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A long gestation turnaround

Godrej delivered a price-led growth quarter (+8% YoY) with 4% growth in India volumes (3-year CAGR; down 6% YoY though). HI had a weak quarter and price increases in personal wash impacted offtake. Hair Colors had a good quarter though. Margin trajectory further weakened (RM and also mix-led) but is likely to have bottomed out. In the international markets, the trajectory continues to be similar, with double-digit growth in GAUM while Indonesia continued to be impacted by high base (Sanitor) and weak demand environment. Results of category development have become a key marker for (GCPL’s) stock performance. In HI, new communications and continued resilience in nonmosquito portfolio are other key positives. We like the (1) cut in price of Jumbo Fast Card coupled with on-ground activities, (2) pushing Goodknight Activ Plus to drive upgradation, (3) extending powder-to-liquid format to body wash and (4) sachet pack of Expert Crème. The confidence on success in personal wash is high (new formats) and we believe GCPL can also have a bigger play in fabric care. Maintain ADD

* Volumes continue to be weak, on expected lines: Consol sales growth of 8% YoY with 3-year CAGR of 10%. India business was up 12% YoY (3-year-CAGR of 12%). Volume was down 6% (up 4% on 3-year CAGR). In personal care (+25% YoY), both personal wash and hair colour reported good performance but the former was more price-led. Home care had a muted quarter (down 4% YoY) given weak HI season and high base. Rural markets witnessed slower growth compared to urban. Gross margins contracted 560bps YoY to 46.6%. Overall EBITDA was down 13% YoY given RM pressure and increased ad spends. India EBITDA margins contracted 360bps YoY to 22.4%. Ad-spends were normalized (up 43% YoY on absolute basis and +150 bps YoY as % of sales). We note that employee costs were down 27% YoY and 6% QoQ. Consol net profit was down 16% YoY to Rs3.5bn.

* International – decent performance in Africa while Indonesia woes remain: Indonesia sales were down 12% in CC terms; ex-Sanitier the decline was 4% (in CC). GAUM grew 12% in CC terms and 11% on 3-year CAGR basis. In terms of EBITDA margins, Indonesia margins were down 810bps YoY to 15.3% (high base, RM pressure and investments) while Africa margin were down 160bps YoY to 8.3% (mainly higher investments).

* Optimistic outlook given some respite in RM pressure: Management believes that the inflation pressure abating, and recovery in consumption and gross margin is expected. In terms of market shares, Godrej Continues to gain share in all most categories fabric care (where it has marginal presence). We note that in Dec-21, the company had highlighted the agendas of category development and increasing penetration. It had also highlighted EBITDA margin recovery trailing gross margin given the plan to increase media and distribution investments.

* Valuation and risks: Our earnings estimates are largely unchanged for FY24E; modelling revenue / EBITDA / PAT CAGR of 10% / 15% / 13% over FY22-24E. Maintain ADD with an SoTP-based revised target price of Rs950 (prior: Rs900). At our target price, the stock will trade at 42x P/E multiple Mar-24E. Key downside risk is structural deceleration in India household insecticides and steep input cost pressure.

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