Our Take:

Godrej Consumer Products Ltd (GCPL) is a part of the over 123-year-old Godrej Group. The group enjoys the patronage of 1.15 billion consumers globally across its businesses. GCPL is present in emerging markets of Asia, Africa and Latin America and the company’s product portfolio ranges from home care, personal care to hair care. GCPL is ranked among the largest household insecticide and hair care players in the emerging markets. In household insecticides, GCPL is the leader in India and Indonesia and is expanding its footprint in Africa. GCPL ranks second in soap products in India, first in air freshener products in India and Indonesia, and is the leader in wet tissue products in Indonesia. Given the nature of daily essentials that the company has been manufacturing for years and its presence in major emerging economies, there is growth visibility seen just on the basis of macro factors like demographics, geography, etc. The company has a strong product portfolio and brand established with a very capable management. International business accounts for ~45% of its turnover.

Valuations and Recommendations:

We believe there is tremendous potential for long-term growth in emerging markets. This will power global consumption and growth over the next couple of decades. GCPL moved from 50% soaps portfolio in FY09 to a more balanced, strategic portfolio over the last decade. The company has centered its growth strategy on targeting these markets and the emergent consuming class. As incomes increase, purchasing power improves and these markets will mature. The new distribution systems will enable greater reach and, to leverage this, GCPL is ramping up their go-to-market strategy. GCPL launched 45 products across geographies in Q1FY21 and plans to launch more products in Household insecticide (HI) portfolio. Domestic HI business, which has struggled, (revenue has declined 1% on CAGR basis over FY16-20) could see strong rebound owing to consumers’ increasing preference for disease prevention products (in wake of COVID-19 breakout). The management is focusing on value proposition offers to consumers and consistent innovative launches to gain market share. The company’s business recorded strong sequential recovery across most of its markets and expects to deliver close to low double-digit year-on-year constant currency sales growth in JulySeptember. The business fundamentals could get normalized by Q3 and a strong recovery is anticipated in FY2022. The management commentary suggests a sharp revival in structural earnings momentum after 3 odd years of flat growth. GCPL has grown dividend payouts at a fast rate even as its RoE remains at a high level. We believe the company is a good play in the FMCG sector. Investors can buy the stock on dips to Rs.696-700 band (40xFY22E EPS) and add more in the Rs.641-645 band (37xFY22E EPS) for a base case fair value of Rs.758 (43.5x FY22E EPS) and a bull case fair value of Rs.809 (46.5xFY22E EPS) over the next two quarters.

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