Godrej Consumer will have to deliver on volumes for valuations to sustain

The company posted a 15-per cent decline in domestic volumes compared to a fall of 14.6 per cent by other major FMCGs
The Godrej Consumer Products (GCPL) stock has continued rising, despite the firm posting the weakest volume performance among FMCG players to have declared results.

It has risen  18.6 per cent since the results announcement on May 13, outperforming a 9.5 per cent rise in the Nifty FMCG index during the same period.

Besides attractive valuations (41x its FY21 estimated earnings compared to over 50x in the case of other FMCG majors), the positive management commentary mainly for the two key segments of household insecticides (HI) and soaps has also helped.
In the March quarter, the firm posted a 15 per cent fall in domestic volumes, compared to a decline of 14.6 per cent by other major FMCGs. Therefore, any underperformance, given the positive management commentary or street expectations, could lead to a correction.

The management believes FY21 will be a year of resurgence for HI, as its portfolio is now better placed than ever, and is focusing on health and hygiene-driven innovations in soaps to propel growth.

 

 
While 65-70 per cent of domestic revenue contribution from these segments justifies the Street’s positive reaction, analysts at HDFC Securities believe GCPL’s business will continue showing volatility given the high dependence on seasonal and competitive categories in India, as well as a higher share of international business (45 per cent of consolidated revenue).

In fact, seasonality, competitive intensity, and international market dependence have been impacting GCPL over the last few years. In the last five years ending FY20, GCPL’s annual earnings growth almost halved to 10 per cent from 21.7 per cent, achieved during FY11-15, said Motilal Oswal Securities. This highlights the Street’s tendency to give it a discount, compared to peers.
Nonetheless, the firm’s sharp focus on volume growth and market share gains in previous quarters should help.

Even in Q4, the management highlighted market share gains in key segments. The success of the company’s focus on profitable growth in its Africa business, under the new leadership of Dharnesh Gordhon, remains to be seen.

Manoj Menon, head (research) at ICICI Securities, believes the firm is moving in the right direction and expects the soaps and HI segments to do well. However, he believes stocks will face pressure if the category growth trajectory underwhelms.

The growth metric for GCPL, over the next few quarters, will be a key monitorable.


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