Household Insecticide sales disappoint; Overall results in-line

* 2QFY21 results were largely in line, despite weaker-than-expected household insecticide (HI) sales due to regional lockdown in Guwahati, which affected the company’s manufacturing operations.

* Price increases taken in soaps due to inflation in palm oil prices should alleviate some of the pressure on overall gross margin.

* The single-digit EPS trajectory over the past five years is not expected to change materially over the next few years. 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 48.9x FY22E seems fair. Maintain Neutral.

Sales and PAT in line; India business volumes grow 3%

* Consolidated net sales grew 10.8% YoY to INR29.2b (in-line). EBITDA grew 18.7% YoY to INR6.8b (v/s est. INR6.5b), PBT grew 21.5% YoY to INR6b (v/s est. INR5.7b), while Adj. PAT grew 9.8% YoY to INR4.6b (in-line). Net profit without exceptions and one-off items stood at INR4.6b (as per press release).

* Consolidated comparable constant currency (CC) sales grew 11% YoY.

* Gross margin contracted 60bp YoY to 56% due to lower ad spends as % of sales (down 100bp YoY to 7.2%), lower other expenses (down 20bp YoY to 16.2%), and lower staff costs (down 100bp YoY to 9.1%). This led to EBITDA margin expansion of 160bp YoY to 23.5% (v/s est. 22.3%).

* India branded business volume grew 5% YoY. Sale of Soaps/Household Insecticides (HI) was up 18% YoY/4%, while Hair Color sales were down 5% YoY.

* International business: On CC basis, sales in Indonesia grew 3% YoY. Africa, the USA and the Middle East (GAUM) together grew 10% YoY while Others (LATAM, Europe and SAARC) grew 46% YoY.

* 1HFY21 sales/EBITDA/PAT grew 5.3%/11.8%/7.2% YoY.

* Consolidated Balance sheet:

* Inventory/payables were up 7.2%/6.3% YoY to INR16.4b/INR25.4b whereas receivables were down 19.4% YoY to INR10.5b. Accordingly, net working capital was down 66.2% YoY to INR1.5b.

* Borrowings were down 53.2% YoY and net debt was down 77.2% YoY to INR2.8b

Highlights from management commentary

* Regional lockdown of 21 days in Guwahati, where the HI manufacturing facilities are located, impacted business.

* Due to rising palm oil prices, GCPL took some price hikes in soaps toward the end of the quarter. PFAD prices currently stand at USD750 levels, up 35- 40% YoY.

* Working Capital days reduced by 12 days to 5 days due to lower receivable days.

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