Mentions: anubhavsays

Godrej Consumer posts weak Q1 results, outlook for the stock remains ‘cautious’

Godrej Consumer’s reported a weak set of numbers for Q1 FY18, partially clouded by GST transition, highlight headwinds of competition reflected in flattish volumes. International operations provided a mixed picture in terms of growth and so at the current elevated valuations, we prefer to remain cautious.

Pricing-led Growth

Godrej Consumer’s (GCPL) Q1 2018 consolidated net sales were Rs 2,172 crore (2.8% YoY) benefitting from the improved pricing and favourable product mix, but partially offset by subdued volume growth. Organic sales at constant currency (excluding Strength of Nature inorganic sales of Rs 44 crore) grew by 6%. Margin pressure was visible in most of the segments and geographies. Consolidated EBITDA margin shrank by more than 200 bps to 15.9% impacted partially by higher advertising cost.

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India Business — Hair Colour Result was Positive

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The organic growth of India business was 6%, coming mainly from the pricing effect. Branded volume growth was flattish, reminding us of similar trajectory posted by HUL. Amongst segments, hair colours (14% of India business) witnessed double-digit volume growth (Godrej Expert Rich Crème). Scaling up of BBlunt also aided the same. The performance of Household Insecticides (33% of sales) segment was below expectations primarily due to destocking in the month of June. Soaps (40% of sales) unit witnessed volume decline in high single digit but was relatively less impacted by GST.

India Business Dragged by Indonesian Operations

godrej Indonesia ops

GCPL’s operations in Indonesia (15% of consolidated net sales) continued to face headwinds from the elevated competitive intensity. Sales in Indonesian operations were down by 4% (constant currency basis), partially impacted by higher sales promotion spend. Management sounded cautious on the near-term future for the business but was hopeful that recent initiatives would help in getting better clarity on margins in the next quarter.

Elsewhere, particularly in Africa, sales growth (16% growth CC) was better, aided by hair extensions business.

GST Transition Impact to Wane by End of August

As per management, GST transition impact was high for segments like household insecticides and hair colours. In the case of Soaps, the impact was relatively low. The company mentioned improved offtake for the household insecticides unit in the current quarter. Regarding trade channels, particularly wholesale, the company expects normalcy by the end of August. CSD (Canteen Store Department) purchase is stalled as was noted by other FMCG players.

Patanjali Impact on Soap Category

While in the earlier quarters, GCPL had mentioned about a possible adverse impact of Patanjali in soaps category, this time they sounded unaffected. However, the fact that there was a volume de-growth in the quarter and even in the month of April and May there were no volume improvement points to rising competition in the low-cost category of soaps. Currently, the impact of Patanjali in terms of change in market share is difficult to gauge as the market research firms don’t take Patanjali’s own store sales into account.

Focus on Wet Hair Segment in Africa

Amongst the positive takeaways was the company’s increased focus on wet hair segment. The company is, therefore, focusing on consolidating the business of Strength of Nature (SON) and started local manufacturing of wet hair products in East Africa.

Overall, the quarterly numbers were below expectations on both top line growth and margin front. Godrej Consumer’s efforts to consolidate hair segment — both in India and Africa — is encouraging. Traction in soaps segment is something to be closely watched amid competition from unlisted players. However, a possible trend towards premiumisation can help. The other key factor to watch out for the company is the earnings visibility in Indonesia operations.

While we like Godrej Consumer’s geographically-diversified and de-risked business model, and the growth drivers from other emerging markets, at current valuation (48x 2018 earnings), it prices in most of the near-term positives and leaves little room for upside.



Elantas Beck: Subdued realisation weighs on profitability; long-term outlook intact

Last week, Elantas Beck reported a weak set of numbers on the back of lower realisation in electrical insulation division. Post its result, the stock has sharply corrected by 11% till date.

While we acknowledge the transition effect due to the implementation of GST in the near term and the ongoing headwinds from the low-cost import of electrical machinery from China, long-term drivers are intact, in our opinion.

Also read: Specialty chemicals maker Elantas Beck gains from power reforms, delisting buzz

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Sales De-growth on Account of Lower Realisation

In June quarter (Q2 2017), Elantas posted sales of Rs 91.9 crore (-6% YoY) impacted by the lower realisations in the electrical insulation division. EBITDA margin contracted by 200 bps on account of higher raw material and employee cost. Consequently, profit after tax was down 18% YoY basis.

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Working Capital Requirement has Increased

Compared to the end of December numbers, the working capital requirement has risen by 14%. However, delving into the details suggests that inventories have normalised from the elevated level in the quarter impacted by demonetisation. Trade receivables have also come down. However, short-term loan and advances have risen sharply contributing to the working capital requirement.

