Godrej Consumer: Management may maintain margins at current elevated levels

The Godrej Consumer Products (GCP) stock is trading near its 52-week high. A likely revival in volume growth, led by new product launches, is the reason for the Street’s enthusiasm. After a two-year gap, GCP plans to launch 10 new products, its highest ever across all major categories in the current financial year, which would improve its market penetration for key categories such as household insecticide (HI). After introduction of ‘Fast Card’ in the HI segment, it was able to increase rural penetration by five per cent. The company expects new products to contribute around a fourth to its FY19 growth.

GCPL is introducing two-three new innovative products in the HI segment to improve sales, as the segment was under pressure in the March quarter, with growth falling by five per cent. This would provide an upward thrust to the overall domestic growth, as HI accounted for over 40 per cent of its Indian business in Q4. The penetration-based growth would also get impetus with modified new formats for its existing products. 


"There is good demand in the soap category (second largest category for GCP, 30 per cent of domestic sales in Q4). Further, new categories such as air care and personal hygiene are gaining good acceptance in the domestic market,” says Kaustubh Pawaskar, analyst at Sharekhan. 

The company also expects its international business (over 47 per cent of consolidated revenue in FY18) to do well in the coming years. An expected double-digit growth from Indonesia and improvement in geographical reach and re-launch of key brand – Darling – in Africa would push GCP’s international sales. GCP gets 70 per cent of international business from Indonesia and Africa.

The company expects to keep domestic margins at all time high levels of 24-25 per cent achieved in FY18. Some of the margin gains in the last fiscal were on account of cost savings initiatives such as the Project Pi programme which helped to post gross margins of over 55 per cent. Consolidated margins for FY18 stood at 21.3 per cent.

“With better growth prospects and strong earnings visibility, GCP remains one of our top picks in FMCG. Also, its current valuation of 36 times FY20 expected earnings is at a discount to some large FMCG stocks,” says Sharekhan’s Pawaskar. Brokerages expect 10-15 per cent upside from the current levels.



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