Growth pick-up under new mgt key for further gains in Godrej Consumer

Near term margins likely to be under pressure

Godrej Consumer (GCPL) was among the FMCG companies that suffered from the palm oil export ban and it should equally be a beneficiary in Q2 of the resumption of Indonesian exports. Given the new management, there could be a new thrust towards growth although FY 2022-23 will certainly be affected by weak demand and high raw material costs.

Consolidated net sales grew 6.8 per cent YoY to Rs 2,920 crore, while EBITDA and adjusted net profit fell 9 per cent and 5.9 per cent respectively YoY to Rs 520 crore and Rs 400 crore. Domestic revenue was up by 9 per cent and international was up 4 per cent. The consolidated EBITDA margin was down to 3.9 per cent.

Sales, EBITDA and PAT grew 11.3 per cent, 5.2 per cent and 2.7 per cent YoY respectively in the full FY22. The net cash flow (excluding lease liabilities) was Rs 370 crore at the end of FY22. Management guidance is for double-digit sales growth, despite low single-digit volume growth in 2022-23. After elevated palm oil costs and reduced margins in Q1, 202-23, it expects gradual improvement in margins.

Rationalisation of SKU (stock keeping units) is part of several “strategic refresh” measures designed to reduce complexity. It is also rolling out new packs and products in several areas. The new CEO seems focused on boosting growth in the high margin, high return on capita employed in the domestic business.

Africa and Indonesia were both disappointments this quarter. Africa saw margin being hit by among other things, massive pilferage of inventory. Indonesia was disappointing on most metrics with revenue and margins being hit. India Home Care was also considered a disappointment by most analysts.

While most analysts remain positive on the stock, with one year price targets in the range of Rs 950-1,030, they are also being cautious in their projections. There’s consensus that further margin compression is likely at least through the first half of 2022-23 and also that growth recovery is likely to be very gradual.

The current price to earnings (P/E) ratio is at around 55 and the forward 2-year P/E is estimated to be around 37 times for 2023-24. This would be on the low side for an FMCG blue-chip. The stock has however, dropped from Rs 830 to Rs 761 in the last few sessions. Obviously, the bulk of the market was disappointed by the Q4 results. If you trust the analyst projections, there’s a considerable upside for the patient investor.