Godrej Consumer Products: Buy

Healthy volume growth indicates that the company has put the GST blues behind it

Strong recovery after the lull due to GST transition, presence in under-penetrated segments and a portfolio leaning towards premium products favour Godrej Consumer Products (GCPL). The stock currently trades at about 49 times its trailing 12-month consolidated earnings.

With many stocks across sectors trading at rich valuations now, GCPL is no exception. Yet the fact that the stock trades at a discount to Marico (52 times) and Hindustan Unilever (58 times) offers comfort.

Besides, with the markets already showing sign of correcting, the stock may also be able to contain downside better than cyclicals as it belongs to the defensive FMCG space. Investors with a perspective of one to two years can buy the stock.

Domestic recovery

  GCPL derives about 55 per cent of its total revenue from the domestic market. While overall domestic volumes grew by a mere 0.1 per cent in the quarter ended June 2017 (over the June 2016 quarter) due to the GST transition, the company has recorded double-digit volume growth of 10 per cent and 18 per cent, respectively, in the September and December 2017 quarters.

The low base in the December 2016 quarter due to demonetisation may have helped to an extent, but price cuts in segments such as soaps and hair care, triggered by lower GST rates for these products have also played a major role in improving volumes. While GCPL reduced the prices of soaps in July, it took price cuts of 6 to 10 per cent in hair colours to pass on the benefits of GST rate cuts announced in November 2017 to customers. Thanks to this, revenue growth in soaps and hair colour segments have come in at 24- 33 per cent in September/December 2017 quarters.

Even otherwise, over the last few quarters, premium products such as cream-based hair colour (Expert Rich Crème), BBLUNT range of hair care products, hand wash (Protekt), and Cinthol Deo Sticks have led sales growth for the company in the soaps/personal care and hair care segments. This factor helped in the insecticides segment too, where personal repellents and fabric roll-on products have seen good off-take even as coils and mats have stagnated. New product lines, led by home and car air fresheners (Aer), have also seen strong revenue growth of over 20 per cent in the last many quarters since 2016-17. With a penetration of less than 10 per cent, this segment offers great potential. These factors will continue to favour the company. It has also planned a slew of launches across categories.

Improving global outlook

Africa, the US and West Asia together form the company’s biggest overseas markets, bringing about 50 per cent of total international revenues. The rest comes from Indonesia, Latin America and Europe. GCPL has been facing competitive headwinds in Indonesia, especially in the insecticides business. Revenue growth dropped by 8 per cent in the latest December 2017 quarter, continuing the trend of the previous two quarters. Some recovery in sales is being seen in this geography, thanks to a sharper marketing and promotion strategy initiated by the company and product innovations. It recently launched Hit One Push and Hit Expert Aerosol, the response for which has been encouraging.

The company has now started localising manufacturing in Africa for the wet hair care segment. This will bring down costs, give flexibility in product sizing and improve margins in the near to medium term. Overall, the outlook for most geographies, according to the company, is sanguine. For the quarter ended December 2017, consolidated net sales (in constant currency terms and assuming GST in the base quarter) moved up by 11 per cent over the December 2016 quarter to ₹2,604 crore. Net profit grew 22 per cent to ₹430 crore.

EBITDA (operating) margin came in at 23 per cent, compared with 21.5 per cent last year.

This was partly helped by a 320-basis-point expansion in margin in India due to better product mix and cost-saving initiatives.

Although higher crude oil prices may lead to input cost escalations in the coming quarters, the company expects prices of palm oil, another key raw material, to remain stable.

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