Buy Godrej Consumer Products Ltd For Target Rs.1,075 - Motilal Oswal Financial
Improving prospects for the GAUM business
GCPL organized a conference call, led by Mr. Dharnesh Gordhon (Business Head – Godrej Africa, USA & Middle East), to discuss its business performance and strategy for the GAUM region. Here are the key highlights:
Competitive intensity
* Over the past one-year, big players emerged stronger in key geographies.
* The management’s drive to improve product availability and boost distribution has already resulted in early gains.
* It has increased product availability and distribution. Currently, its coverage has grown by over 2.5x from CY20 levels.
* The next phase of growth will be driven by the broadening of its portfolio. It is already seeing a massive acceleration in its FMCG portfolio.
Business mix
* The US constitutes 20-25% of the overall business, and primarily caters to the Wet Hair category.
* In GAUM, West Africa (i.e. Nigeria and Ghana) accounts for 30-35% of the business, followed by South Africa (at 25-30%), Kenya, and smaller nations.
* From a category perspective, 55% is Dry Hair and the rest is FMCG, of which Wet Hair is a major part.
Margin
* If the current currency exchange rate was similar to that two-to-three years back, margin would have expanded by 600-700bp.
* At present, GCPL has a far more profitable portfolio mix.
* Despite an improving sales mix, margin is expected to improve by only 150bp due to higher raw material and freight costs and forex fluctuations.
Growth
* Over the past 10-12 quarters, both the Dry and Wet Hair category is growing at double-digits in Africa.
* In Nigeria, GCPL currently has a presence in ~80k stores from ~10k stores at the end of CY20. The aim is to increase direct expansion to cover 120k stores by the middle of CY23.
* This was achieved by expanding the key distributor model using an ecosystem of sales vans, motorcycles, and salon ambassadors. These sales vans are also used to drive GCPL’s sub-distributor model.
Simplification of the business
* Given the breadth of GCPL’s product portfolio, there is a need to rationalize the number of SKUs to achieve on-ground simplification.
* Customers need a value proposition in two-to-three SKUs. Except for the US, the other entire clusters will probably have ~2,000 SKUs.
* In Kenya, GCPL has already halved the number of SKUs.
* The whole momentum in reducing complexity and increasing productivity is on track, but is differing across markets.
Hair Extension
* GCPL is experiencing a lot of changes in this market, with the impact of inflation and its impact on consumer income resulting in challenges.
* Its focus is on improving the sourcing of raw materials and manufacturing. It is coming up with new styles, which are more value-based than discretionarybased.
* The management’s focus will be more on the core as compared to high fashion.
HI
* HI is a USD800m market in Africa.
* The management said HI is a developed category in South Africa and a tough market to operate in.
* Nigeria offers a huge opportunity. GCPL has launched differentiated products, with these products seeing good traction.
* It has started manufacturing products in Nigeria, which provides it an added advantage. Most of its African products are manufactured in Nigeria.
* Its market share gains appear promising as it has come in a very short time and given its differentiated portfolio (Power Shot).
* LV is going to be extended to East Africa.
Working capital
* Inventory levels are expected to decline across GUAM. *
* The management’s focus will be on receivables (especially in certain parts of Africa, where it is currently higher).
Valuation and view
* The commentary on GCPL’s GAUM business is improving, with the management guiding at a margin expansion of 150bp YoY in FY23, despite an adverse currency exchange rate. Excluding the same, the improvement in margin would have been 600-700bp.
* Increasing salience of the FMCG business and growing distribution in the GAUM region will provide better sales and earnings visibility over the medium term.
* Better capital allocation, a moratorium on acquisitions, and an improved performance in the GAUM region was already witnessed before the new CEO took command in Oct’22.
* As investments by the new CEO are aimed at boosting growth in the high margin, high RoCE domestic business, its medium-term earnings growth outlook remains strong.
* GCPL remains among our top picks in the Staples space. Valuations, at 37.5x Sep’24E EPS, are attractive, given the potential earnings CAGR of ~16% over FY22-24. We maintain our Buy rating with a TP of INR1,075.
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