Godrej Consumer Products: A breath of fresh air

The March 2017 quarter results of companies such as Maruti Suzuki, Hero MotoCorp, Marico, Dabur and Godrej Consumer show that while rural sales have been patchy, urban consumption has revived convincingly after the jolt from demonetisation in the December 2016 quarter.

Godrej Consumer Products (GCPL), with its urban focus and presence in under-penetrated segments such as household insecticides and hair colours, presents a good opportunity for investors. In the months to come, GCPL should continue to benefit from innovations and premiumisation in the household and hair-care segments, as well as from recent product lines such as air fresheners, hand-wash and deo sticks. Introduction and cross-selling of new products across global markets and improving localisation of manufacturing in Africa, its biggest overseas market, should stand the company in good stead.

The GCPL stock currently trades at about 42 times its estimated consolidated earnings for 2017-18. With many stocks across sectors trading at rich valuations currently, GCPL is no exception. Yet the fact that the company trades at a discount to Marico (43 times) and Hindustan Unilever (49 times) offers comfort. Besides, belonging to the defensive FMCG space, the stock may also be able to limit downside to an extent in case of major corrections in the market.

GCPL, the maker of the ‘Good Knight’ and ‘Hit’ repellent range of products, is the market leader in household insecticides and hair colours in India.

The company, which derives 50-55 per cent of its consolidated revenue from the domestic market saw sales shrink in all its major segments — household insecticides, hair care and soaps — in the December 2016 quarter, due to the note ban.

Demand has since revived in the March 2017 quarter, with these segments recording sales growth of 4-15 per cent. Moreover, the company has been able to hike soap prices due to the increase in cost of inputs such as palm oil, without denting demand.

This indicates a return of pricing power. An overall volume growth of 5 per cent and price-led growth of another 5 per cent saw domestic sales for the company grow 10 per cent in the latest quarter over the same period a year ago.

Launches such as the Good Knight personal repellents and Hit gel sticks during the quarter also helped attract consumer interest. Lower penetration of segments in which GCPL has a presence will help sustain demand. Unlike soaps which are almost fully penetrated, only 40-50 per cent of the households use insecticides and hair colour products, leaving enough growth opportunities in these segments.

What also holds promise for GCPL are its new product lines. The ‘aer’ air fresheners has now become the market leader in this segment and has seen consistent double-digit sales growth in the last year. This has been helped by successful launch of ‘aer pocket’ for bathrooms in early 2016.

The recently launched Cinthol Deostick has also been received well in the markets. The focus on premiumisation – aerosols and liquid repellents in the insecticides category, cream-based hair colour, BBLUNT range of hair styling products, as well as the hand-washes and hand sanitisers, should favour the company in terms of improving the realisations and margins.

Globally, GCPL is among the top three players in air fresheners, insecticides and hair extensions/colour in major international markets such as Indonesia and select African and Latin American countries. In the recent March quarter, the international business reported 6 per cent sales growth (organic) in constant currency terms, with expansion in margins across all geographies.

Although the company has been facing stiff competition in the insecticides segment in Indonesia in the last few quarters, it has managed to gain market share here. The recent entry into the hair care segment in Indonesia with the NYU range of hair colours and the cross-pollination of aer pocket from India has also helped.

GCPL’s strategy of inorganic growth through acquisition of premium brands across the globe, continues. In April 2016, the company acquired US-based Strength of Nature, which manufactures wet hair care products such as shampoos, conditioners and relaxers for women of African descent. Already holding a leadership position in products in the dry hair care and hair colours category in Africa, the company has marked up its presence in the wet hair care segment (shampoos, conditioners, etc.) through this acquisition.

While all manufacturing for products in the dry hair care segment in Africa is currently localised, the company is actively working on localising manufacturing in Africa for the wet hair care segment.

This will bring down the costs, give flexibility in product sizing and improve margins in the near to medium term.

Backed by both domestic and international operations, GCPL’s consolidated revenue grew 13 per cent year-on-year in the quarter ended March 2017 to ₹2489.5 crore. Adjusted net profits moved up by 22 per cent to ₹383 crore over the same period last year.

Operating margin expanded to 22.2 per cent from 20.7 per cent a year ago. Margin expansion has been aided by price hikes taken in India and some global markets, cost control initiatives, as well as by superior product mix across some geographies.

Adverse currency movements remain a risk factor, which can pull down the consolidated numbers.

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