Godrej Consumer
BSE SENSEX
30,248
S&P CNX
9,407
10 May 2017
Update
| Sector:
Consumer
CMP: INR1,925
TP: INR1,950(+1%)
Neutral
Increased focus on new growth vectors encouraging
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INRm)
Free float (%)
We attended Godrej Consumer’s (GCPL) analyst meet. Key takeaways:
GCPL IN
340.5
1956 / 1286
12/18/22
656.9
10.2
354
36.7
Financials Snapshot (INR b)
Y/E Mar
2017 2018E 2019E
Net Sales
92.4 107.3 122.4
EBITDA
18.9
22.1
24.9
PAT
12.9
14.8
17.0
EPS (INR)
37.8
43.6
50.0
Gr. (%)
12.4
15.4
14.6
BV/Sh (INR)
155.7 200.6 233.5
RoE (%)
24.6
24.5
23.0
RoCE (%)
16.8
16.6
16.5
P/E (x)
50.9
44.1
38.5
P/BV (x)
12.4
9.6
8.2
Shareholding pattern (%)
As On
Mar-17 Dec-16 Mar-16
Promoter
63.3
63.3
63.3
DII
2.2
2.1
1.9
FII
28.4
28.4
28.6
Others
6.1
6.2
6.3
FII Includes depository receipts
Stock Performance (1-year)
Godrej Consumer
Sensex - Rebased
2,000
1,800
1,600
1,400
1,200
The huge risk appetite for acquisitions seems to have faded in recent years, and the
focus now appears to be on relatively small acquisitions and improving consolidated
RoCEs, which had worsened over many years.
Management believes that gross margin needs to go up every year to be able to
invest more in the core business as well as new vectors.
GCPL is now spending 27% of A&P on new products, as against 15% four years ago, in
the quest for new vectors of growth.
New products have on average 1,500bp higher gross margin compared to the core
range, and thus the impact on EBITDA margin from increased A&P has been limited.
New growth vector in Indonesia is Hair Care, while in Africa it will be Wet Hair
products.
We maintain our Neutral rating with a target price of INR1,950. At 38.5x Mar-19E
EPS, the stock appears fairly valued.
Strategy:
The thrust remains on growing ahead of category across geographies
and on profitable growth. Nisaba Godrej, who has been part of the business for
around 10 years, took over as executive chairperson of the board (effective 10
May 2017), replacing her father Adi Godrej, who has now been designated as
chairman emeritus. She underlined the need for building a team ready for
future growth with a focus on product development/improvement, stating that
she has been part of these activities in her erstwhile role. The huge risk
appetite for acquisitions seems to have reduced in recent years, and the focus
appears to be on relatively small acquisitions and improving consolidated
RoCE, which has been adversely impacted by a spate of acquisitions.
Overall business:
From a geographical mix perspective, India contributed 52%
of consolidated sales in FY17, followed by Africa (21%; including the Strength of
Nature acquisition), Indonesia (16%), Latin America (6%), the UK (4%) and
others (1%). From an overall business mix perspective, Hair Care accounted for
31% of consolidated sales in FY17, followed by Household Insecticides (HI; 30%),
Personal Wash (17%), Air Care (7%) and other smaller segments (15%).
Increasing salience of Household Insecticides and Hair Care is margin-accretive,
as profitability in Personal Wash (mainly soaps) is lower than the other two
large segments. The two large overseas markets – Indonesia and Africa – are
also more profitable than India. Management is keen to ensure that the core
business remains strong while still building new growth vectors across
geographies. It believes that gross margin needs to go up every year to be able
to invest more in core business as well as new vectors. Management has made
a conscious call to not expand into Food & Beverage. However, it clarified that
this is not cast in stone and that decisions are reviewed every 4-5 years. Project
Pi and its equivalents worldwide have led to cumulative cost savings of INR4b.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 3982 5428
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 3980 4261

