Growth revival key to reversing declining trend in Godrej Consumer stock

Weak show in India business dents Q3, margin pressures may remain

Godrej Consumer Products (GCPL) had a soft December quarter performance on the back of sluggish India sales, ongoing weakness in the Indonesian business and margin pressures. The muted show added to the weakness in the stock of the fast moving consumer goods major falling nearly 16 per cent since its monthly high on February 3 before recovering a bit over the last three sessions. 

The muted volume performance in the India business which accounts for 55 per cent of revenues disappointed the Street. While the geography posted a revenue growth of 8 per cent, the same was largely due to price hikes. HDFC Securities highlights that domestic volume growth was flat YoY, its two-year compounded annual growth rate was at 3 per cent and it trails peers such as Dabur (10 per cent), Marico (7 per cent), Emami (6 per cent), Britannia and Colgate’s (4 per cent) on this count.

In the India business, home care segment sales lagged reporting a growth of 3.5 per cent. This was largely on account of the soft show of Household Insecticides (HI). Demand conditions for HI was impacted by seasonality in South and East India; GCPL however indicated an improvement in market share and penetration in the segment.

Sales of paper based mosquito repellent, Jumbo Fast Card, which has been launched at price points similar to those of illegal incense sticks, is scaling up across key markets. Analysts led by Richard Liu of JM Financial believe that this (HI) is one area that needs a quantum-leap in order for it to drive overall company-level growth. The street will watch out for the expansion in rural markets where its presence is low. Personal care segment sales reported a growth of 12 per cent led by soaps business; the segment posted double digit growth over a two-year time frame as well.

The Indonesia business continues to remain an underperformer with its constant currency sales down 2 per cent. The performance was impacted by lower demand for Saniter (hygiene segment) which was the focus area for the company. While sales are expected to improve sequentially going ahead, the company believes that it will be a few quarters before it can stabilise sales. The geography accounts for about 14 per cent of overall sales. The other key geography bucket (Africa, Middle East and the US) reported double digit sales growth (12 per cent) while the two year growth for these markets was 14 per cent. 

Higher input costs led to pressure on margins with gross margins dipping by 438  basis points to 50.2 per cent. The impact of the raw material inflation was more on the domestic business (555 basis points) due to sharp rise in palm oil prices (input for soaps). The company was able to limit the impact on operating profit margins to 210 basis points (21.1 per cent)  on the back of lower advertising spends, staff costs and slightly higher other expenses. 

Highlighting the near term challenges, analysts led by Jaykumar Doshi of Kotak Institutional Equities say these are on account of elevated input costs of palm/palm fatty acid distillate, crude oil prices and limited room for incremental pricing given softening demand. In addition to this, volatility in HI portfolio, moderation in hygiene (sanitiser) and some weakness in core categories in Indonesia business are the other worries, they add. 

Despite the Q3 show, most brokerages are keeping the faith in the company’s refreshed strategy aimed at delivering a double digit volume growth and margin expansion in the medium term. The recent sale of  hair care brand Bhabani Blunt Hair Dressing (BBLUNT) for Rs 84.5 crore is part of the new strategy. Edelweiss Research believes that the deal shows better capital allocation behaviour and follows up on the company’s intention of focussing on core businesses.

What could support the stock is valuation given the 26 per cent decline in the stock price since its highs in September. The stock is trading at 35 times its FY24 earnings estimates.