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Published on 7/12/2018 11:38:42 AM | Source: Motilal Oswal Securities Ltd

Annual Report - Godrej Consumer Products FY18 - Motilal Oswal

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GCPL’s FY18 annual report highlights the subdued operating performance of its subsidiaries leading to a) lower consolidated revenue growth at 6% to INR98.4b (Standalone: revenue up 11% to INR52.6b) and EBITDA growth at 9% to INR20.7b (Standalone: EBITDA up 17% to INR13.3b), and b) high Cash Conversion Cycle (CCC) of consolidated entity at 29 days (FY17: 35) v/s standalone CCC at -30 days (FY17: -12 days) primarily due to increased working capital requirement in Africa. This has led to consolidated return ratios (ROCE of 17% and ROE of 25%) being significantly lower than standalone return ratios (ROCE of 67% and ROE of 68% - ex investments in subsidiaries). Despite an improvement in the Cash Conversion Cycle, OCF declined to INR15.7b (FY17: INR17.4b) due to increase in other current assets by INR2b. Acquisitions over the past few years had led to increased intangibles (including goodwill of INR47.2b) at INR72.5b, 116% of net worth. Interestingly, GCPL has changed its future growth rate (increased) and discount rate (reduced) estimates for impairment testing of goodwill.


*   Subsidiaries performance remains muted :

Declining growth in Indonesia and Africa business’s failure to gather momentum led to muted revenue (subsidiaries’ derived) growth at 1% to INR45.8b (FY17: INR45.2b) and a 70bp decline in the EBITDA margins to 16%. Though EBITDA margins improved 100bp in Indonesia, it declined 240bp in Africa, USA & Middle East.


Rising CCC in Africa dent operating cash flow :

Our analysis of subsidiaries’ cash flow highlights stretching CCC days at 98 (FY17: 87 days). Subsidiaries’ CCC, excluding the Indonesia business, stood significantly higher at 129 days (FY17: 113 days) which we believe, majorly on account of African business. Consolidated OCF declined by INR1.7b to INR15.7b due to increase in balance with Govt. authorities and other advances by ~INR1b respectively.


Write back of earn-out liability pertaining to SON :

GCPL wrote back provision of INR1.9b (further INR1.9b in 2QFY19) pertaining to contingent consideration payable to the sellers of SON LLC on account of lower-than-expected performance. As part of the acquisition, GCPL was expected to pay INR8.6b after FY19, based on a multiple of future EBITDA.


Intangibles high, impairment estimates changed :

Increased acquisition over the past few years has led to higher intangible assets at INR72.5b, 116% of net worth. Of this, goodwill (at INR47.2b) and brands (at INR21.3b) with indefinite life are not amortized but tested for impairment. During FY18, GCPL has revised its Pre-Tax discount rate downwards to 9.2-21.4% (16.8-26.5% since FY15) and its long-term growth rate upwards to 2-8.6% (2-3% since FY15), thereby leading to high recoverable value of Cash Generating Unit to which goodwill and brands are allocated.


Standalone performance impressive, subsidiaries continue to drag

*  Consolidated revenue grew by 6% to INR98.4b (FY16: INR92.7b) and EBITDA increased by 8% to INR20.7b, primarily led by standalone operations while growth of subsidiaries was subdued.

*  Consolidated PAT stood at INR16.3b (FY17: INR13.1b) aided by exceptional gain of INR1.8b primarily on write-back of earn out liability on acquisition of SON.

*  Standalone revenue grew by 11% to INR52.6b primarily led by 9% volume growth. Reported EBITDA grew 17% to INR13.3b with margins expanding 140bp to 25%. Adjusted to inter-company business support charge, royalty and Technical fees, EBITDA grew 21.1% to INR13b from INR10.8b in FY17.

*  Subsidiaries (derived) revenue growth stood at 1% to INR45.8b on account of de-growth in Indonesia market and EBITDA margins declined by 70bp to 16% primarily due to weak operating performance of the Africa business.

Geographical analysis highlights :

(a) Indonesia business witnessed a turnover decline of 13%, while adjusted EBITDA margins expanded by 100bp, and (b) Africa business witnessed revenue growth of 10%, while adjusted EBITDA margins contracted by 240bp. We have considered turnover as reported in segmental reporting of annual report, while constant currency turnover may differ marginally


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