Promotional offers dent Godrej Consumer's June quarter performance

Investors should wait for good earnings trend despite attractive valuations

The June quarter (Q1) performance of Godrej Consumer Products (GCPL) was above expectations on the earnings front.

Though consolidated net profit of Rs 407.6 crore remained almost flat as compared to the year-ago quarter, it was more than analysts’ expectations of Rs 315.3 crore. 

However, GCPL missed estimates on the top line front, given the price cuts and discounts. In order to push up volumes, the company reduced prices of products and introduced promotional offers, which weighed on sales realisations. 

In the domestic (India) business, sales and trade promotion spends as a percentage of sales rose by 128 basis points year-on-year (YoY) to 6 per cent in Q1.

Therefore, despite a 5 per cent volume growth in domestic business (54-55 per cent of overall revenue), domestic sales of Rs 1,289.8 crore increased by just 0.9 per cent on a YoY basis. 

The company indicated price drops across the categories with soaps, liquid vaporiser and hair colour (Creme brand).

The muted top line growth of the India business, coupled with a 0.6 per cent YoY decline in revenues from Africa, weighed on the overall consolidated top line. 

GCPL reported close to 5 per cent YoY decline in net sales to Rs 2,330.6 crore in the quarter, against estimates of Rs 2,482.7 crore. 

Yet, a 5.4 per cent revenue growth from the Indonesia business capped the overall top line fall. 

While Africa has over 20 per cent revenue share, Indonesia accounts for 14-16 to GCPL’s consolidated top line. The trend of chasing volumes with higher promotional spends is likely to persist in the near-to-medium term. 

The management, during its analyst call, highlighted that volume growth will improve hereon mainly from the December quarter onwards.

What helped on the profit front was benign input cost. 

GCPL’s gross profit margin and Ebitda (earnings before interest, tax, depreciation and amortisation) margin improved by 147-148 basis points YoY to 56.8 per cent and 19.4 per cent, respectively.

Though the management expects overall performance to improve, including its Africa business, this should reflect on the financials of the company if there is to be a re-rating of the stock, says an analyst at a domestic broking house. 

Though valuations are attractive, investors should await a positive earnings growth trend. The stock currently trades at 32 times its FY21 estimated earnings, which is at a 41 per cent discount to peer Hindustan Unilever.