1. Introduction

Godrej Consumer Products Ltd.(GCPL) is a major player in the Indian FMCG market

with leadership in personal, hair, household and fabric care segments. The company employs

950 people and has three state-of-the-art manufacturing facilities at Malanpur (M.P.)

Guwahati (Assam) and Baddi (H.P).

The current operating environment of the Company consists of many competitors in this

segment – namely, HUL, Marico, Dabur, ITC, Wipro FMCG, Emami. Since GCPL operates

in the mid-market segment it has not been affected by the current economic crisis. In fact, due

to recession, many consumers would have shifted from premium to next lower segment.

That’s why the company’s Annual Report highlights – ‘’Creating Opportunities in

Adversity’.

FMCG Sector: The FMCG sector in India is growing at a fast pace and more and more

companies are diversifying in this sector – the last major one being ITC. So GCPL needs to

formulate new strategies to maintain the growth rate it has enjoyed till date. With the per

capita income rising and the expansion in retail chains, GCPL needs to ensure visibility to

consolidate its position.

Technical: In today’s world business in driven by consumers. Constant Innovation is the way

to improve performance. Extensive R&D in personal care products and technical

developments to minimize costs is something GCPL needs to focus on to deal with global

giants.

Legal: The modern day consumer is very conscious and alert about the harmful effect of

chemicals. The raw material input should be as per standards set by the regulatory authority

to avoid any legal action against the company. Legal proceedings can permanently damage

the reputation.

Political Consideration: In the next few years, rural markets, having huge number of

‘prospective consumers’ is going to be the new domain of many FMCG giants. To tap the

rural market, and avoid resistance from small local players in these markets, the company

needs to have political support to grow ahead with its expansion plans, if any.

2. Analysis of Reports

In this section, an analysis of the statements of the top management is presented.

Chairman’s Statement

From the Chairman’s Statement, it can be seen that even though the global recession has hit

almost every sector, the Indian FMCG sector has not been hit and has in fact posted increased

growths. Due to this, there is a huge scope for investors feeling safe to invest in the Indian

FMCG sector. As far as GCPL is concerned, there is a need to innovate and come up with

products that are relevant to the consumers and this will help GCPL to differentiate itself

from the other players in the sector. The Chairman also feels that Godrej has been very

successful with the launches of new brands and with the increase in sales and hence it is in a

good position to address the effects of the economic downturn.

Management Discussion and Analysis

The management feels that due to the rapid economic growth of India over the last few years,

rural consumption levels are bound to rise and hence this presents major opportunities for

Indian Consumer Product companies. Over the current year, GPCL has launched a wide

variety of new products across all its product categories. As part of improving the efficiency

of its operations, GCPL has entered into a 10 year contract with Hewlett Packard (HP) who

are expected to provide IT solutions and products specially designed for GCPL’s needs.

Owing to the uncertainties in the international market due to the recession and strengthening

of the rupee compared to currencies like GBP (British Pound) and ZAR (South African

Rand), the international operations of GCPL don’t seem to be upto the mark and hence they

have adopted a ‘wait and watch’ policy in this regard.

As far as the financials are concerned, the major factor is that the company has been involved

in a rights issue and the cash generated through this operation has been utilised to repaying

high cost debt and the remaining has been deposited into fixed deposits with banks. What the

company is planning to do with this huge cash reserve is not very clear. The major strategies

that the company seems to be adopting for the immediate future is to achieve reductions in

expenditures, without having to sacrifice in the quality of its goods and services, as well as

getting involved in acquisitions as a means of improving the market share. It is this, which

the company is counting on to help it get across these recessionary times. So, on the whole

the company has a very positive outlook for the next year.

Directors’ Report

The Directors feel that the overall performance of the company is encouraging. It can be

noted in the Director’s report that GCPL has adjusted the book value of intangibles like

Trademarks and brands, worth 31.3 crores, against the securities premium account. The

directors feel that this gives a better picture of the company’s operating performance. The

company was also granted permission by the Ministry of Corporate Affairs to exclude

showing the accounts of its subsidiaries in its accounts. The Stakeholder’s Value Creation

and Governance Rating of GCPL has been upgraded to SVG2+ to SVG1.

Accounting Policies

The accounting policies of GCPL seem to be inline with its operations and no major

discrepancies have been found. The only point worth noting is that though the company has a

policy of amortising trademarks and other intangible assets for a period not exceeding 10

years, it has taken an exception in the case of Rapidol, for which the amortisation is provided

over a period of 20 years.

