Strong Q3 showing, improved outlook positive for Godrej Consumer Products

Godrej Consumer Products flags double-digit volume growth in Q3 FY26 as home care and soaps rebound, with margins set to recover on lower palm oil prices

The Q3FY26 quarterly update by Godrej Consumer Products (GCPL) was positive with expectation of double digit volume growth in domestic business which is one-of the highest amongst FMCG peers.

 

This is on the back of a sequential pick-up in growth in home care (6 per cent in Q2 and double digits growth in Q3) and the soaps portfolio which saw a pick-up due to re-stocking post de-stocking in Q2.

 

Margins could recover to normative levels (24-27 per cent in domestic business) owing to palm oil deflation and growth momentum in Godrej Africa, US and Middle East or GAUM.

 

The challenges in Indonesia are known and may be priced in.

 

For Q3FY26, the estimated revenue growth is pegged at 10 per cent with operating profit growth of 22 per cent Y-o-Y and operating profit margins expanding by over 200 basis points Y-o-Y.

 

Demand in India strengthened during the quarter.

 

The company expects gradual improvement of consumption supported by falling inflation and affordability following lower GST rates. The India business is expected to deliver double digit revenue growth driven by double digit underlying volume growth, albeit on a lower base.

 

Home care (household insecticides or HI, air care, liquid detergents) which contributed 45 per cent of domestic sales and about 27 per cent of consolidated sales of FY25 is likely to grow by double-digits, beating consensus.

 

Personal care (soaps, hair colours, deodorants) contributed 51 per cent of India sales and 32 per cent of consolidated sales of FY25. The guidance is mid-single-digit sales growth was better than consensus again. This was led by a substantial recovery in soaps after ten quarters of flat performance.

 

International business contributed 39 per cent of consolidated sales in FY25. In Indonesia (14 per cent of consolidated sales last year) there are early signs of stabilisation and management expects it to improve from FY27. Indonesia may decline by 7 per cent Y-o-Y in Q3, due to sustained high pricing competition.

 

GAUM (about 19 per cent of consolidated sales in FY25) business remained strong and is likely to achieve its guidance of double-digit top and bottom-line growth, according to the company. GAUM should have seen constant currency growth of 15 per cent Y-o-Y.

 

Management expects India business margins to return to its normative range (24 per cent-26 per cent) as the benefits of lower palm prices materialise. The Q3 India margins may be at the low end of the range at 24 per cent. Africa margins will hold up around 14-15 per cent, while Indonesia margins will be under some pressure.

 

The company had earlier guided for standalone volume growth in mid-to-high single digit and consolidated revenue growth in high single digit. Further consolidated operating profit growth was expected in double digits and India operating profit margin was to be in the range of 24 per cent-26 per cent. This is likely to be fulfilled or exceeded.

 

Post Sudhir Sitapati taking over as MD & CEO of GCPL in Oct 2021, GCPL has undergone a transformation in its strategy with a material step-up in advertising and promotion and new communication across its core products, dealer retailer SKU rationalisation -- improving return on investment and new mega factories consolidating manufacturing among other steps. Nomura Research expects this to have a better medium-term effect on GCPL's overall operations.

 

GCPL is foraying into categories like deodorants, perfumes, liquid detergents, body wash, pet care, which are largely new, underpenetrated with low per-capita consumption vs global averages and thus with significant headroom for growth. GCPL is witnessing strong growth in these categories and is cementing its brand positioning. 

The company has undertaken structural initiatives and investments in its Africa and Indonesia business which is yielding results and improving its growth and margins in Africa. It has to find ways to fight competitive intensity in Indonesia in a weak economic environment.

 

The full benefits of lower raw material prices will kick in from H2FY26 to support margin recovery. For Q3FY26, expect consolidated margins of 20-21 per cent, which should drive 12-13 per cent growth in operating profit.

 

Sales and earnings growth is expected to be around 12 per cent and 16 per cent over FY25-28 driven by strong growth of emerging categories and insecticides. As a top-rated company in the FMCG category, the stock has premium valuation but analysts are upgrading target prices over the medium term.