Godrej Consumer
India business and outlook:
Indian FMCG sector has been growing at 0.4x-1x
GDP over past four years (v/s 1x-2x GDP growth over FY06-FY12), mainly due to
weak rural growth – a key driver of sales. Management, however, is optimistic
on industry growth prospects in FY18. GDP growth is progressing well, inflation
is low, demand in India is showing signs of recovery and the government’s
schemes/reforms are set to provide fillip to growth. Based on S-curve
comparison and its own projections, GCPL believes that Indian FMCG sector
sales can grow at 9-17% over medium-to-long term. In FY17, the company
expanded its market share in HI and Hair Care, but its share in Soaps declined
marginally. Management believes that gaining share in Soaps is very difficult, as
low margins in the category inhibit significant innovation, barring fragrances and
liquid soaps. There is also a low loyalty factor. GCPL believes that value-added
soaps, such as Cinthol, is the market to be in.
New launches and digital/ecommerce expansion in India:
GCPL is now
spending 27% of A&P on new products (v/s 15% four years ago) in the quest for
new growth vectors. Recent launches in India have been in: (1) the personal
repellent range of products under the ‘Good Knight’ brand in HI segment –
globally, this category is as high as 20-40% of HI segment sales; (2) ‘Hit’ stick
launched at INR30 price point, also in the HI segment; (3) Cinthol Deo Stick; (4) B
Blunt range of Hair Care products, all of which have attracted good initial
response. With higher backing of A&P toward new products and extensive reach
via 5.6m outlets (1.1m direct, +20% YoY in FY17; the third largest among FMCG
peers), management expects these products to drive around a third of
incremental growth, with the remaining two-thirds coming from its core
products. Recent extensions of Godrej No 1 soaps, however, have, not been
successful. The new products have on average 1,500bp higher gross margins
than the core range, and thus the EBITDA margin impact of increased A&P
spends has been limited. Air Care is another emerging core area. Management
believes that it is now the largest player in this segment, a data point that
Nielsen does not capture because it does not take into account car fragrances –
a segment which GCPL started with before expanding into home and bathroom
fragrances. Sales growth was 2x in FY17, and management believes that the
business can grow 4-5x over next few years.
On the digital front, the company had been 2-3 years behind MNCs, but is now
catching up well. Project Optimus now covers 37 cities, where it has suggested
ordering pattern to sales personnel. Digital spend was 3x over FY16-17.
Management believes that e-commerce could be 8% of FMCG sales in 3-4 years,
and it is preparing for the same. Duration of advertisement on Digital is much
shorter, focusing on the key USP of the product. GCPL has also started Project
Ajna, which enables much better data analytics via a highly useful dashboard.
International business and outlook:
GCPL does not call itself an MNC in
overseas markets, but defines it as having a multi-local operating model. Hiring
of locals gives it agility. New growth vector in Indonesia is Hair Care, while in
Africa it will be Wet Hair and HI, with the former being a much higher priority
for now.
10 May 2017
2

Godrej Consumer
Indonesia:
Sales rose 5% in FY17, with very strong rains in the country (usually a
one in seven year phenomenon) leading to lower Home Insecticides sales and in
turn dragging overall growth. Gross margin expanded 190bp and A&P rose
160bp, leading to flat EBITDA margin. The company has a market share of 52%
in Household Insecticides (Hit Brand), 62% in Air Freshener brand Stella, and the
baby products brand ‘Mitu’ has regained the share it had lost after the Megasari
acquisition by Godrej. The company has launched the brand ‘Nyu,’ which is
basically Godrej Expert Crème adapted to suit Indonesian conditions. The
company is already a strong no. 3 player, and likely to inch up one position soon
in a market that has Garnier as the leader. Existing Hair Care products of GCPL in
Indonesia only cater to 30% of the USD200m market. Other areas like styling
hair mask and hair vitamins/treatment are being explored for entry. Stella also
has a USD70cents bathroom fragrance product which is disruptive pricing.
Outlet increase in Indonesia has been ~17% in FY17. FY18 is likely to witness 12
launches, and most of these innovations are likely to be gross margin-accretive.
Management is aiming for low-double-digit sales growth in Indonesia in FY18.
Africa:
GCPL already has a platform for countries which account for 70% of
consumption in Africa. South, West and East Africa account for ~33% of
business, and thus there is no high dependence on a single geography. In FY17,
gross margin expanded by 560bp and EBITDA margin by 50bp. GCPL has three
manufacturing hubs in Nigeria, Kenya and South Africa. The FY18 target is to
scale up Wet Hair portfolio and sustain Dry Hair double-digit momentum. The
Strength of Nature portfolio has one brand for mass market (TCB) and also one
for premium brands (Mega Grow). African countries have high Gini coefficient,
and thus the rich may account for 30% of consumption in some premium
categories, wherein the company is working to expand the Mega Grow brand in
Salons. Facebook and Youtube have as high reach as the top 2-3 TV channels in
Africa. Naveen Gupta (Godrej Indonesia head) is set to take over from Omar
Momin (who will relocate to India) as head of Africa cluster. The full control of
the ‘Darling’ JV has enabled the company to become more nimble on decision
making and in terms of working capital. There have been fill rate improvements
from ~75% to 95% in Africa over past four years.
In Latin America, profitability has improved in Argentina, with management
trying to replicate this performance in Chile. GCPL is looking at synergies
between these two businesses and, over the medium term, expanding into
Colombia, Peru and Paraguay. However, the bigger near-term focus remains
profitability with an emphasis on core personal care products. Argentina (6
th
or
7
th
largest HI market) could be the target for this segment, but as of now
management has no plans outside of personal care.
Valuation view:
There are no changes to our EPS forecasts. We maintain
Neutral
with a target price of INR1,950. At 38.5x Mar-19E EPS, the stock appears
fairly valued. While earnings growth has been more consistent than FMCG peers
(FY17 was 8
th
consecutive year of double-digit EBITDA and PAT growth), we
believe that due to its exposure to various geographies, attendant currency risks
and relatively low RoE (mid-20’s), the stock does not warrant a higher multiple.
10 May 2017
3

