Godrej Consumer: Q3 in sync with street, analysts positive on future

Healthy demand outlook and turnaround of Africa business key factors for the stock

Godrej Consumer Products’ (GCPL’s) December quarter results, revealed on Monday, were largely in-line with the Street’s expectation. The consumer goods maker’s consolidated top line grew 10 per cent over the corresponding quarter in 2019 to Rs 3,055 crore, versus consensus estimate of Rs 3,051 crore. This marked a second successive quarter of double-digit sales growth — in line with earlier guidance — for the company. Growth in the top line would have been a percentage-point higher at 11 per cent, had it not been for cross-currency changes, according to the firm’s presentation. 

Growth was primarily driven by a healthy double-digit increase in sales for the company’s soaps (up 15 per cent YoY) and hair colour (14 per cent) businesses, even as household insecticides grew by modest 7 per cent during the same period. Barring Indonesia, all geographies reported good growth on a year-on-year (YoY) basis. In Indonesia, the weak macroeconomic scenario — along with a sharp rise in Covid-19 cases — resulted in a 2 per cent drop in revenue in constant currency terms. 

But, the company remains confident of delivering double-digit sales growth over the medium term, led by its focus on the personal and home hygiene segment, recovery in demand momentum across key products, and improvement in international business.

The consumer goods maker has been betting on its range of hygiene products amid the pandemic with plans to build the category as its “new core” over the next three years. Under its hygiene brand “Protekt”, GCPL has introduced a range of products into new segments. 

In Q3, the company announced its foray into home cleaning products, a segment which is witnessing accelerated growth after the pandemic. Increased awareness about the need to maintain hygiene has benefitted the company’s soaps business and helped gain market share. The hair colour business, which had been struggling for one year, witnessed a sharp recovery aided by easing of lockdown restrictions. “Sales for the business were impacted as people were forced to remain confined to their homes owing to the Covid-19 pandemic. But as we have seen across discretionary FMCG consumption, hair colour has seen a very good comeback and we expect that to continue over the coming quarters, too,” said Abneesh Roy, research analyst, Edelweiss Securities. 

Moreover, the company has also been focused on augmenting its distribution network and streamlining its Africa operations, which is a key positive for the company, analysts said.

Operating profit also saw 10 per cent growth to Rs 693 crore, but was a bit lower, against expectations of Rs 708 crore; the consolidated Ebitda margin remained steady at 22.7 per cent on a YoY basis. For the India business though, the Ebitda margin at 28.1 per cent were about 80 basis points (bps) lower than the year-ago figure of 28.9 per cent, partly due to higher raw prices. 

Going ahead, analysts believe, higher palm fatty acid distillate (PFAD) prices, a key raw material used to make soaps, may impact gross margin. Increased competition from unorganised incense stick players in the home insecticides business, along with the failure to scale up margins, is a key concern. Net profit, adjusted for exceptional items, was Rs 496 crore, an increase of 17.3 per cent over the Rs 423 crore figure of Q3FY20.

On the whole, analysts remain positive on GCPL, given the improving outlook for its businesses. “The company is doing well, and all its key categories are expected to perform well,” said an analyst with a domestic brokerage. 

Reacting to the results, GCPL's stock declined 1.74 per cent on Monday. With this, the stock has corrected close to 10 per cent from its all-time high made in recent weeks. Given the business outlook, the correction provides an opportunity for long-term investors to enter the counter. With the stock trading 51x on a trailing 12-month basis, as compared the five-year average of 52x valuations appear to be comfortable. Prior to results, 27 analysts had a “buy” rating for the stock and 11 had “hold”; none had “sell” recommendation.