Covid-19 impact: Analysts see over 20% decline in Q4 profit for GCPL

High revenue decline resulting in weak operating leverage to result in 220 bps fall in operating profit margin

There is little doubt that the coronavirus-led lockdown will hit the earnings of even the fast-moving consumer goods sector. Godrej Consumer Products’ (GCPL’s) March 2020 quarter (Q4) update, announced on Thursday after the market hours, too, indicated a heavy impact on its overall business. Not only do analysts see a sharp fall in GCPL’s Q4 net profit, but there is also little clarity on whether the June quarter will be any better.

“We estimate around 23 per cent year-on-year (YoY) decline in the consolidated net profit of GCPL in Q4, mainly led by an 11 per cent revenue fall,” says Nitin Gupta, analyst at SBICAP Securities. GCPL owns key consumer brands like Godrej No. 1, Goodknight, Hit, and Cinthol.

The supply chain disruption amid lockdown across many geographies and social distancing norms took a hit on the revenue of the company in the latter part of March, resulting in high-teens 

revenue fall, said GCPL.

The supply chain disruption is likely to have also impacted sales of GCPL’s essential items. Top-line pressure is also likely to have stemmed from lower demand for non-essential products, which form around 45 per cent of GCPL’s revenue pie, according to UBS Securities. Both domestic business and international operations (45 per cent of consolidated sales) of GCPL are expected to report poor top-line performance in Q4.

 

 

While the Indonesian market is expected to have performed better with mid-single-digit constant currency revenue growth, its other overseas markets, i.e., Africa, the US and West Asia (65-70 per cent of international business), remained under pressure because of lockdown.

The top-line growth leading to negative operating leverage would result in around a 220-basis point YoY Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin contraction to 21.4 per cent in Q4, estimates Gupta. GCPL had also deferred its price hike decision in soaps because of the pandemic, despite higher raw material prices.

While the company has seen some improvement in performance (mainly domestic) in the early days of April with better production and supplies and some progress in distribution, it would be too early to feel gung-ho about it, as there is still uncertainty about the extension of the lockdown in India and how the overall situation pans out in other geographies. Analysts at IIFL, thus, have cut their FY21 earnings estimate for GCPL by around 9 per cent. 

Some analysts also believe the expected recovery in household insecticides, which account for around 38 per cent of domestic sales and a key trigger for re-rating of GCPL’s stock, may get delayed. The jury is out on this.