Godrej Consumer
Exhibit 1: Category-wise revenue break-up
Exhibit 2: Increasing salience of international business
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: India potential in Hair color and HI
Source: Company, Euromonitor, MOSL
Exhibit 4: Prioritizing emerging geographies
Source: Company, AC Nielsen, MOSL
10 May 2017
4

Godrej Consumer
Exhibit 5: Distribution headroom in India
Source: Company, AC Nielsen, MOSL
Exhibit 6: Company’s power brands
Source: Company, MOSL
Exhibit 7: Investing in growth opportunities in new vectors in India
Source: Company, MOSL
10 May 2017
5

Godrej Consumer
Income Statement
Y/E March
Net Sales
Change (%)
Cost of Goods Sold
Gross Profit
Margin (%)
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Interest Income
Other Income-rec.
PBT
Change (%)
Margin (%)
Tax
Tax Rate (%)
PAT
Change (%)
Margin (%)
Minority interest
Reported PAT
2014
76,024
18.5
35,547
40,477
53.2
64,457
11,568
17.7
15.2
819
1,074
285
342
10,302
15.0
13.6
2,167
20.4
8,199
14.4
10.8
596
7,597
2015
82,764
8.9
38,415
44,348
53.6
69,111
13,653
18.0
16.5
908
1,002
284
632
12,659
22.9
15.3
2,861
21.5
9,936
21.2
12.0
693
9,071
2016
84,132
1.7
38,672
45,460
54.0
67,881
16,252
19.0
19.3
1,006
1,190
664
282
15,001
18.5
17.8
3,361
22.4
11,640
17.2
13.8
29
8,276
2017
92,428
9.9
41,325
51,103
55.3
73,545
18,883
16.2
20.4
1,416
1,452
753
94
16,862
12.4
18.2
3,792
22.5
13,071
12.3
14.1
31
13,041
2018E
107,339
16.1
47,705
59,634
55.6
85,279
22,060
16.8
20.6
1,908
1,350
767
113
19,683
16.7
18.3
4,488
23.6
15,045
15.1
14.0
39
15,006
(INR Million)
2019E
122,413
14.0
54,871
67,543
55.2
97,511
24,902
12.9
20.3
2,020
1,350
835
136
22,502
14.3
18.4
5,131
23.5
17,204
14.4
14.1
39
17,166
Balance Sheet
Y/E March
Share Capital
Reserves
Minority Int
Networth
Loans
Deferred Liability
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Goodwill
Non Curr Investments
Current Investments
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
E: MOSL Estimates
2014
340
37,414
2,251
40,005
23,734
-203
63,536
22,511
6,821
15,689
1,671
35,525
343
1,020
28,751
10,821
7,321
7,048
3,536
25
19,462
12,344
6,731
387
9,289
63,536
2015
340
42,767
1,620
44,727
27,172
-312
71,587
22,890
7,821
15,069
2,246
40,441
343
1,514
31,464
10,717
8,046
8,942
3,682
76
19,489
10,869
7,886
734
11,974
71,587
2016
341
50,636
842
51,819
28,911
-413
80,317
26,383
9,020
17,363
437
45,741
344
1,529
35,684
13,070
11,180
7,459
3,857
118
20,780
10,372
10,064
345
14,904
80,317
2017
341
52,679
0
53,020
33,408
1,898
88,326
44,662
10,435
34,227
1,012
46,626
2,518
6,818
38,151
14,125
10,287
9,127
3,126
1,487
41,025
17,239
23,388
398
-2,874
88,326
2018E
340
67,928
0
68,269
37,511
-563
105,217
48,912
12,343
36,569
1,012
46,626
2,014
5,454
44,360
15,880
11,763
9,946
4,987
1,784
30,818
11,763
18,710
345
13,542
105,217
2019E
340
79,122
0
79,462
37,511
-730
116,243
53,162
14,363
38,799
1,012
46,626
1,611
4,363
54,237
18,110
13,080
15,230
5,676
2,141
30,405
15,092
14,968
345
23,832
116,243
10 May 2017
6

