Demonetisation: GCPL to see muted impact

Given its lower exposure to domestic markets and wholesaler channel, firm may be better off than peers

Note ban is expected to impact fast moving consumer goods (FMCG) companies in multiple ways. While cash crunch will lead to a temporary slowdown in consumption demand, companies having high dependence on the wholesalers (usually have high cash transactions) will see slowing sales over the medium term. Finally, the shift away from unorganised players to organised companies will accelerate and enable the latter to capture more market share.

For Godrej Consumer Products (GCPL), the impact will be less than some of its peers, believe analysts. This is because of its diversified business model and relatively lower dependence on the wholesale channel. Like its peers, GCPL too has extended credit facilities to select distributors and will tone down its advertising spends in the current quarter. The management believes its hair colour portfolio could see the maximum impact from note ban with the soaps business expected to be least hit.

Godrej Consumer Products

Domestic business contributes half to GCPL's consolidated revenues and wholesale channel contributes 40% of the domestic business. "We believe around 20% of GCPL's domestic business will be affected for two quarters compared to peers, which derive about 80-100% of revenues from the domestic business," estimates Sagarika Mukherjee, FMCG analyst at Elara Capital. She has trimmed her FY17 earnings estimates for the company by 7.2% and for FY18 by 7.4%. On the other hand, Amit Sinha, FMCG analyst at Macquarie Capital has not made any changes to his estimates for GCPL after meeting the management. In fact, Bloomberg consensus FY17 earnings estimates too have largely remained stable for the company post demonetisation. "We believe the medium- to long-term demand outlook for a majority of GCPL's India product portfolio will not be impacted," adds Sinha.

The GCPL scrip has shed 5.5% since November 8 — similar to the 4.9% fall witnessed by the S&P BSE Sensex in this period. At current levels, the GCPL stock trades at fair valuations of 37 times FY17 estimated earnings. The company though stands to gain market share from both organised and unorganised peers given its relatively lower impact from note ban, believe analysts.

Overall, most analysts remain positive on GCPL given its strong earnings visibility, scope to scale up business in Indian as well as international markets coupled with its successful track record of achieving inorganic growth.