In the past one week, Goldman Sachs and Jefferies predicted that Godrej Consumer Products Ltd (GCPL) is likely to turn around soon. The stock is an analyst favourite with 30 analysts rating it a Buy, 7 Hold and only 1 Sell, according to Bloomberg.
“The company has taken multiple tough decisions over the past 12 months for improving long-term growth. Most of these initiatives caused near-term pain to FY23 earnings,” Jefferies analysts wrote.
The management’s mindset has changed from that of a ‘wholesaler’ to an ‘FMCG’ (Fast-Moving Consumer Goods) company, Motilal Oswal Financial Services had written in an earlier note.
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GCPL Chief Financial Officer Sameer Shah told Moneycontrol that category development by building accessibility, brand relevance and sampling have been part of the most important strategy.
“I’ll give you an example. In hair color cream, which is a relatively under- penetrated format, we launched a Rs 15 product, which has actually driven penetration up and also resulted in market share gains,” he said.
Premiumization of air fresheners has also worked well for the company, he added.
Region-wise growth and El Nino impact
Indonesia has been a pain point for the company, with sales declining over the past few quarters. The maker of Cinthol soaps and Goodknight mosquito repellents has been struggling in Indonesia amid economic challenges, accelerating inflation and competition.
But management expects a recovery in FY24. “The building blocks are in place to bring about a gradual recovery in Indonesia. If not this quarter, then there will be improvement definitely from the next quarter,” said Shah.
Growth has been steady in GCPL’s Africa and India business and it expects the trend to continue. After three consecutive quarters of decline in domestic sales volumes, the company reported 3 percent growth in Q3 FY23.
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“Volume growth rate should be relatively better as compared to what it has been over the last year or so,” said Shah.
The launch of small packs of household insecticides was seen as a positive move last quarter, but it is too early to call it a triumph. The company hopes to replicate the success of its Rs 15-hair cream color in this category as well.
While the Street is talking about the impact of the El Nino weather phenomenon on rural demand recovery, GCPL actually has a contrarian view. El Nino associated with subnormal monsoon rainfall and drought in the subcontinent that may hurt demand in rural India.
“Theoretically a stretched summer is actually not bad news for a category like soaps, which is one-third of our saliency,” said Shah. The company’s rural exposure, at 28 percent, is also lower than that of other FMCG companies with 40-45 percent exposure.
Margins yet to recover
Pre-COVID, the company’s quarterly margins used to touch 23 percent. Currently, it is in the range of 17-20 percent. The contraction in margins was largely on the back of high prices of palm oil, which have now cooled from all-time high levels.
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That said, the company has not given any timelines as to when operating margins will go back to the pre-COVID level. It has increased its advertising and promotional expenses by 28 percent year-on-year, which is restricting its EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) margin expansion.
“With both palm oil and crude prices falling, gross margins will go back to the normative levels soon. However, we have increased media spends and R&D (Research and Development) investments, so EBITDA margin expansion will happen only in a sustainable away,” Shah said.
In its Q3 earnings call, the management had talked about 100 to 150 basis points of EBITDA margin expansion over the next 3–4 years, which is still below pre-COVID levels.
EBITDA margin is a measure of a company’s operating profit as a percentage of its revenue.
Consensus target
The 12-month consensus target on the stock is Rs 1,024, which indicates a 7 percent upside from current levels.
Jefferies has forecast GCPL’s earnings to rise at a ~13 percent Compound Annual Growth Rate (CAGR), partly impacted by sharp input inflation in FY23. It values the stock at 48x March 2025 earnings with a price target of Rs 1,200 per share.
Going ahead, Nuvama Institutional Equities expects GCPL to continue to enjoy market leadership in air fresheners.
“Indonesia sales shall also recover gradually in our view. We continue to assign a 20 percent weightage to GCPL in our model portfolio, with a target of Rs 1,130,” it wrote in a note.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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