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Revenue outperformance coming at the (shortterm) cost of (seemingly unavoidable) gross margin challenge

We believe Godrej Consumer now provides (1) better visibility on (improved) revenue trajectory based on several interventions (undertaken) and (2) can (potentially) surprise through new initiatives. That said, the margin normalisation can take some time given the intense pressure.

Q2FY22 was decent (in the current context) with 9% YoY domestic revenue growth (4% YoY volume growth), continued profitable recovery in Africa while Indonesia was weak. India growth was driven by soaps and hygiene (continued market shares gains in an inflationary environment) and HI (broad-based across formats) while Hair Colour continued to recover well. Africa sales grew 16% YoY (CC terms) and margins expanded (to 11.9%) driven by scale and cost-saving initiatives. Indonesia down 2% YoY (in CC terms) due to weak macros.

We believe strong growth momentum is likely to continue driven by (1) acceleration in India HI (innovations in burning formats should recruit consumer and upgrade to premium formats), (2) recovery in Indonesia (more a macro issue as trajectory was good prior to Covid), and (3) profitable turnaround underway in Africa. We believe GCPL is looking at a bigger play in fabric care. ADD.

* Decent performance in the current context: Consolidated revenue grew 9% YoY with 2-year CAGR of 9.7%. EBITDA was down 2% YoY with controlled opex partly offsetting high GM pressure; PAT was up 5% YoY. India business sales grew 9% YoY with 2-year CAGR of 10% and volume growth of 4% YoY. Home care grew 7% YoY on the back of high-single digit growth in HI – (1) Intense rains in some regions weighed on demand, (2) Dengue fear did aid demand, (3) Jumbo Fast Card has been scaled up nationally and is seeing good growth. Within home care, (1) other segments of air fresheners and fabric care also saw gradual recovery and grew in double digits, (2) ProClean range of home cleaners continued to scale up. Personal care grew 12% YoY with calibrated price increases being taken to mitigate high RM pressure in soaps. Hair Colours also continued to perform well with double-digit growth. It highlighted continued market share gains in soaps.

Domestic EBITDA margins declined by 320bps YoY to 24.6% due to major input cost pressure – gross margins down 820bps YoY (3/4th of the inflationary impact is due to palm oil). Rationalisation of operating costs curtailed EBITDA margin contraction.

* International – strong performance in Africa while Indonesia woes remain: International business sales grew 7% YoY with 1% EBITDA growth YoY. Indonesia business was down 2% YoY in CC terms, continued to be impacted by adverse macroeconomic factors and high competitive pressure. On the other hand, robust recovery continued in GAUM (Africa, USA, and Middle East) with revenue growth (CC) of 16% YoY (15% YoY on reported basis). Management highlighted (1) strong growth in southern and west Africa and (2) continued GTM initiatives in key countries.

* Valuation and risks: We cut our earnings estimates by ~9-2% for FY22-23E; modelling revenue / EBITDA / PAT CAGR of 11% / 14% / 13% over FY21-23E. Maintain ADD with an SoTP-based revised target price of Rs1,075 (prior: Rs1,100). At our target price, the stock will trade at 48x P/E multiple Mar-23E. Key downside risk is structural deceleration in India household insecticides and steep input cost pressure.

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