3. Performance Analysis

In this section, the performance of GCPL is analysed by comparing current financial ratios

with the previous financial year. Details of the different ratios are provided in Appendix. 1.

Profitability Ratios

It can be seen from the ratios that Profit margin has decreased in spite of 22% increase in

income from net sales. This is mainly because, in this period, operating expenses have

increased by 30%. ‘Other income’ in the P&L Statement includes a huge chunk of interest

income earned, which does not seem to be a consistent source of income. If this is taken into

consideration, Profit margin is bound to decrease further. Since such interest income cannot

be considered as part of operating income, NOPAT profit margin has fallen by more than 4%.

Asset turnover and operating asset turnover have both fallen considerably. This is because

though assets have increased by 45%, sales have increased only by 22%. A possible

explanation could be that an enormous amount of cash, more than 50% of operating assets

have been locked up in deposit accounts. As a result, this cash doesn’t seem to be used for

operating activities. Thus it can be reasoned that the company is not making good use of its

available assets.

Due to all this the Return on Assets has fallen considerably by 6.64% compared to last year.

On analysing this using Du-Pont Analysis, it can be observed that there is an almost equal

contribution of both Profit margin and Asset turnover in this fall of ROA.

It can also be observed that Return on Equity and Earnings per Share have shown declines

due to a rights issue during the year. A total sum of 393 crores seems to have been raised.

However, this amount seems to have been transferred to deposit accounts, thus increasing the

cash balance, rather than on any other investment. So, it is possible that GCPL has some

plans of expansion in the coming year, for which it needed some cash reserves and this it

raised by issuing shares.

Liquidity Ratios

At first glance, current ratio and quick ratio look very favourable and indicate a high

degree of liquidity. However, this is due to huge increase in cash (Deposit Accounts) which

was raised through a rights issue during the courts of the year. So we cannot assume that the

company's ability to pay off debts has increased, as most probably the company might be

planning to invest this cash in some kind of long term investment or fixed assets. So, there is

a high opportunity cost to the kind of current assets that Godrej is holding now. It could also

be to pay off long term debt. This can also be inferred from the Vice Chairman's statement.

Both debtor turnover and inventory turnover have improved compared to last year.

However, the effectiveness of these ratios can be gauged completely only by comparing them

with industry averages, which is presented in Section 6.

Solvency Ratios

It can be observed that Debt-Equity ratio has decreased significantly. This is because the

company has cleared off some loans and also due to the huge increase in equity due to the

rights issue. It is possible that Godrej has made a conscious decision to reduce their Debt-

equity ratio as they perceived wide fluctuations in the market. So, GCPL seems to be getting

prepared for difficult economic times by reducing debt and raising equity.

Current liabilities to equity ratio has also decreased due to this funds raised through issue of

shares. Interest cover has increased, though this could be due to the fact that total debt has

also decreased significantly.

So, on the whole, though raw numbers indicate that GCPL might be having good numbers to

attract investors, it has to be understood that GCPL has actually cleared off many of its high

cost debts through the cash raised from the rights issue and not due to any great performances

in its core business.

Capital Market Ratios

The analysis of Captial Market Ratios is handled in detail in section 8.

4. Common Size Financial Statements

Common size financial statements have been prepared for the recent most two years.

Common size P&L statements have been prepared by comparing every item with the total

income earned by the company.

The comparisons are as shown below.

 P&L Statement 2008-09   2007-08  Income        Sales (gross) 99.42%   102.16%  Excise Duty -3.73% 95.69% -3.39% 98.77%Processing Income 0.32%   0.16%  Other Income 3.98%   1.08%  Total Income 100% 100.00% 100.00% 100.00%         Expenditures        Materials consumed and purchase of goods 53.05%   48.12%  Expenses 26.65%   31.68%  Interest and financial charges 0.78%   1.16%  Depreciation 1.27%   1.75%  Inventory change 1.85% 83.59% -1.56% 81.15%         Profit Before Tax   16.41%   18.85%         Provision for taxes        Current taxes 1.86%   2.15%  Deferred taxes 0.28%   0.12%  Fringe benefit taxes 0.07% 2.21% 0.08% 2.35%Tax adjustments 0.06%   0.00%  Profit after Tax   14.26%   16.50%

The common size Balance Sheet has been prepared by comparing every item in the Balance 

Sheet with the total sources of funds. The comparisons are as shown below. 