Godrej Consumer
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
RoIC
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2014
21.9
24.3
117.5
5.3
24.0
88.1
79.4
8.8
58.1
16.4
0.3
19.8
14.7
16.6
35
4.4
2015
26.7
29.3
131.4
7.1
26.7
72.2
65.6
8.1
49.3
14.7
0.4
21.4
15.9
17.9
35
4.8
2016
33.6
36.6
152.2
9.7
28.9
57.3
52.6
8.0
41.6
12.6
0.5
23.7
16.5
18.3
49
4.7
2017
37.8
42.0
155.7
11.8
31.2
50.9
45.9
7.3
35.9
12.4
0.6
24.6
16.8
19.4
41
2.6
2018E
43.6
49.2
200.6
15.0
34.4
44.1
39.1
6.3
30.9
9.6
0.8
24.5
16.6
19.8
40
2.9
2019E
50.0
55.9
233.5
15.0
30.0
38.5
34.4
5.5
27.1
8.2
0.8
23.0
16.5
19.4
39
3.1
0.6
0.6
0.6
0.6
0.5
0.5
Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Net interest
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Extraordinary Items
Inc in FA
Free Cash Flow
Pur of Investments
Goodwill
CF from Investments
Issue of Shares
Inc in Debt
Dividend Paid
Other Income
Interest Paid
Other Item
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2014
11,121
732
-2,167
2,351
12,036
-6
-1,197
10,839
-343
-6,440
-7,986
0
-829
-2,091
627
-1,074
-1,112
-4,478
-428
7,476
7,048
2015
13,567
370
-2,861
-791
10,285
-172
-955
9,330
0
-4,916
-6,043
0
3,437
-2,835
915
-1,002
-2,863
-2,347
1,894
7,048
8,942
2016
16,007
909
-3,361
-4,413
9,142
-3,335
-1,683
7,460
-1
-5,300
-10,319
0
1,740
-3,870
946
-1,190
2,068
-307
-1,483
8,942
7,459
2017
18,278
1,358
-3,792
19,445
35,289
1
-18,854
16,435
-2,173
-885
-21,912
0
4,497
-4,698
847
-1,452
-10,903
-11,709
1,668
7,459
9,127
2018E
21,590
1,237
-4,488
-15,596
2,744
0
-4,250
-1,506
504
0
-3,747
0
4,103
-5,972
880
-1,350
4,162
1,823
820
9,127
9,946
(INR Million)
2019E
24,523
1,215
-5,131
-5,006
15,601
0
-4,250
11,351
403
0
-3,847
0
0
-5,972
971
-1,350
-118
-6,470
5,284
9,946
15,230
10 May 2017
7

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MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities mentioned
in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Motilal Oswal Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. SEBI Reg. No. INH000000412
Pending Regulatory inspections against Motilal Oswal Securities Limited:
SEBI pursuant to a complaint from client Shri C.R. Mohanraj alleging unauthorized trading, issued a letter dated 29th April 2014 to MOSL notifying appointment of an Adjudicating Officer as per SEBI regulations to hold inquiry
and adjudge violation of SEBI Regulations; MOSL replied to the Show Cause Notice whereby SEBI granted us an opportunity of Inspection of Documents. Since all the documents requested by us were not covered we have
requested to SEBI vide our letter dated June 23, 2015 to provide pending list of documents for inspection.
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The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or
indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research
receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues
Godrej Consumer
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Analyst ownership of the stock
Served as an officer, director or employee -
GODREJ CONSUMER PRODUCTS
No
No
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Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law,
regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For Hong Kong:
This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities and Futures
Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has
an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Kong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of
Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation
of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not
conducting Research Analysis in Hong Kong.
For U.S.
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is
not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States.
Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S.
persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors").
This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors
and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and
interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S.
registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and
therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in
the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
Varun.kumar@motilaloswal.com
Contact : (+65) 68189232
Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931
10 May 2017
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd
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