Improved Traction in Domestic Biz; Upgrade to BUY
Godrej Consumer Products (GCPL) posted an encouraging set of numbers in 2QFY18 on the back of strong performance in domestic business. While consolidated revenues came in at Rs25bn, marginally lower than our estimate of Rs25.2bn, EBITDA grew by 12.4% YoY to Rs5.2bn and net profit by 12.6% YoY to Rs3.6bn, ahead of our estimates of Rs4.9bn and Rs3.4bn, respectively. While reported consolidated sales grew by 6% YoY, net sales on constant currency comparable basis grew by 10% YoY. Consolidated EBITDA margins improved by 120bps YoY to 20.2%. Standalone performance was even more encouraging with 10% growth in revenues and 21% growth in EBITDA and net profit.
Strong new product pipeline, recovery in international business and improving product-mix should enable GCPL to post 13% revenue and 18.5% earnings CAGR through FY17-19E. Valuations at 36.4x FY19E earnings appear to be reasonable considering that the stock has been trading at average forward multiple of 38.5x in past three years. Hence, we revise our recommendation on the stock to BUY from HOLD with a revised Target Price of Rs1,120 (from Rs999 earlier).
Soaps Segment Aids Domestic Business
Domestic business grew by 11% YoY in 2Q, while the underlying volume grew by 10% YoY. Domestic growth was led by soaps segment, which witnessed 26% YoY growth in revenues led by strong double-digit volume growth. Volume growth was also aided by passing on the benefit of lower GST rates to the consumers through price cut. Household Insecticide (HI) reported 4% YoY revenue growth, which was impacted by higher base effect (18% growth in 2QFY17) and weakness in coils segment (more dependence on wholesale channel). Hair colour business too reported 4% YoY growth in revenue with strong growth in hair crème but weak performance in economy segment of hair powder.
Mixed Growth in International Business
International business saw 2% YoY sales growth, which grew by a strong 9% YoY in CC terms. Adjusted EBITDA margin improved by 10bps YoY to 17.3%. Indonesian business witnessed 7% YoY de-growth in CC terms due to higher sales promotion spends in HI segment. Latin American and European business reported sales growth of 30% and 15%, respectively in CC terms.
Outlook & Valuation
Increasing our earnings estimates by 4.5% for FY19E, we expect GCPL to post consolidated revenues of Rs105.1bn/Rs118.3bn and net profit of Rs15.2bn/Rs18.3bn in FY18E/FY19E respectively. We believe that enhanced product-mix across categories, continued cost saving initiatives and improved performance in international business would drive growth for GCPL in coming years. Valuations at 36.4x FY19E earnings are reasonable considering average forward multiples of 38.5x in past three years. Hence, we revise our recommendation on the stock to BUY from HOLD with a revised Target Price of Rs1,120 (from Rs999 earlier).
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