Published on 14/05/2021 12:24:35 PM | Source: Yes Securities Ltd

Add Godrej Consumer Products Ltd For Target Rs. 956 - Yes Securities

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Leadership change sets rerating process in motion

Quarter Highlights

* Leadership update – Appointed Sudhir Sitapati as MD & CEO starting October 2021; Sudhir has spent 22 years at HUL in various leadership roles with the last one being the head of HUL’s foods business.


* Result highlights – Consolidated sales growth of 27%, EBITDA margin decline of 200bps leading to growth of 25% and PBT growth of 19%.


* India segmental growth – 35% growth in India led by 38% growth in hygiene (including soaps), 34% growth in household insecticides, 27% in value for money segment and 17% in others.


* International markets – Constant currency growth of 36% in GAUM, 54% in Latam/SAARC and 4% in Indonesia.


* Margins – Overall margin decline of 110bps to 21.2% led by a 500bps fall in India margins given input cost pressures, inventory provisioning, low base on employee costs and higher marketing investments; international business margins up 230bps to 18.9% driven by scale leverage in GAUM and cost-savings in Indonesia.


Valuation and view –

FY22 is now expected to be a strong year for HI and soaps categories given the pandemic returning and aggressive product innovation from the company. With Sudhir Senapati, ex-ED of HUL Foods business joining as CEO and Dharnesh Gordon, ex-CEO of Nestle Nigeria and Indonesia joining as head of Africa business, the top management of the company has been significantly strengthened which should start showing up in numbers from FY23 onwards by way of better execution and supply chain capabilities, portfolio scale-up in under penetrated categories like HI and hair colors, entry into newer categories in India and pruning down some unprofitable international businesses.

We expect a multiple-rerating for the company much earlier than an actual change in financials in anticipation of these positive changes as has happened earlier in companies like Tata Consumer, Nestle and Britannia. The overhang of a promoter CEO giving way to a dynamic and pedigreed professional CEO should be taken positively by investors. While the revenue performance in 4Q was good except in Indonesia, margins surprised negatively due to higher RM costs and ad spends which should normalize in FY22.

While these leadership changes have potential to alter the long-term growth trajectory for the business, for now we are building in a 10%/13%/12% revenue/EBITDA/PAT CAGR over Fy21-23E for the company and assume coverage with an ADD rating with a TP of Rs 956, based on 45x FY23E earnings (vs 42x 5-yr average multiple). Today’s 20% plus up move on the stock has left limited further upside from a one year perspective.


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