Stock Fundamentals

Godrej Consumer Products: Gaining colour - BUY

Parvatha Vardhini C | Updated on October 07, 2018 Published on October 07, 2018

A portfolio leaning towards premium products boosts prospects

With the bellwether indices plunging, many large-cap stocks have nose-dived in recent times, presenting an opportunity for long-term investors.

Godrej Consumer Products (GCPL), a solid player, spells one such opportunity. The stock has lost over 25 per cent since it touched its one-year high of ₹979.8 on September 3. This correction has brought down the stock’s consolidated PE now to about 40 times its trailing 12-month consolidated earnings, from over 50 times in the beginning of September. Peers such as Hindustan Unilever, Dabur and Marico trade at much higher valuations of 50-60 times.

A sustained recovery in volumes post transition to GST, presence in under-penetrated segments such as household insecticides (HI), hair colour and air fresheners, and a portfolio leaning towards premium products favour GCPL.

 

 

 

Considering that the market is highly volatile currently, investors could accumulate the stock in phases, and on any further drop as well.

Strong domestic growth

GCPL derives 50-55 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 bounced back with aplomb, recording a healthy volume growth since then. The company clocked a volume growth of 14 per cent in the first quarter of this fiscal.

Over the last year, price cuts in segments such as soaps and hair care, triggered by lower GST rates for these products, have played a major role in improving volumes.

What is noteworthy is that the HI segment, which has been an Achilles’ heel for the company in the past few quarters, has bounced back this fiscal. In the three months ended June 2018, the HI segment recorded a revenue growth of 17 per cent. In the earlier quarters, the company had either seen a fall in revenues or only a low to-mid single-digit revenue growth in the segment.

The introduction of premium products such as personal repellents and fabric roll-ons, as well as the launch of Goodknight Power Chip to upgrade coil users, has helped the segment gain colour.

 

 

 

To improve penetration of higher-margin products such as personal repellents and fabric roll-ons, the company has introduced low-unit packs to encourage trials. With several recent launches and with some more lined up for the next few months, the good run in the HI segment is likely to continue.

Other premium products such as cream-based hair colour (Expert Rich Crème) and BBLUNT range of hair-care products are ringing the cash registers, too. The company has strengthened its ‘naturals’ portfolio in hair care by introducing herbal hair-colour powder. New product lines, led by home and car air fresheners (Aer), have seen strong revenue growth of over 20 per cent over the past several quarters. With a penetration of less than 10 per cent, this premium segment, too, offers great potential.

Encouraging global outlook

Africa and Indonesia are two of the biggest overseas markets for the company. GCPL has been facing headwinds in Indonesia, especially in the HI business in 2017-18, with revenue growth dipping every quarter. Some recovery in sales is seen in this geography, thanks to a sharper marketing and promotion strategy initiated by the company, and product innovations.

In the latest June 2018 quarter, the Indonesia business clocked 10 per cent revenue growth in constant currency, led by HI. Recent launches such as HIT One Push and HIT Expert Aerosol have seen encouraging sales, and helped the company regain market leadership position.

Though the business in South Africa faced some rough weather in the June quarter, the rest of Africa has done well.

Excluding South Africa, the Africa business grew in double digits in constant currency terms. The company has been making efforts towards expanding its wet hair-care products there, which fetch higher margins. To bring down costs and have greater flexibility in product pricing, it has started localising manufacturing in Africa for the wet hair-care segment.

Financials

For the quarter ended June 2018, consolidated net sales (in constant currency terms and assuming GST in the base quarter) moved up 10 per cent over the June 2017 quarter to ₹2,449 crore. Adjusted net profit grew 36 per cent to ₹313 crore. Consolidated EBITDA (operating) margin came in at 18.3 per cent, compared with 15.9 per cent last year.

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

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