Godrej Consumer's FY20Q2 results beat estimates, domestic volume up 7%

Godrej Consumer Products’ (GCPL’s) better-than-expected earnings for the July-September 2019 quarter (Q2), on Wednesday, cheered the Street, with the stock rising up to 5 per cent before closing the session up 2.7 per cent at Rs 741.6.

GCPL’s net profit at Rs 413.9 crore was way ahead of Bloomberg consensus estimate of Rs 388 crore. A 28-per cent year-on-year (YoY) decline in reported net profit was mainly due to one-off gains in the year-ago quarter, and adjusting for the same, Q2 profit shows a sharp 31 per cent growth. Profit before tax and exceptional items at Rs 497.9 crore was up 21.7 per cent YoY, and according to the management, there will not be any impact of new lower tax rate in FY20.

While the top line declined by 1.3 per cent YoY to Rs 2,608 crore — a tad lower than analysts’ estimates of Rs 2,690 crore — it was due to lower sales realisation on account of promotional offers like discounts to garner volumes amid a weak consumption environment.

GCPL clocked 7 per cent growth in domestic volumes, despite a 5 per cent increase in the year-ago quarter. Even in the near term, a volume-focused strategy is likely to continue for GCPL’s domestic business (55 per cent of consolidated sales), according to the management.

Each of the two key segments, household insecticides and soap (around 75 per cent of domestic sales), reported a 7 per cent 
volume growth in Q2 versus a decline or muted volumes in the April-June quarter.

In value terms, while household insecticides reported around 4 per cent YoY growth in sales in Q2, soap business that saw higher price cuts and consumer offers posted a 4 per cent YoY fall in revenue.

In fact, a strong recovery in household insecticides segment, which had got impacted earlier with rising competition from illegal incense sticks, enthused investors. The management now believes that the competition from such players is now behind for organised players like GCPL, with awareness being created about the harmful health effects of illegal cheaper incense sticks.

Apart from lower sales realisation in the domestic business, a 6 per cent YoY decline in Africa business further pulled down the overall top line performance. However, sales in Indonesia business were up 17 per cent YoY in Q2, and provided some cushion. Indonesia and Africa are two key geographies, accounting for over 80 per cent of GCPL’s international business.

Despite price cuts and lower realisations, GCPL saw a sharp improvement in the operating margin due to benign input costs. Its earnings before interest, tax, depreciation, and amortisation margin was up 345 basis points YoY to 21.7 per cent. International regions, including Africa, also provided some margin support.

All this indicates an improved earnings outlook for GCPL.

“Improvement in international margin would lead to overall earnings upgrade for GCPL,” says Nitin Gupta, analyst at SBICAP Securities, who, however, believes that sustained top line recovery would be key.

Even going ahead, the input cost trajectory is likely to remain supportive at least for the next four-six months, said the management. This should help GCPL protect margins, while focusing on growing volumes. The latter is also expected to get impetus from a strong new product pipeline aided by marketing investments, according to the management.

Thus, how GCPL manages its volume and margins would be interesting to watch, which would also reflect on its stock valuations. The stock is currently trading at about 40x its FY21 estimated earnings — a 14 per cent premium to its historical five-year average valuation.

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