Godrej Consumer Products reported strong fourth-quarter results, ending fiscal year 2012 with marginally improved operating margins from 16.6% in 2011 to 16.7% in 2012.
Our operating margin assumptions were too conservative and we are now raising our fair value estimate from INR 464 to INR 535, and adjusting our operating margin assumptions upwards.
The company was able to drive revenue and cost synergies in its international operations, which now account for 38% of consolidated fiscal year 2012 sales versus 19% in 2010.
Our fair value estimate of INR 535 implies a price/earnings ratio of 26 to expected fiscal year 2013 earnings.
In fiscal year 2012, GCPL's top line grew by a healthy 33% with India business growing at 26% and international business growing at 55%.
In India, the company's home insecticide and soap businesses grew ahead of industry growth, primarily led by an increase in household penetration. In hair care, the company grew slower than the industry.
In international markets, GCPL launched multiple home care products in Indonesia and hair care products in Africa, Argentina, and UK to drive revenue growth.
We believe the levers GCPL used to improve fourth-quarter earnings are quite impressive.
The company was able to reduce its cost of goods sold by 60 bps through buying efficiencies despite a high-inflationary environment for most raw materials. It also curbed advertising and selling expenses by a good 30 bps. As expected, other expenses and selling, general and administrative expenses were slightly higher than in 2011.
However, the company was able to drive improvements in EBITDA margins in its existing international business in Indonesia and U.K. through cost-saving efforts, launching higher margin products and increasing prices without losing market share.
EBITDA margins for the international business as a whole increased by 4% as per company estimates.
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