GCPL: Rise and shine

Godrej Consumer has managed to control its raw material costs quite well

Godrej Consumer Products (GCPL) posted 36.81 per cent y-o-y increase in its standalone operating profit on 16.8 per cent top line growth in FY06.

In an environment of increasing raw material prices, the company has managed to control its raw material costs quite well.

Adjusted raw material costs as a percentage of sales declined by 330 basis points, which propelled a rise of 305 basis points in its 2005-06 operating profit to a smart 20.91 per cent.

In spite of a price hike in its hair powder category earlier this year, GCPL saw its market share in the hair colour segment increase marginally to 40.1 per cent in FY06, indicating that the company still commands pricing power.

But its performance in the key soaps category, which contributed 63 per cent of sales, is even more encouraging as the company increased its market share by 110 basis points to 9.1 per cent.

GCPL is going to invest Rs 110 crore in capex, use tax holidays and increase exports on its own as well as leverage distribution through the UK-based Keyline Brands, which it acquired in October 2005.

Keyline, which has a strong presence in various retail chains in the UK, made profits between November 2005 and March 2006, and is expected to contribute between 17-20 per cent to the company's top line in FY07.

In toilet soaps, which grew at a decent 18 per cent in volumes, GCPL could see its market share rise to over 10 per cent this year, through product innovation and an increasing consumer base.

It also plans to enter one new segment every year within the personal care or home products segment. At about 21-22 times its FY07 earning per share, the growth opportunities appear factored in the price.

Cummins India: Bright future

For engine manufacturer Cummins India, like other engineering companies, FY06 has been a reasonably good year.

The company reported 41.57 per cent y-o-y growth in its consolidated operating profit to Rs 252.8 crore, while net sales increased 20.66 per cent to Rs 1,775 crore.

The company saw double-digit growth in both domestic and exports markets. With the ongoing boom in the domestic industry, demand for both its power generation engines and industrial engines increased, and the company effected a small price hike.

It also introduced a new 8.3-litre heavy commercial vehicle diesel engine during the year.

Cummins managed to reduce costs by 17.77 per cent y-o-y. The company reduced raw material expenditure as a percentage of sales by 130 basis points in FY06.

Improvement in productivity, sourcing synergy and a better product mix were largely responsible for the lower expenditure.

As a result, operating profit margin improved by 210 basis points y-o-y to 14.25 per cent in FY06. Going forward, the company is positioned well as the domestic industry continues to grow.

Besides, it will benefit from exports, which grew over 30 per cent last year. New products such as gas engines and automotive engines will also help Cummins. Its top line is expected to improve by 17-18 per cent in FY07. The stock trades at about 17 times estimated FY07 EPS, which is not expensive.

Jindal Steel: Discounting weak realisations

Jindal Steel & Power (JSPL) reported 14 per cent y-o-y growth in its operating profit to Rs 1,027.64 crore in FY06, broadly in tune with 14.4 per cent improvement in net sales to Rs 2,590.25 crore.

The company was able to minimise the impact of weaker realisations for its products in the iron and steel division such as sponge iron via enhanced sales in FY06. Nevertheless, JSPL's operating profit margin fell marginally on a y-o-y basis to 39.67 per cent in FY06.

The company's stock has fallen approximately 10.6 per cent over the past four months compared with 3.75 per cent fall in the Sensex.

The company's sponge iron sales grew 34 per cent y-o-y to 620,383 tonne in FY06. However, realisations are estimated to have weakened by 12 per cent y-o-y to Rs 11,000 levels per tonne in FY06, say analysts.

A larger sales volume did help revenues of the segment rise 18.6 per cent y-o-y to Rs 2,669.85 crore last year. In contrast, profits of the iron and steel division grew only 5.6 per cent y-o-y to Rs 641.17 crore in FY06.

In its power division, profits increased 34.6 per cent to Rs 276.16 crore, helped by power sales rising 16 per cent last year.

For the March 2006 quarter, the company's overall operating profit margin fell by 500 basis points y-o-y to 39.82 per cent.

Going forward, the company is expected to get better realisations for its steel portfolio, given the current recovery in prices. In addition, it has recently added additional capacity. The stock appears reasonably valued at about 7 times trailing 12-month earnings.

With contributions from Priyanka Sangani and Amriteshwar Mathur