Add Godrej Consumer Products Ltd For Target Rs.946 - Yes Securities Ltd
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Disappointing quarter due to volume decline and subdued Indonesia business; downgrade to ADD
Our view
GCPL reported a soft quarter both on growth and margin fronts led by a 4% decline in India-home care business, continued sluggishness in Indonesia business and sharp margin fall in international business especially in Latin America and SAARC. Soft growth in its key HI and 12% cc decline in Indonesia business dragged topline despite c.18% price hikes taken by the company. Key positives were strong performance in Home care, Air freshener and Hair care. We expect Africa margin to improve on better growth prospects and strategic initiatives like simplifying business and improving governance. Management indicated that reducing pipeline inventory and media spends in Indonesia business to improve performance from Q3FY23 onwards. HI growth should recover after the recent volatility with increasing penetration, marketing spends and category innovation, 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 should continue into FY23 as well. We believe category development-led scale-up in under penetrated categories like HI and hair colors in India in addition to strong growth in Africa can alter the long-term growth trajectory towards double-digits. We downgrade from Buy to ADD rating due to near-term headwinds and limited upside potential.
Result Highlights
* Result highlights – Revenue growth of 8%, India business growth of 12% with 6% volume decline on a base of +15%, Gross margin contracted 560bps YoY given - 660bps in India business, EBITDA margin came in at 16.7% vs 20.7% YoY largely due to 810bps fall in Indonesia business.
* India segmental growth – -6%/12% volume/value growth in India led by -4% growth in Home care and 25% in Personal care, relatively soft performance in HI, Hair colors and strong performance from air freshener.
Valuation
We maintain our estimates by 3-8% and build in revenue/EBITDA/PAT growth of 11%/16%/13% over FY22-24E with unchanged TP of Rs 946 and downgrade from Buy to ADD rating based on 42x FY24E earnings, in-line with LPA. In addition to potential benefits from the new leadership, re-rating should be seen once volume growth starts picking up in India in addition to a sustainable recovery in the Indonesia business.
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