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Disappointing domestic performance — maintain REDUCE
Godrej Consumer Product’s (GCPL) 4Q consolidated sales were down 3% yoy to Rs 24.53bn, 5% below EE. India volumes grew only 1% yoy as (a) domestic HI continued to reel under unfavourable seasonality and increased salience of incense sticks and (b) soaps sales were hit by delayed summers. International business grew in double digits led by the Indonesia business. Consolidated EBIDTA was down 3% yoy to Rs 5.78bn (in line with EE). Consolidated gross margins at 58.7% contracted 31bps yoy but expanded 241bps qoq. We expect volume growth for GCPL to remain muted in 1HFY20 due to weakness in the domestic HI segment and a high base for the domestic personal wash category. We pare FY20/FY21 estimates and believe a domestic business recovery is still some time away. Maintain REDUCE with a Mar’20 TP of Rs 650 (Rs 653 earlier) set at 40x TTM EPS of Rs 16.2.
Domestic biz delivers another disappointing qtr; corrective actions to take time in yielding results:
Domestic volumes grew only 1% during 4QFY19. Domestic HI segment declined 6% yoy (two-year CAGR: -6%) amid unfavorable seasonality and increased salience of incense sticks in the overall HI segment. Management has taken corrective actions to bring the domestic HI segment back onto the growth trajectory through the launch of neem-based incense sticks; however, we believe it would be difficult to gain meaningful scale in a short span of time given the strong presence of unorganized players. The personal care segment slid 1% yoy on a high 4Q base despite market share gains. Hair colors grew 7% yoy in 4Q led by Godrej Expert Rich Crème as pricing wars have cooled off in the crème segment — a major revenue contributor in domestic hair colors for GCPL.
Indonesia biz recovery continues; Africa biz disappoints:
During 4Q, international business recorded 10% yoy CC growth adjusted for the UK business sale. The Indonesia business delivered strong and profitable CC growth of 14% yoy led by HI and air fresheners, while adjusted EBITDA margins improved 360bps yoy on account of cost savings and operating leverage. GAUM reported weak CC growth of 5% yoy as sales were partially hit by 2-3 weeks of shutdown in Nigeria due to elections. Darling relaunch and scale-up of the wet hair care portfolio remains on track. Success in the Africa business remains the key for GCPL in international business.
Valuations & view:
We believe GCPL is likely to face headwinds in the short-to-medium term, especially on the domestic front. Domestic HI (~45% of India business) continues to face challenges as it undergoes a structural change due to higher prevalence of incense sticks, unfavorable seasonality and government initiatives on cleanliness. Growth trajectory for the soaps segment is slowing down due to price cuts and a high base. International business remains unpredictable owing to competition and a weak macro. We maintain REDUCE on the stock with a Mar’20 TP of Rs 650 set at 40x TTM EPS of Rs 16.2. Key risks: Higher-than-expected volume growth, stable raw material costs.
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