GCPL: In a bind

Rising input costs and higher sales of low-margin soaps mar numbers.

Godrej Consumer Products' (GCPL) margins in the March 2007 quarter were adversely affected by the rising cost of key inputs such as palm oil, coupled with higher growth in low-end soap segments (like Godrej no 1) which made it difficult to absorb higher costs.

As a result, its consolidated operating profit grew 13 per cent y-o-y to Rs 43.1 crore in the March 2007 quarter, on a net sales growth of 26.6 per cent growth to Rs 242.4 crore. Its operating profit margin also declined 210 basis points y-o-y to 17.8 per cent in the last quarter.

This pressure on margins was owing to adjusted raw material costs as a percentage of net sales rising by 50 basis points y-o-y to 45.4 per cent in the last quarter.

The Street appears to have factored in the margin pressure for the company in the last quarter - the stock has declined 9.5 per cent over the past three months compared with 12.9 per cent rise in the Sensex.

Meanwhile, in its soap division, segment revenue grew 19.3 per cent y-o-y in Q4 FY07 and it helped Godrej's market share rise 20 basis points to 9.4 per cent.

However, higher input costs resulted in segment profit rising merely 2.7 per cent y-o-y in the last quarter. In its personal care division, segment revenues grew 34.6 per cent y-o-y in the last quarter, thanks to a price hike for its hair colour repertoire in December 2006.

For FY07, the company's consolidated operating profit margin fell 130 basis points y-o-y to 18.9 per cent. The company's growth will be powered by recent product launches such as Fairglow soap.

In addition, the company has recently hiked prices of soaps by 5-8 per cent and that should help to reduce pressure on its operating margins over the next few quarters. At Rs 133, the stock trades at 18 times estimated FY08 earnings.