Godrej Consumer’s Ebitda growth puts bite back in its results

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Fewer mosquitoes tormented sleeping Indians in the December quarter than they did a year ago, going by Godrej Consumer Products Ltd’s slow sales of mosquito repellents. That was the only weak spot in an otherwise stellar quarter for the company’s domestic business. Its international business continues to face rough weather, partly due to one-off reasons, though a few key markets are improving.

The December quarter for the domestic business had the benefit of a low base, partly due to the effect of demonetisation and owing to a decline in soap volumes because of a hike in prices. Then, the quarter also saw the market return to normal post-GST (goods and services tax). Therefore, its sales rose by 18% in volume terms while value sales rose by 17%, on a comparable basis. That implies growth would have been even higher if insecticide sales were normal.

Household insecticides, however, saw value sales increase by only 5%, which Godrej Consumer attributed to unfavourable weather conditions and a lower incidence of mosquito-borne diseases. The company remains confident that growth will recover but that also depends on the weather and the spread of mosquito-borne diseases. The effect is more pronounced in the sale of coils than liquid vapourizers.

Its other segments did well, especially soaps, and were able to pull up volume growth despite lower insecticide sales. The management said that all its distribution channels were back to normal post-GST and that rural demand recovered stronger than urban did. It expects this trend to continue in fiscal year 2019 as well.

In its international business, Indonesia saw sales decline by 2% in constant currency terms, which is better when compared to the 7% decline seen in the September quarter. Indonesia contributed to around a third of its international revenues. Another big grouping that contributes to sales is the US, Africa and Middle East, which reported slower growth at 10% compared to 13% in the preceding quarter. Godrej Consumer expects one-off effects to fade and growth to improve but past performance calls for a wait-and-watch approach on this front.

While reported sales rose by 5% from a year ago, the company said comparable sales (adjusting for the accounting of GST) increased by 8%, and its Ebitda (earnings before interest, tax, depreciation and amortization) rose by 15.8%. This is entirely driven by the India business, as Ebitda was flat for the international business in constant currency terms. If Godrej Consumer can get its international business up even slightly, it could add to profitability at the consolidated level.

The management said it is planning a number of launches in the market, consequent to a two-year exercise, sometime in the near future. It is pinning hopes on these products to drive growth. At least some of them should be in the insecticide segment, which appears in need of a growth boost. While that is something to look forward to for investors, their significance will be known when they are launched and how well they do in the market.

Till then, Godrej Consumer’s existing businesses will have to do the heavy lifting. Investors will take solace in the overall sales growth looking healthy and the equally healthy growth in Ebitda. As of now, a recovery in its mosquito repellent sales and in the international business is the main trigger to look forward to. The shares trade at a rich 42 times its projected FY19 earnings per share, based on the mean of analyst estimates compiled by livemint