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Performance trending ahead of expectations; promising outlook

Even before the new CEO has taken over, likely in Oct’21, GCPL has been performing consistently well in various large categories over the past year. As highlighted in our 1QFY22 results note, both key domestic categories of Household Insecticides (HI) and Soaps posted a double-digit two-year CAGR during the quarter.

The sales momentum is also leading to increased asset turns. Consequently, ROCE seems poised to cross 20% levels for the first time in a decade, after languishing in the mid-teens for most of this period.

The outlook remains promising, with the possibility of significant improvements. ROCEs could improve further in case of a) the sales momentum picking up further under the new CEO, b) a further increase in the contribution of the higher margin, higher ROCE domestic business to sales (nearly 2x higher margins in domestic v/s international business), and c) continued efforts to boost margins and ROCEs in the international business.

Maintain Buy, with TP of INR1,250 (45x Dec’23 EPS).

HI and Soaps continue strong momentum

After reporting strong sales in the range of 15–16% in FY21, HI and Soaps (together comprising ~74% of domestic sales) reported double-digit sales growth once again in 1QFY22 (actual number not reported).

HI reported peak sales growth of 0.9% in the four years ended FY20, with three of these years seeing sales decline. Given this performance, the ongoing momentum over the past 15 months is a healthy development.

Similarly, Soaps reported a disappointing 2.8% CAGR in the four years ended FY20. Accordingly, the current improvement is remarkable.

There are no COVID-related factors at play now in the case of HI. In the Personal Wash category, even if the COVID impact abates, the habitual behavior to maintain hygiene inculcated due to the fear of COVID is leading to higher usage. The penetration in Hand Wash is likely to be ~2x pre-COVID levels even going forward.

As highlighted in our detailed note in Jun’21, the longer term track record for both HI and Soaps has been excellent, barring the FY16–20 period – with HI seeing a ~19% revenue CAGR and Soaps a ~11.5% CAGR particularly over FY10–16.

Barring Indonesia, overseas performance has been healthy recently

* While the Indonesia business was flat in 1QFY22, Africa reported a strong twoyear double-digit CAGR. The Africa performance was driven by initiatives undertaken under the new CEO, discussed in our Mar’21 analyst meet note. The LatAm business performance was also healthy in 1QFY22.

* EBITDA growth in Indonesia has been healthy in recent years, but sales growth has been lower than expected. While the lack of growth in Indonesia is more of a macro issue, we believe GCPL’s new CEO, Mr Sudhir Sitapati, who takes over in Oct’21, would have a big role to play in this geography – as he has past experience in Indonesia.

Balance sheet improving

* After nearly a decade of ROCEs in the mid-teens, ROCE is likely to surpass 20% in FY22, led by: a) the recent revival in domestic topline growth, b) an increase in the share of the higher margin, higher ROCE domestic business (57% of consolidated sales in FY21 v/s 55% in FY20), c) the moratorium on big-ticket acquisitions, d) the better utilization of capacity, and e) debt reduction

Valuation and view

Recent trends add to our confidence in the investment case for GCPL.

As highlighted in our upgrade note, we believe that Mr Sudhir Sitapati’s appointment as MD and CEO for a period of five years could have a transformational change on GCPL’s fortunes.

We further highlighted in another detailed note in Jun’21 that Mr Sitapati’s appointment fills an important piece of the puzzle, unlocking the path to strong earnings growth for GCPL. This comes along with a) better capital allocation efforts in recent years, b) the appointment of a new head in the – erstwhile, significantly underperforming – GAUM business (largely Africa), with good initial results in the first year of his tenure in FY21, and c) potential tailwinds in Soaps and Personal Wash products – led by more frequent usage since COVID-19 – and a sharp increase in penetration levels in the Hand Wash category

The stock has rallied nearly 50% since the announcement of Mr Sitapati’s appointment. However, this spurt is just the first step to what could be the potentially massive revitalization of both earnings and RoCE over the next few years, leading to a sustained re-rating as well. We have seen transformative changes on all these fronts in the past with companies such as BRIT, NEST, JUBI, and HUVR.

We continue to value GCPL at 45x, but move forward from Sep’23E EPS to Dec’23 EPS, arriving at TP of INR1,250 (INR1,140 earlier), 15% upside to CMP.

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