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Pieces of the growth puzzle coming together

* Transformational changes likely: As stated in our upgrade note four weeks ago, we regard the appointment of Mr. Sudhir Sitapati as MD and CEO from Oct’21 as a potential transformational change for GCPL’s prospects. In that note, we highlighted: a) weak domestic sales growth in the last five years; b) Mr. Sitapati’s pedigree, experience, tenure of his appointment as CEO, as well as his young age, enabling potentially significant extension of tenure; c) how new CEOs with a fresh thought process have led to structural change in the earnings prospects of Consumer companies like BRIT, NEST, JUBI, and HUVR over the last 15 years; and d) how the low penetration in Household Insecticides and Hair Color offers a high growth opportunity. All these factors led us to upgrade the stock to Buy after over a decade of maintaining our Neutral rating.

* Other pieces of the growth puzzle are also coming together: We think Mr. Sitapati’s appointment fills an important piece of the puzzle that is the key to unlocking sustainable topline and earnings growth in GCPL. A few other pieces have also fallen into place in recent years, namely: a) moratorium on big ticket acquisitions and far better capital allocation in recent years, particularly in the international business (~45% of sales); b) sale of the UK business, potential sale (in our view) of the LatAm business, appointment of Mr. Dharnesh Gordhon (former head of Nestle Nigeria) as GCPL’s Africa business head over a year ago, with good initial results; and c) potential tailwinds in Soaps (GCPL’s second largest domestic segment, contributing ~18% to consolidated sales in FY21) and the broader Personal Wash category, leading to higher growth and significant premiumization, which was proving elusive in this category over the last decade.

* Delving into the factors behind the underperformance, recent changes and prospects: In this note, we delve further into: 1) the underperformance of each domestic segment in the past five years compared to the past, and the reasons why the growth potential is high, 2) how the potential tailwind in Soaps could lead to much higher topline growth, 3) what has happened after Mr. Gordhon took over as CEO of the Africa business and his targets, and 4) what has GCPL done in recent years on the capital allocation front.

Valuation and view

* 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 in GCPL’s fortunes.

* Many of GCPL’s domestic categories have underperformed in recent years, despite low penetration levels. As a result, domestic sales CAGR for the four years ending FY20 has only been ~3% CAGR.

* Even with a healthy growth of ~14% YoY in FY21, its five-year domestic sales CAGR hovers ~5%. Given its much superior margin and RoCE in the domestic business, this slowdown was a key factor behind weak consolidated earnings CAGR of ~8% in the past five years.

* Mr. Sitapati’s appointment fills another important piece of the puzzle that unlocks the path to strong earnings growth for GCPL, along with: a) better capital allocation efforts isn recent years, b) appointment of a new head in the erstwhile significantly underperforming GAUM (largely Africa) business, with good initial results in the first year of his tenure in FY21, and c) potential tailwind in Soaps and Personal Wash products, led by more frequent usage post COVID-19 and sharp increase in penetration levels in the Hand Wash category.

* While the stock has rallied nearly 20% on the announcement of Mr. Sitapati’s appointment, we believe this spurt is just the first step of what could be 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 like BRIT, NEST, JUBI, and HUVR. There are no changes to our modest earnings growth forecasts of ~8%/16% in FY22E/FY23E as we await the path to growth that the new CEO unveils when he joins in Oct’21. Valuing GCPL at 45x Jun’23E EPS (40x Mar’23E earlier), we arrive at our TP of INR1,020, a 19% upside to its CMP.

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