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. Thats why the companys 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 todays 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.

Chairmans Statement
From the Chairmans 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 GCPLs 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 dont 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 Directors 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 companys 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 Stakeholders 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 doesnt 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.
200809 99.42 % 3.73% 0.32% 3.98% 100% 200708 102.16 % 95.69 % -3.39% 0.16% 1.08% 100.0 100.00 0% % 98.77 %

P&L Statement Income Sales (gross) Excise Duty Processing Income Other Income Total Income Expenditures Materials consumed and purchase of goods Expenses Interest and financial charges Depreciation Inventory change

100.0 0%

53.05 % 26.65 % 0.78% 1.27% 1.85%

48.12 % 31.68 % 1.16% 1.75% 83.59 % -1.56% 16.41 % 81.15 % 18.85 %

Profit Before Tax Provision for taxes Current taxes Deferred taxes Fringe benefit taxes Tax adjustments Profit after Tax

1.86% 0.28% 0.07% 0.06% 2.21% 14.26 %

2.15% 0.12% 0.08% 0.00% 2.35% 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.
200809 4.25% 84.64 % 2.47% 7.95% 10.41 % 0.69% 100% 200708 7.68% 43.48 % 13.80 % 31.96 %

Balance Sheet Sources of Funds Shareholder's Funds Share Capital Reserves and Surplus Loans Deferred Tax Liability Total Sources of Funds Application of Funds Fixed Assets Gross Block Depreciation Capital Work in Progress Investments Current Assets, Loans and Advances Secured Loans Unsecured Loans

88.90 %

51.16 % 45.75 % 3.08% 100%

44.13 % 16.02 % 0.41% 28.53 % 16.21 %

90.28 % 37.73 % 24.33 % 76.88 % 26.38 %

Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans and Advances

20.97 % 1.63% 57.05 % 1.49% 19.01 %

56.06 % 4.15% 6.75% 0.00% 21.73 %

Less: Current Liabilities and Provisions

Current Liabilities Provisions

39.44 % 5.45% 55.27 %

82.54 % 10.38 %

4.24%

Miscellaneous Expenditure Total Application of Funds

0.00%

0.00% 100%

0.00%

0.97% 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 companys 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 companys reserves. While overall sales have increased, the companys 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 GCPLs 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 companys performance compared to the industry is very good. On the whole, the company doesnt seem to be utilising its cash inflows effectively. However, the companys performance in the share market has not been good and shareholders will not feel justified at the returns that they are getting from GCPLs stock. So, investors will not be looking up to invest in GCPL unless there is a marked improvement in the companys core operations. Overall, even though the performance of the company has been good over the last 5 years, compared to previous year, the companys 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 Profitability Ratios Profit Margin (Net PAT) Profit Margin (NOPAT) Asset turnover Operating asset turnover ROA (PAT/Avg total assets) ROA (NOPAT/Avg Op Assets) Return on Equity Earnings per share Liquidity Ratios Current Ratio Quick ratio Debtor Turnover Inventory Turnover Avg Debt collection period Avg Inventory Holding Period Solvency Ratios Debt-Equity Liabilities-equity Interest Cover Capital Market Ratios PE Ratio Dividend Yield Price to Book ratio 08-09 14.90% 12.39% 1.51 1.72 22.44% 21.26% 0.47 6.36 2.23 1.76 98.32 6.44 3.66 55.93 0.12 0.62 22.07 19.52 3.22% 5.78 07-08 16.70% 16.65% 1.74 2.04 29.08% 33.97% 1.13 6.56 0.95 0.35 80.63 5.09 4.47 70.72 0.89 2.71 17.30 20.65 2.95% 19.43

Appendix 2. Comparison of ratios with industry

Financial Ratios Key Ratios Debt-Equity Ratio Long Term Debt-Equity Ratio Current Ratio Turnover Ratios Fixed Assets Inventory Debtors Interest Cover Ratio PBIDTM (%) PBITM (%) PBDTM (%) Godrej Ratio 0.12 0.01 2.23 6.29 6.44 98.32 22.07 19.29 17.96 18.47 Industry Ratios 0.54 0.28 1.13 3.56 6.97 15.18 8.42 15.85 13.75 14.22 Inc/Dec Dec Inc Inc Dec Inc Inc Inc Inc Inc

Appendix 3. Trend Analysis over past 5 years

2009 Sales (gross) Total Income Expenditure s PBT PAT Shareholder s funds Loans 186.6901 199.118 199.2781 198.3063 180.3153 1076.954 1025.274 2008 151.9788 157.7567 153.2693 180.5072 165.3241 301.8714 2194.209 223.0088 155.1773 253.0016 194.4202 2007 132.0142 134.2191 132.4176 143.3524 147.5118 222.4517 1839.985 185.3225 143.5432 188.5265 158.174 2006 114.6591 116.7232 112.1291 140.0147 135.2862 152.7506 79.46038 78.7704 100 117.3199 116.084 2005 100 100 100 100 100 100 100 100 0 100 100

Fixed Assets 169.8869 Investments Current Assets Liabilities 195.7197 586.7025 192.8598

References
Annual reports of GCPL http://www.godrejconsumer.com/investors/annual-report.php Dabur Annual Report http://www.dabur.com/en/Investors1/Annual_reports/200809/AnnualReport200809.pdf Marico Annual Report http://www.marico.com/investor_relations/index.html CMIE Database