Resilient Performance but Valuations Pricey
Godrej Consumer Products (GCPL) has posted an impressive performance in 4QFY17 with its consolidated revenues, EBITDA and consolidated net profit growing by 11.8% YoY, 19.3% and 22% to Rs23.8bn, Rs5.4bn and Rs3.8bn, respectively. While its domestic business grew by 10% YoY, international business revenues increased 16% YoY during the quarter. However, organic growth (in constant currency terms) in international business stood at 6%.
We expect GCPL to post consolidated revenue and earnings CAGR of 12.4% and 16.9%, respectively through FY17-19E. However, as valuations at 36.9x FY19E earnings offer no meaningful upside from the current levels, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs1,846.
Decent Performance in Domestic Biz
In domestic operations, branded volume growth stood at 5% YoY in the quarter. The HI segment grew by a modest 4% YoY, which the management attributed to erratic weather in the Northern India. However, on the positive front, the brand continues to gain market shares across all formats. Hair Colour segment reported double digit volume-led sales growth of 13% YoY with the highest ever market shares, while revenue from soaps segment increased by 9% YoY on the back of 5% volume growth, price increase and withdrawal of consumer offers.
International Biz Sees Modest Organic Growth
In constant currency terms, GCPL’s international business posted an organic revenue growth of 6% YoY to Rs11.7bn. Indonesian business reported flat constant currency sales at Rs3.9bn, while African business reported revenues of Rs4.8bn buoyed by SON acquisition. Higher gross margins, improved-mix and cost saving initiatives led to 150bps YoY increase in EBITDA margins to 19.6% for the international business.
Margin Gain in International Business
Consolidated gross margins improved by 250bps YoY to 56.5% in 4QFY17, mainly due to international business. Quarterly A&P spends remained flat at Rs1.6bn, although they fell 70bps YoY to 6.5% of sales. Employee cost also declined by 40bps to 10.4% of sales. The resultant EBITDA margins rose by 140bps YoY to 22.7%. Domestic business and international business recorded 19% YoY and 22% YoY growth, respectively in EBITDA during the quarter.
Outlook & Valuation
We expect GCPL to post consolidated sales of Rs104.6bn and Rs116.8bn and net profit of Rs15.3bn and Rs17.8bn in FY18E and FY19E, respectively. Based on expected EPS of Rs52.3, the stock currently trades at 36.9x FY19E earnings. Although we remain positive on GCPL’s strong brand positioning, market leadership and management bandwidth, valuations at current levels look stretched, in our view. Hence, we maintain our HOLD recommendation on the stock with an upwardly revised Target Price of Rs1,846 (based on 35x FY19E earnings).
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