Long-term Drivers Intact

Government’s focus on the power sector reforms remains positive for the sector in which the company operates. Further, the company’s dominant position in the electrical insulation industry (40% market share), significant barriers to entry and strong clientele should help in generating growth above the industry’s average.

Financial projections adjusted to account for recent results

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Post the latest set of numbers, we have reduced our top line projections for the FY17 and 2018 and pencilled in slightly higher estimates for the raw material costs. The stock is currently trading at a multiple of 23 times 2018 earnings, which is reasonable in our view.

As the long-term investment case of the company is intact, we think recent correction gives an opportunity to add on to the exposure.


ITC hasn’t kicked the butt, but journey from ‘health hazard’ to healthcare is complete

ITC has over the years sought to position itself as a complete consumer company. It tried shedding the “cigarette” tag by diversifying into other businesses, especially in areas with strong linkages to the farm economy. While FMCG has grown to a decent size, the company hasn’t yet commanded the exact valuations of the sector. ITC’s recent AGM further shed light on the company’s future path away from cigarettes.

After successfully establishing packaged food brands, ITC is also foraying into perishable segments and investing in supply chain infrastructure. Is the market taking note of these changes?

Focus on FMCG business drives diversification

In the last 11 years, ITC’s sales from its FMCG business (excluding cigarettes) has increased substantially to Rs 10,512 crore. In 2005-06, the FMCG business used to contribute about 6 percent of gross sales which has now increased to 19 percent. Augmenting the non-cigarettes business is a conscious choice as the company attempts to diversify and capture the entire value chain of the consumption cycle.

Chart: Segment level exposure at gross revenue level

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Prudent capital allocation

Another way to look at it is in terms of the management’s changing priority in capital allocation. In 2006, a third of the capital expenditure was for the cigarettes business and only 14 percent for the FMCG business. In contrast, last year, the company deployed 46 percent of capital expenditure, amounting to Rs 1,153 crore, for the FMCG business.

Branded packaged food leads food

ITC says that consumer spend (FY 2017) on the brands from the new FMCG businesses are now close to  Rs 14,000 crore with major brands such as Aashirwaad and Sunfeast garnering Rs 3,500 crore and Rs 3,000 crore of sales respectively. Branded packaged foods category in particular clocked a CAGR (compounded annual growth rate) of 26 percent during FY17. ITC is targeting a turnover of Rs 1 lakh crore from the new FMCG businesses by 2030.

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In line with the focus on expanding the non-cigarettes business, the ITC management reiterated at the recent AGM their commitment to harnessing value chain of “Farm to Consumer”.

Earlier farm supply chain initiatives help

ITC has been a key player in linking agri-commodities sourcing with the processing industries and delivering food brands such as Aashirvaad, Sunfeast, Bingo! and B Natural. In continuation with that strategy, the company recently launched “ITC Master Chef” brand of spices.

Further, its landmark initiative of e-Choupal in 2000 helped in providing host of services to farmers related to agriculture best practices, know-how and weather-related information.

Need for post-harvest infrastructure

Primed by the huge annual agri-wastage of about Rs 92,000 crore, company has emphasised the dire need for the infrastructure, ranging from post-harvest logistics, processing, and packaging. The company says that about 20 integrated consumer goods manufacturing and logistics facilities are under various stages of development.

Expansion of food business into perishable segments

ITC is also strengthening its focus on food processing. The company now plans to foray into perishable segments such as fruits, vegetables etc. It mentioned that investments are underway to create climate-controlled infrastructure for an efficient supply-chain. In pursuance with this objective, ITC Master Chef Frozen Prawns have recently been launched in select markets. Further, investments have also been made in farming for aromatic and medicinal plants.

A brand new segment

At the AGM, the company also took approval for a healthcare business wherein it targets establishing a multi-specialty hospital for starters. Further, details on the investment outlay and time frame are yet to be finalised. However, the foray into healthcare is seen as another initiative by the company to emerge as a health-oriented business conglomerate.

Overall, the company’s new initiatives to expand the product portfolio particularly in the FMCG and food business should be seen as continuation of the strategy of product diversification. What remains credible is the company’s multi-decade linkages with the farm sector that are now getting integrated with new investments in logistics and food processing. This can go in a long way in establishing ITC as a leading player in the FMCG business. There is no denying that the low=level of food processing in India at 10 percent leaves enough room for growth.

For the long term investors, ITC, in our view, continues to hold a prospect of quality growth and is available at reasonable valuation (30x FY 2018 earnings).