 Balance Sheet   2008-09   2007-08  Sources of Funds          Shareholder's Funds Share Capital 4.25%   7.68%    Reserves and Surplus 84.64% 88.90% 43.48% 51.16%Loans Secured Loans 2.47%   13.80%    Unsecured Loans 7.95% 10.41% 31.96% 45.75%Deferred Tax Liability     0.69%   3.08%Total Sources of Funds     100%   100%           Application of Funds          Fixed Assets Gross Block 44.13%   90.28%    Depreciation 16.02%   37.73%  

 Capital Work in Progress 0.41% 28.53% 24.33% 76.88%

Investments     16.21%   26.38%Current Assets, Loans and Advances Inventories 20.97%   56.06%    Sundry Debtors 1.63%   4.15%  

 Cash and Bank Balances 57.05%   6.75%  

  Other Current Assets 1.49%   0.00%    Loans and Advances 19.01%   21.73%             Less: Current Liabilities and Provisions Current Liabilities 39.44%   82.54%    Provisions 5.45% 55.27% 10.38% -4.24%           Miscellaneous Expenditure   0.00% 0.00% 0.00% 0.97%

Total Application of Funds     100%   100%

Major analysis of the above mentioned figures is provided in the next section.

5. Trend Analysis

The detailed figures relevant to the comparison of trends over the past 5 years have been

provided in Appendix 3.

The sales have increased by 86% over the past 5 years while fixed assets have increased by

69%. Therefore it can be said that over the past 5 years, the company is making good use of

its assets in generating sales. However Operating Expenses have increased at a faster pace

than sales have indicating a need to control the expenses better while generating sales. Net

Profit has increased by more than 80% over the past 5 years and has kept up with sales

increase (86%) indicating that the company is doing a fairly good job at keeping over-all

expenses in control over the past 5 years in comparison to sales. The interest expense has not

kept up with the long term debt suggesting that interest rates could have changed for different

borrowings significantly.

However, a closer look at the analysis reveals a jump in current assets particularly over the

past year. The company’s balance sheet also reveals a huge increase in cash reserves. A look

at the vertical analysis indicates that cash and cash equivalents form 57% of the current

assets. Perhaps this cash can be better utilized by the company in investments or in paying off

current liabilities. The long term liabilities of the company has reduced significantly from the

past year and perhaps the cash could be used to pay this off some more if the opportunity

costs have been analyzed correctly. The amount of unsecured loans has reduced both as an

absolute value and as a percentage of the source of funds from 32% last year to 8% this year.

The gap in funding has been made up by the vast increases in the company’s reserves.

While overall sales have increased, the company’s costs have increased more, thereby

reducing profit margins over the past 2 years. The company was better at cost control last

year than this year. This can mainly be attributed to the increase in purchases of goods

consumed, perhaps due to an increase in the price of these goods consumed. All other

expenses have declined as a percentage of sales over the period indicating that the company

needs to cut back on inventory purchased for consumption in order to maintain the same

expense-as-percentage-of-sales ratio as the previous year.

6. Comparison with Competitors

7. Comparison with the Industry

In this section, the performance of GCPL has been compared with other Indian companies in

the Personal Care industry. The industry ratios have been acquired from the Capitaline

database. The key ratios used for the analysis are as shown in Figure 1. They have also been

provided in Appendix 2.

FIGURE 1: COMPARISON OF FINANCIAL RATIOS WITH INDUSTRY

From the comparison it is evident that GCPL is doing much better compared to others in the

industry in most counts. Even though some of them could be due to the huge increase in

GCPL’s share capital, it can be argued that GCPL does have resources to count on in the

fluctuating economic conditions.

So on the whole, GCPL might be able to beat out its Indian peers, but it will be severely

tested by competition from the MNC giants in the industry like Colgate-Palmolive, HUL,

P&G etc.

8. Market Assessment

The relevant capital market ratios used to analyse the standing of GCPL in the market are

shown in Appendix 1. Following are the main aspects that can be observed from these ratios.

The share prices of Godrej have fallen over the last year and the difference is quite significant

compared to the BSE Sensex average. This, and the fact that there was an issue of shares, has

had the greatest influence on capital market ratios. The P/E ratio has decreased by a small

amount which means that investors are willing to spend lesser price per rupee of earning of

the company. Dividend Yield has increased although the Dividend has remained the same for

the recentmost two years. This increase is also because the Average Stock Price had fallen.

The Book Value of share has increased drastically due to the rights issue, as there has been a

great increase in capital. Due to this the P/B ratio has decreased significantly because the

average stock price has also decreased.

