Godrej Consumer: Sustaining sector-leading growth key for further gains

Margin expansion and international business growth are the other triggers

Expectations of strong growth in the domestic market, recovery in international markets, and the appointment of a new chief executive officer have led to a rally in the stock of Godrej Consumer Products over the past three months.
 
Since the beginning of May, the stock, which hit the Rs 1-trillion market capitalisation last month, has gained 40 per cent. The outperformance over a three-month period over its peer index (BSE FMCG) and benchmarks (Nifty50) has been sharp with gains that are four times those of the indices.
 
Given the performance in the June (Q1FY22) quarter and growth outlook, investors’ enthusiasm for the stock does not seem to be misplaced. The company reported a better than expected 24.4 per cent growth in revenues over the year-ago quarter. The volume growth of 15 per in the domestic business powered the top line with the personal and home care segments (17-21 per cent) standing out on the growth parameter. Even on a two-year compound annual growth rate (CAGR) basis, growth at 12 per cent in the domestic market is the highest among peers in the home and personal care businesses.
 
The domestic market accounted for 57 per cent of consolidated revenues.
 
Within the home care business, the household insecticides segment, which accounts for over 80 per cent of revenues in that area, delivered double-digit growth with good demand across premium (aerosol, electric, non-mosquito) and burning formats. In addition to tackling the illegal incense sticks, the company launched Goodknight Jumbo Fast Card in Maharashtra.

The personal wash and hygiene space too saw double-digit revenue growth, helped by single-digit price hikes. The company indicated that it had gained market share in the soaps category (Cinthol, No.1). Value for money advertising campaigns and the demand for hygiene products led to strong growth in the Protekt Magic Handwash products. While the hair colour segment posted good growth and saw a pickup in June and July, it is on a low base; given the discretionary nature, the pickup in volumes will depend on the extent of unlocking.
 
In international operations, while the Africa business reported its fourth consecutive quarter of double-digit growth, the performance in Indonesia was disappointing. The geography reported flat y-o-y growth due to the pandemic and an adverse macroeconomic environment.
 
Commenting on revenue growth, Richard Liu and Vicky Punjabi of JM Financial say the two key important monitorables of India home care and Africa have delivered healthy steady-state sales growth (two-year CAGR), which is a key positive, given the prolonged weakness on these fronts in the recent past.
 
While revenue growth has been strong, the outperformance was higher at the operating profit level. Even as gross margins contracted by 210 basis points due to raw material inflation (higher palm oil prices and a lag in price hikes), the company posted a 40 basis point expansion in operating profit margins to 20.7 per cent.
 
While there is all-round growth across geographies and segments, the rerating triggers for the stock, according to analysts led by Himanshu Nayyar of YES Securities, are portfolio scale‐up in under penetrated categories like household insecticides and hair colour, entry into newer categories in India, and pruning down some unprofitable international businesses along with recent leadership changes.
 
A majority of analysts have a buy rating, but given the target price of Rs 1,034, there is limited upside from the current price. Investors should await a meaningful correction before considering the stock, which is trading at 44 times its FY23 earnings estimates.