New products, volume boost Godrej Consumer

Double-digit growth, cost efficiencies should translate into higher profits

The Godrej Consumer Products stock has been on an upward trend over the past month on expectations that product launches in the Indian business, coupled with improving performance in key markets of Indonesia and Africa, should reflect on its financials. The Indian business accounts for over a half of the consolidated revenues, while Africa accounts for about 45 per cent of the international business.
 
The company, which had refrained from launching products due to uncertainty and muted business environment, has lined up multiple launches in the India business in the household insecticides (HI) and hair colour categories over the next year.
 
Analysts at Macquarie said the HI market has significant scope for growth on account of higher penetration and growth in out-of-house repellents and non-mosquitoes insecticides portfolio. The segment grew only four per cent in the September quarter on the back of a high base and subdued performance of the coils business, given the dependence on the wholesale channel. The company is reducing its dependence on coils to focus on value added and premium products.
 
The hair colour segment, too, registered a muted four per cent growth in the quarter due to lower demand for powder hair colour (lower range), which is dependent on the wholesale channel. However, the crème format, where the company achieved its highest market share, did well. The company, which has rolled out the Godrej Professional range in saloons, is looking at product innovation to maintain its market share in the segment. Analysts at Sharekhan expect the household insecticides and hair colour segments to witness a recovery on account of new launches, shift from the unorganised segment and recovery in rural demand.

Analysts expect the volume momentum of 10 per cent growth registered in the first half of FY18 to continue in the second half, led by the soap segment. Market share gains for Cinthol and Godrej No. 1, lower competition from unregulated companies, low base, and price cuts of six-eight per cent, after the introduction of goods and services tax, led to strong double-digit volume growth. The company is looking at expanding its presence in more states.
 
On the international front, Godrej expanded its geographic footprint through acquisitions — such as Strength of Nature, Darling Group, Tura, Megasari and Latin American companies. This should translate to revenue growth. While it expects the Indonesian business to recover on the back of product launches and cost efficiencies, in Africa, it is looking at expanding the hair portfolio, which should sustain the high teen growth levels, while local manufacturing should boost margins. At the current price, the stock is trading at 38 times its FY19 earnings estimates and investors could take an exposure at lower levels.