Inconsistent growth across segments to weigh on Godrej Consumer valuations

The reason for the stock lagging behind on the valuation front is inconsistent performance across segments and geographies
Despite Godrej Consumer Products (GCPL) delivering double-digit revenue growth in the September quarter (Q2) and its valuations remaining the lowest among peers, investors aren’t rushing to accumulate the stock.

The GCPL stock has risen marginally since its results were announced last week and flat over the last three months. 

The reason the stock valuation has lagged is inconsistent performance across segments and geographies. Say analysts, led by Richard Liu of JM Financial, “The stock is quite cheap at 36 times its FY22 earnings per share estimates as compared to the sector average but we believe the volatility in its growth profile needs to be addressed for investors to get more comfort on the steady state growth profile for the company as a whole — not the least complex mix of businesses.” 

Consider household insecticides (HI), its largest product segment. The company’s Good Knight brand dominates the category with half of the organised segment market share. 

After a 26.5 per cent year-on-year (YoY) growth in the June quarter, the company reported a muted 4.2 per cent growth in Q2. Primary sales were held back by supply side disruption due to the 21-day lockdown in Guwahati, the production hub for the products. 

The company, however, indicated that secondary sales have grown in low double digits. 

With unorganised incense stick players losing share and encouraging response to new products such as the Gold Flash liquid vaporisers. 

While sharp sales drop for the unorganised segment during Covid is a positive for the firm, the Street will keep an eye out on growth metrics of the category, which has grown just 1 per cent over FY16-20. 

The weakness in HI was, however, offset by the strong performance in the health and hygiene segment — soaps grew 18 per cent aided by price hikes. The growth comes after four quarters of falling sales YoY. After a 17-23 per cent fall in the last two quarters, the company was able to restrict the drop in the hair colour segment to 5 per cent. Analysts believe it will take time for discretionary products to see a consistent uptick in sales. 

Growth variance is also visible in the international business, which accounts for 44 per cent of revenues. Its biggest market, Africa, saw 10 per cent growth in Q2 after five consecutive quarters of decline. Even as Africa rebounded, growth in Indonesia was lower than expected because of social restrictions in September and destocking by dealers. 

While operating profit margins expanded, led by lower advertising spends and operating leverage, this could be difficult to maintain given rising raw material costs and increase in promotional spends going ahead. The extent of price hikes and sales growth could decide the margin trajectory in the coming quarters. 

Analysts at Emkay Research have a ‘hold’ rating on the stock given that growth is not as steady as its peers’. While the Africa turnaround is positive, volatility in HI and weak outlook in Indonesia along with rising input price inflation are keeping them neutral on the stock, they add.

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