Medium-term volume, margin targets positive for Godrej Consumer

There could be pressure in the near term due to sharp rise in commodity costs

The stock of Godrej Consumer Products was up 5.4 per cent after the company outlined a refreshed strategy aimed at growing its volumes in double digits and expanding its margins by 150–200 basis points (bps) over the medium term.

The growth plan, outlined by the company’s new Managing Director and Chief Executive Officer Sudhir Sitapati, improved the sentiment for the stock which had, prior to Tuesday’s upmove, corrected 18 per cent in three months. 

The double-digit volume growth is expected to come on the back of increased penetration, accounting for half the overall gains, while market share, demand growth, and innovation will account for 10-25 per cent of the improvement.

Pointing out the scope for gains on the penetration front, the company pointed out that four key products (household insecticides, hair colour), accounting for 40 per cent of revenue and 60 per cent of profit, have less than 20 per cent penetration.

Any improvement will be a positive since inconsistent volume growth has been one of the key concerns for investors. Volume growth in the September quarter (on a muted base of 5 per cent) had slipped to 4 per cent; growth in the first quarter was at 15 per cent.

Between 2015-16 and 2019-20, volume growth had dropped to 5 per cent. However, over the past year and a half, there are signs of some improvement, with the metric rising to 9 per cent.

In addition to category development, the company is looking at simplifying its product portfolio, with renewed focus on meaningful innovations, collaboration across key markets of India, Indonesia, and Africa, and cost-saving/efficiencies, which will offer room for investment in advertising, talent, and distribution.

The improvement in operating profit margins will be another trigger for the stock. The company seeks to increase margins by 150-200 bps over the medium term, while acknowledging that commodity pressures in the near term, especially fuel and palm oil, may lead to low volume growth.

While the management’s steps appear to be in the right direction, Ashit Desai of Emkay Global believes the stock has limited upside potential, given the near-term pressure on earnings. The stock is trading at 44x its 2022-23 earnings estimates. Despite the uptick on Tuesday, it is down over 17 per cent, from its highs in September. Investors can consider the stock on corrections.