Recovery in global business crucial for Godrej Consumer bounceback

Despite P/E ratio being attractive, it is better for investors to wait for pick-up in domestic business

After a dismal show in recent quarters, the stock of Godrej Consumer Products (GCPL) has underperformed the markets and most of its FMCG peers. The GCPL stock has fallen 12 per cent in the last three months, much more than the BSE FMCG index’s 1.7-per-cent decline.

There may be little relief for investors ahead, as GCPL’s overall financial performance is unlikely to improve significantly in the near term on account of its international business, say analysts.

GCPL earns close to 45 per cent of its revenues from foreign markets such as Indonesia, Africa and the US, among others. Higher competitive intensity has been impacting its Indonesia and Africa businesses since the June 2016 quarter.

Though the Indonesian business’ operating sales improved marginally in Q3FY19, it came at the cost of profit margins. The Ebitda (earnings before interest, tax, depreciation and amortisation) margin of GCPL’s Indonesia business contracted by 160 basis points year-on-year, mainly due to marketing and promotional spends.

South African performance remained soft in Q3, restricting overall top line growth of the GAUM (including Africa, the US and Middle East) cluster to 14 per cent despite a softer 6 per cent growth in the year-ago quarter.

The company is taking measures with new launches and re-launches to improve penetration and the overall performance of its international business. It has also launched low-cost products in South Africa to resist stiff competition. However, this is unlikely to move the needle much.

According to analysts at Equirus, GCPL has been taking corrective action in key markets of Africa and Indonesia, but these will take time to play out given the changing industry dynamics and muted demand in some pockets. While Indonesia accounted for 29 per cent of GCPL’s global business, Africa’s share was 47 per cent in FY18, indicating its importance for GCPL.

The company has leadership position in the domestic household insecticides segment, which is a positive. While near-term hiccups are likely due to declining usage of mosquito killing coils, GCPL has recently launched Goodknight Naturals Neem Agarbatti incense sticks to regain traction.

Lower penetration in the hair oil category also provides a good long-term growth opportunity. Nevertheless, some analysts have cut their FY20 net profit estimates by 5-7 per cent.

At current levels, while the price-earnings ratio of 36 times its FY20 estimates looks reasonable, it would be better for investors to wait till there are clear signs of improvement in global operations and also till the domestic business picks up.