
Holding of GIL
Holding of other promoters
Total promoter holding
March, 2012
No. of shares
% of Holding
(m)
72
145.7
217.7
21.2
42.8
64.0
March, 2013
No. of shares
% of Holding
(m)
73.7
142.4
216.1
21.6
41.9
63.5
December, 2013
No. of shares
% of
(m)
Holding
75.9
22.3
139.6
41.0
215.5
63.3
Source: BSE, MOSL
Amount of money spent by GIL for purchase of stake (INR m)
Godrej Industries Ltd.
Price (INR/share)
Number of shares purchased (m)
Total amount (INR m)
Date
14-Sep-12
660
1.7
1,102
13-Aug-13
862
1.2
1,034
13-Nov-13
852
1.0
869
18-Feb-14
750
1.2
863
Total
5.0
3,868
Source: BSE, MOSL
GIL increasing stake in GCPL
by purchasing shares from
other promoters
The company is making the purchases by inter-se transfer of promoter stake and
not open market purchase due to:
Less liquidity in the stock as they can’t get big blocks.
Management does not want price to shoot up if they source the same from
open market.
As per GIL’s management, the company is very positive on the prospects of
GCPL and hence is keen on buying stake while also being open to increasing
stake further.
21 March 2014
15
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Financials and Valuation
Income Statement (Consolidated)
Y/E March
Net Sales
Change (%)
Cost of Goods Sold
Gross Profit
Margin (%)
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Other Income-rec.
Forex gain/(loss)
PBT
Change (%)
Tax
Deferred Tax
Tax Rate (%)
PAT
Change (%)
Margin (%)
Minority interest
Group Adjusted PAT
Non-rec. (Exp.)/Income
Reported PAT
2012
48,509
32.0
23,185
25,324
52.2
39,903
8,607
35.4
17.7
644
658
672
205
7,771
27.0
2,261
0
29.1
5,511
16.4
11.4
245
5,266
2,002
7,267
2013
63,908
31.7
29,511
34,397
53.8
53,923
9,985
16.0
15.6
770
775
844
328
8,957
15.3
1,792
0
20.0
7,165
30.0
11.2
493
6,672
1,289
7,961
2014E
77,095
20.6
36,146
40,949
53.1
65,756
11,339
13.6
14.7
895
1,098
880
0
10,225
14.2
2,156
-74
21.8
7,994
11.6
10.4
653
7,342
0
7,994
(INR Million)
2015E
90,146
16.9
42,157
47,989
53.2
76,364
13,782
21.5
15.3
1,022
1,020
999
0
12,738
24.6
2,675
-92
21.7
9,971
24.7
11.1
770
9,201
0
9,971
2016E
106,261
17.9
49,529
56,732
53.4
89,750
16,511
19.8
15.5
1,165
917
1,136
0
15,565
22.2
3,269
-110
21.7
12,187
22.2
11.5
847
11,339
0
12,187
Balance Sheet
Y/E March
Share Capital
Reserves
Minority Int
Net Worth
Loans
Deferred Liability
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Goodwill
Currents Assets
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Other Current Assets
Curr. Liab. & Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Net Assets
2012
340
27,796
591
28,136
19,030
111
47,868
20,403
4,940
15,464
158
21,454
22,606
7,839
4,725
6,399
3,143
500
11,815
7,702
3,684
428
10,791
47,867
2013
340
31,564
1,170
31,904
13,530
180
46,784
25,618
5,734
19,885
150
21,454
19,096
8,327
6,072
532
3,565
600
13,801
9,866
3,904
31
5,296
46,785
2014E
340
34,924
1,823
35,264
13,731
255
51,073
29,843
6,629
23,214
150
21,454
22,552
9,639
7,393
754
4,047
720
16,297
11,894
4,371
32
6,255
51,073
(INR Million)
2015E
340
40,144
2,593
40,484
12,755
347
56,179
2016E
340
47,502
3,440
47,842
11,464
457
63,203
34,068
38,818
7,651
8,816
26,417
30,003
150
150
21,454
21,454
26,803
33,082
12,349
14,556
8,644
10,189
351
2,080
4,595
5,220
864
1,037
18,646
21,486
13,860
16,279
4,745
5,158
40
49
8,157
11,596
56,179
63,203
E: MOSL Estimates
21 March 2014
16
 Motilal Oswal Financial Services
ART|
Godrej Consumer Products FY13
Financials and Valuation
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Dividend Yield
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2012
15.5
17.4
82.7
4.6
29.7
2013
19.6
21.9
93.8
8.0
40.8
2014E
21.6
24.2
103.6
10.0
46.4
2015E
27.0
30.0
119.0
10.0
37.0
2016E
33.3
36.7
140.6
10.0
30.0
39.3
35.2
4.3
27.5
8.2
1.0
35.7
31.8
3.6
24.3
7.4
1.3
28.5
25.6
3.0
19.9
6.5
1.3
23.1
21.0
2.6
16.4
5.5
1.3
18.7
20.7
20.9
24.8
20.8
25.7
22.7
28.1
23.7
29.8
36
3.1
35
3.2
35
3.3
35
3.4
35
3.5
0.7
0.4
0.4
0.3
0.2
Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Extraordinary Items
Inc in FA
Goodwill
CF from Investments
Inc in Debt
Dividend Paid
Other Income
Interest Paid
Other Item
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
2012
8,607
-2,261
-223
6,124
2,002
-1,260
-6,050
-5,309
-1,002
-1,820
672
-658
-443
-3,252
-2,437
2,269
6,399
2013
9,985
-1,792
-371
7,822
1,289
-5,207
0
-3,918
-5,500
-3,185
844
-775
-417
-9,032
-5,128
6,399
532
2014E
11,339
-2,156
-738
8,445
0
-4,225
0
-4,225
201
-3,982
966
-1,098
-90
-4,002
218
532
754
(INR Million)
2015E
13,782
-2,675
-2,305
8,802
0
-4,225
0
-4,225
-976
-3,982
1,073
-1,020
-179
-5,084
-507
754
351
2016E
16,511
-3,269
-1,710
11,533
0
-4,750
0
-4,750
-1,291
-3,982
1,300
-917
-179
-5,069
1,714
351
2,080
E: MOSL Estimates
21 March 2014
17
 Motilal Oswal Financial Services
Disclosures
ART|
Godrej Consumer Products FY13
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Godrej Consumer Products
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