The total return for the shareholder, which takes into account the gains for the shareholder

in terms of change in stock price and dividend earned, is very diminutive for the year. This is

because the dividend offered per share has not been able to offset the losses due to fall in

share price.

The total return to the shareholder is calculated to be 0.16%. From the annual report it can be

seen that value of cost of equity estimated by GCPL is as high as 13.2%. This means that

GCPL expects its shareholders to anticipate returns at the rate of 13.2 % on their investments.

Comparing this to the actual return that GCPL has been able to offer, which is 0.16%, does

not put GCPL in a good stand. GCPL has not been able to live up to the expectations of its

shareholders over the previous year.

Due to all this, investors would not see GCPL as a good investment.

9. Conclusion

The major focus on the reports from the top management has been on how to deal with the

unpredictable economic conditions. In this aspect, though GCPL has managed to record a

healthy growth in its sales, the increase in its expenses has been much higher and hence

affecting profit margins. Though the company has been successful in raising a huge amount

of cash using an issue of rights, most of these funds have been locked up in fixed deposits

and it is not clear what the company is planning to do with this money in the long term. In

spite of all this the company’s performance compared to the industry is very good. On the

whole, the company doesn’t seem to be utilising its cash inflows effectively.

However, the company’s performance in the share market has not been good and

shareholders will not feel justified at the returns that they are getting from GCPL’s stock. So,

investors will not be looking up to invest in GCPL unless there is a marked improvement in

the company’s core operations.

Overall, even though the performance of the company has been good over the last 5 years,

compared to previous year, the company’s performance has not been upto the mark. However

GCPL does have the resources needed to turn this trend around next year and its major focus

has to be to use its assets more effectively.

Appendix 1. Financial Ratios

Sl No Description 08-09 07-08Profitability Ratios  Profit Margin (Net PAT) 14.90% 16.70%  Profit Margin (NOPAT) 12.39% 16.65%  Asset turnover 1.51 1.74  Operating asset turnover 1.72 2.04  ROA (PAT/Avg total assets) 22.44% 29.08%  ROA (NOPAT/Avg Op Assets) 21.26% 33.97%  Return on Equity 0.47 1.13  Earnings per share 6.36 6.56Liquidity Ratios  Current Ratio 2.23 0.95  Quick ratio 1.76 0.35  Debtor Turnover 98.32 80.63  Inventory Turnover 6.44 5.09  Avg Debt collection period 3.66 4.47  Avg Inventory Holding Period 55.93 70.72Solvency Ratios  Debt-Equity 0.12 0.89  Liabilities-equity 0.62 2.71  Interest Cover 22.07 17.30Capital Market Ratios  PE Ratio 19.52 20.65  Dividend Yield 3.22% 2.95%  Price to Book ratio 5.78 19.43

Appendix 2. Comparison of ratios with industry

Financial Ratios Godrej Ratio Industry Ratios Inc/DecKey Ratios  Debt-Equity Ratio 0.12 0.54  DecLong Term Debt-Equity Ratio 0.01 0.28  Current Ratio 2.23 1.13  IncTurnover Ratios  Fixed Assets 6.29 3.56  IncInventory 6.44 6.97  DecDebtors 98.32 15.18  Inc

Interest Cover Ratio 22.07 8.42  IncPBIDTM (%) 19.29 15.85  IncPBITM (%) 17.96 13.75  Inc

PBDTM (%) 18.47 14.22  Inc

Appendix 3. Trend Analysis over past 5 years

  2009 2008 2007 2006 2005

Sales (gross) 186.6901 151.9788 132.0142 114.6591 100

Total Income 199.118 157.7567 134.2191 116.7232 100

Expenditures 199.2781 153.2693 132.4176 112.1291 100

PBT 198.3063 180.5072 143.3524 140.0147 100

PAT 180.3153 165.3241 147.5118 135.2862 100

Shareholders funds

1076.954 301.8714 222.4517 152.7506 100

Loans 1025.274 2194.209 1839.985 79.46038 100

Fixed Assets 169.8869 223.0088 185.3225 78.7704 100

Investments 195.7197 155.1773 143.5432 100 0

Current Assets 586.7025 253.0016 188.5265 117.3199 100

Liabilities 192.8598 194.4202 158.174 116.084 100

References

Annual reports of GCPL

http://www.godrejconsumer.com/investors/annual-report.php

Dabur Annual Report

http://www.dabur.com/en/Investors1/Annual_reports/2008-09/AnnualReport200809.

pdf

Marico Annual Report

http://www.marico.com/investor_relations/index.html

CMIE Database