In-line results; Earnings recovery trajectory remains unclear
* Godrej Consumer’s (GCPL) 1QFY21 earnings were in line. Household Insecticides (HI) sales were better than expectations. However, Soaps disappointed with 2% YoY sales decline, despite a favorable environment. Gross margins were below expectations due to an adverse mix. A sharp 46% YoY cut in ad-spends meant that EBITDA was slightly ahead of expectations.
* We do not see any visibility for the single-digit EPS trajectory of the past 5 years to change materially any time soon. RoCE at less than 20% is also much lower than peers and is unlikely to improve materially over the next few years. Thus, valuation of 40.5x FY22E seems fair. Maintain Neutral.
Sales and PAT in line; India business volumes grow 3%
* Consolidated net sales declined 0.9% YoY to INR23.3b (v/s est. INR23.3b). EBITDA grew 3% YoY to INR4.7b (v/s est. INR4.5b), PBT grew 5.9% to INR4b (v/s est. INR3.8b), while Adj. PAT grew 3.3% YoY to INR3b (v/s est. INR3b). Gross margin contracted 290bp YoY to 54.3%. EBITDA margin expanded 80bp YoY to 20.3% (v/s est. 19.5%).
* India branded business volumes grew 3% YoY. All the key categories in domestic business have been very erratic in performance since last seven quarters. HI sales were up 27% YoY while sale of Soaps and Hair color were down 2%/18% YoY.
* International business – Indonesia CC sales were up 5% YoY. Africa, the USA and the Middle East (GAUM) together were down 23% YoY while others (LATAM and SAARC) were up 23% YoY.
Highlights from management commentary
* Primary/secondary sales for 1QFY21 were roughly the same. Inventory at distributor level (end-Jun’20) was at a lower level than the past 18-24 months’ average.
* There has been an impact on illegal incense sticks (HI) because of supply chain issues. Import duty on bamboo sticks from China and Vietnam has increased from 10% to 25%, which has also affected the illegal trade.
* Hair color is the highest gross margin category for GCPL. Sharp decline in Hair color sales coupled with higher input costs for Soaps has led to lowerthan-expected overall gross margin.
Valuation and view
* The structural top line growth outlook appears hazy for both the domestic and international businesses. Hence, there is no indication of any material improvement in the pace of earnings growth at 9.1% CAGR over FY20-22E (similar to the single-digit EPS growth for the preceding 5 years).
* For the first half of the decade, the company reported 21.7% EPS CAGR, which halved over the last 5 years ending-FY20 – GCPL delivered meager 9.8% earnings CAGR on an even more modest 3.7% sales CAGR. Neither the results nor management commentary indicates sharp revival in structural earnings momentum. In addition to the sustained weak earnings growth, GCPL's RoCE of less than 20% is also far lower than peers.
* Consequently, we maintain our Neutral rating with TP of INR665 (38x Jun'22E EPS).
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