Godrej Consumer: Q3 update positive, sustaining trend crucial

Aided by the company’s hygiene portfolio of products, CLSA expects even other segments to post low-double digit growth.
Godrej Consumer Products (GCPL) expects to deliver a second consecutive quarter of low double-digit sales growth, led by an increased focus on personal and home hygiene, sustained demand momentum across key products, and an improvement in the international business. The news, which came through a quarterly update announced on Tuesday evening, is positive given that GCPL has either seen a decline or reported low single-digit growth in consolidated net sales in at least the past five quarters before June 2020. Therefore, analysts say, sustenance of double-digit growth is crucial.

The consumer goods maker has been betting on its range of hygiene products amid the Covid-19 pandemic and plans to build the category as its “new core” over the next three years. Under its hygiene brand “Protekt”, GCPL has introduced a range of products into new segments. Last month, the company announced its foray into home cleaning products, a segment which is witnessing accelerated growth after the pandemic. Aided by the company’s hygiene portfolio of products, CLSA expects even other segments to post low double-digit growth.
Increased awareness about the need to maintain hygiene is aiding the company’s soaps business -- 27 per cent of domestic revenue -- as GCPL expects to deliver strong mid-teen growth in this segment in Q3. The household insecticides business is seen growing in high single digit, aided by a supply chain recovery in Q3 and conducive weather setting in west and south India, said CLSA. Following a sharp recovery, the hair colour category is also expected to deliver mid-teen growth, according to GCPL's quarterly update.

On the flip side, challenging macroeconomic variables, a gradual recovery in air fresheners and high competitive intensity in the wet wipes hurt the company’s operations in Indonesia. And hence, GCPL expects a marginal decline in constant currency sales. However, barring Indonesia, all other regions in its International business should report healthy growth.

Second, although GCPL did not provide an update on input cost trends and operating margins, analysts believe higher palm fatty acid distillate (PFAD) prices, a key raw material used to make soaps, could impact gross margins.

“Although close to double-digit top-line performance in Q3 is encouraging, it is on a soft base of 2 per cent growth in Q3FY20. We need to watch out for management commentary to determine the sustainability of its performance,” said analysts at Motilal Oswal Securities. 

Their concern stems from the slowdown in domestic sales in recent years, inability to scale up margin, and the weak return on capital in international business, which have affected GCPL's pace of earnings growth. 

On valuations, there is some comfort as on a trailing 12-month basis, the stock trades at a P/E of 51x versus its 5-year average of 52x. Although most analysts maintain a bullish stance, the potential upside may be limited given the recent surge in GCPL’s share price.

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