Godrej Consumer faces highest input cost impact among FMCG majors

Turnaround hopes and attractive valuations, however, keep the Street positive on the stock

In just over a month, fast moving consumer goods (FMCG) major Godrej Consumer Products (GCPL) slipped over 28 per cent to hit its 52-week lows. While the fall was largely on account of weak margin outlook due to commodity pressures, the stock has since recovered a bit on long term prospects and attractive valuations.

Among the key commodities that will impact the raw material basket for the company and the sector are higher palm oil and crude oil prices. Analysts led by Vivek Maheshwari of Jefferies India point out that palm and crude oil prices are up 40-50 per cent in the last three months. This is on top of a 30-40 per cent jump in CY21 and 20 per cent to 70 per cent inflation over pre-pandemic levels. Apart from being important inputs for categories such as soaps, packaged foods  and detergents, higher crude prices have a derivative impact on other items such as packaging materials, freight costs among others, they add. The company felt the impact of the higher input costs in the December quarter as its gross margins were down 440 basis points y-o-y to 50.7 per cent.

At 22 per cent, cuts in earnings per share estimates for FY23 are the sharpest for GCPL in the larger FMCG space. While maintaining that the turnaround story for the company is intact, Motilal Oswal Research highlights that cuts in estimates for GCPL are sharp due to the unexpected steep surge in palm oil costs (and its impact on the soaps business) along with some caution on growth and margins in its Africa business (especially the lower income economies). Soaps is the second largest segment for GCPL accounting for 32 per cent of revenues.

What could offset some of the pressures is the ability of the company to pass on costs especially in categories where it enjoys market leadership such as household insecticides, hair colour and air fresheners. Further, cuts in advertising and promotions as well as cost control measures could offer some respite.

The other factor which works in its favour are valuations at 34 times its FY24 earnings estimates, among the lowest in the consumer space. While most brokerages have a buy on the stock, given the uncertainties on the raw material front as well as a lack of consistent growth trends, investors should await recovery signs before considering an investment.