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Soft quarter with margin and Indonesia headwinds, all eyes on new CEO’s strategy; maintain ADD

Our view

GCPL had a soft quarter with weak growth in its key HI category and a decline in sales in Indonesia in addition to a sharp decline in profitability due to palm and crude inflation which could not be fully passed on. Strong pricing‐led growth in soaps, recovery in hair color and fresheners and improved performance in Africa were key positives. HI should continue to do well with increasing penetration and category innovation (Jumbo Fast Card scale‐up), share gains should continue in soaps and other categories should see steady growth. Africa business and LATAM & SAARC are picking up well with improving operating efficiency while lackluster Indonesia business performance remains a concern. We believe portfolio scale‐up in under penetrated categories like HI and hair colors, entry into newer categories in India and pruning down some unprofitable international businesses can alter long term growth trajectory towards double‐digits. Margins seems to have bottomed out in India in 2Q and should normalize by 4Q. A revamped strategic roadmap by the new MD & CEO Sudhir Sitapati would be keenly watched. We maintain ADD rating despite near‐term headwinds given multiple potential re‐rating triggers for the company.

Result Highlights

* Result highlights – Revenue growth of 8.5%, India business growth of 10% with 4% volume growth on a base of 5%, Gross margin contracted 620bps given 830bps decline in India business, EBITDA margin came in at 20.8% vs 23.1% YoY due to the gross margin fall partially offset by savings across all other cost items.

* India segmental growth – 4%/10% volume/value growth in India led by 7% growth in Home care and 12% in Personal care, single‐digit growth in household insecticides; hair color back to pre‐COVID levels, air fresheners still below.

* International markets – Revenue growth of 7% driven by constant currency growth of 16% in GAUM, 11% in Latam/SAARC while Indonesia was down 2%.

* Outlook – 3Q margins to remain under pressure, 4Q should se normalization with another round of price hikes in December, confident of sustaining growth in double‐digits led by increased penetration innovation initiatives albeit it would be pricing‐led in the near term.

Valuation

We build in revenue/EBITDA/PAT growth of 10%/11%/12% over FY21‐24E. We trim our estimates by ~2% to factor in margin headwinds in the near‐term in addition to weak growth in Indonesia and lower our TP to Rs 1,070 but maintain our ADD rating based on 45x FY24E earnings, in‐line with peers like Marico, Dabur, TCPL.

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