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In line result; continuation in sales momentum encouraging

* GCPL’s 1QFY22 sales were in line with our estimates, while EBITDA margin was slightly better than expected, despite higher than anticipated gross margin pressures due to a lag between commodity cost increases and price hikes taken by the company.

* Continued double-digit two-year CAGR in the key domestic segments of Household Insecticides (HI) and Soaps, as well as improving performance in Africa were particularly encouraging highlights.

* We maintain our Buy rating as pieces of the growth puzzle that were missing earlier are gradually falling into place as highlighted in our detailed note on the company in Jun’21 as well as our upgrade note.

Result broadly in line; slight beat on EBITDA margin

Consolidated performance

* Consolidated net sales grew 24.4% YoY to INR28.9b (in line) in 1QFY22. EBITDA grew 29.3% YoY to INR6.1b (est. INR5.8b), PBT rose 36.8% to INR5.4b (est. INR5.2b), and adjusted PAT increased by 38.4% to INR4.2b (in line). Net profit, without exceptions and one-off items, grew 38% (as per the press release).

* Consolidated comparable constant currency sales grew 25% YoY in 1QFY22.

* Home Care/Personal Care grew 14%/29% YoY.

* Gross margin contracted by 210bp YoY to 52.2%.

* As a percentage of sales, higher ad spends (+60bp YoY to 5.1%), lower staff costs (-120bp YoY to 10%), and lesser other expenses (-230bp YoY to 15.9%) led to EBITDA margin expansion of 80bp YoY to 21.1% (est. 20.3%).

Balance Sheet highlights

* As of Jun’21, GCPL’s net debt stood at INR5.9b v/s INR20.7b in Jun’20 (INR7b in Mar’21).

Highlights from the management commentary

* The domestic business reported a sales growth of 19% YoY in 1QFY22 and two-year CAGR of 12%. Both key domestic categories of HI and Personal Wash witnessed double-digit two-year CAGR (absolute numbers not shared separately). The management is positive about good growth ahead.

* The Indonesia business appears to be doing better in Jul’21, the only market/category which underperformed in 1QFY22. Hygiene products are doing well because of the second COVID wave.

* GCPL raised prices by 4-5% in 1QFY22, with some categories witnessing high single-digit or double-digit price hikes. There was a lag between commodity cost increases and price hikes, which affected gross margin in 1QFY22, but is unlikely to be as much of a factor going forward, especially after further calibrated price increases.

* It launched Jumbo Fast Card in Maharashtra to compete against incense sticks and drive category penetration. While the current fast card versions burn for three minutes, the Jumbo Fast Card burns for 40 minutes and is effective for four hours similar to incense sticks.

* It has seen a very good response to the HI category launch in Nigeria.

Valuation and view

* There is no material change to our forecast as the result was largely in line with our estimates.

* 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 also 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, along with: a) better capital allocation efforts in 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 a sharp increase in penetration levels in the Hand Wash category.

* While the stock has rallied nearly 40% post the announcement of Mr. Sitapati’s appointment, this spurt is just the first step of what could be a 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.

* Valuing GCPL at 45x Sep’23E EPS, we arrive at our TP of INR1,140, a 17% upside to its CMP.

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