Margin pressures may ease for FMCG major Godrej Consumer Products in H2

Disruption during Q2 may result in lower volumes and revenues

The stock of fast moving consumer goods (FMCG) major Godrej Consumer has lost 12.6 per cent over the past month.

 

While the lower goods and services tax (GST) is positive, the gains will start to flow in the December quarter as well as in the medium term.

 

During the short term (Q2), there is disruption that may result in lower volumes and revenues while margins, too, are expected to be under pressure.

 

The company, in a pre-quarter update, pointed out that a third of GCPL’s portfolio — primarily toilet soaps as well as smaller categories like talcum powders, shampoos, and shaving creams — will benefit from the reduced GST of 5 per cent compared to the earlier 18 per cent. 

However, the rate reductions have resulted in some short-term adjustments across trade channels, as distributors and retailers focused on liquidating existing inventories.

 

This has delayed the flow of new orders and temporarily deferred consumer purchases, impacting both growth and profitability.

 

The disruption means that India business growth will be restricted to mid-single digit value growth, supported by low-single digit volume growth.

 

The ongoing segment growth trends are expected to continue in Q2 as well. 

 

While the home care segment grew in high single-digit in Q2, it sustained its strong momentum of mid-single to double-digit growth for the 12th consecutive quarter.

 

The personal care portfolio witnessed low single-digit decline impacted by soaps, marking the 10th consecutive quarter of subdued growth.

 

The company believes this is a transitory adjustment and remains confident of the long-term benefits of reforms.

 

In the international business, the Indonesia operations continue to remain under pressure due to intense competitive pressure on pricing across key categories.

 

It is likely to result in low-single digit decline in value growth though volumes were slightly higher.

 

Its Godrej Africa, US, and Middle East (GAUM) business is expected to deliver the third consecutive quarter of strong top line performance. This is on the back of double-digit value as well as volume growth.

 

At the consolidated level, the company expects a mid-single digit revenue growth.

 

The pricing pressure in global business will reflect negatively on profitability. Mihir P Shah and Riya Patni of Nomura Research expect GCPL to report weak margins pressured by high competitive intensity in the Indonesia business, higher brand investments in Africa and continued pressure of higher-priced palm oil.

 

They expect this to lead to a mid-to-high single-digit year-on-year (Y-o-Y) decline in consolidated operating profit.

 

The brokerage expects the company to witness gains from lower-priced palm from Q3FY26.

 

Nomura Research has a buy rating with a target price of ₹1,500.

 

Antique Stock Broking also expects profitability to be impacted by GST transition leading to a decline in operating profit Y-o-Y. Analysts led by Abhijeet Kundu of the brokerage believe that profitability is likely to be muted due to high cost inventory and uncertainty of raw materials.

 

Over FY25-28, however, the brokerage expects operating profit margin to expand by 188 basis points (bps) to 22.8 per cent during FY25-28.

 

It expects the emerging categories of fabric care, air fresheners and the new Renofluthrin (RNF) molecule (patented mosquito repellent) in the household insecticides segment to remain the growth levers in the medium-to-long term.

 

The brokerage has maintained its earnings estimates with a target price of ₹1,403. The target price, based on H1FY28 earnings, comes at a multiple of 46 times which is in line with its five-year average.