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Clear emphasis on achieving double-digit volume growth

Reiterate our bullish view and retain GCPL as our top pick

In his first detailed interaction after taking over as CEO in Oct’21, Mr. Sudhir Sitapati touched upon GCPL’s growth prospects. The key takeaways are as follows:

* The focus is on double-digit volume growth in the medium term: There was a clear emphasis on driving double-digit underlying volume growth (UVG) in the medium term. This would be achieved through: a) 50% coming from penetration gains in 50% of the portfolio, b) 15% from moderate market share gains in 50% of the portfolio, c) 25% from consumption-led market growth, and d) 10% from disruptive innovation.

* Key strengths of GCPL in Mr. Sitapati’s view: The new CEO emphasized on GCPL’s core strengths of innovation, quality obsession, and a very frugal cost mindset. He also highlighted its other strengths: robust processes, good market distribution (which is somewhat urban-centric), and a top notch portfolio, with potentially high growth core categories and geographies.

* Weaknesses that GCPL needs to work on: There was a candid admission on the key weaknesses that GCPL will work on under his tenure. These include:

a) Relative inability to drive category development as highlighted by the fact that penetration has plateaued (between 13% and 28%) in categories where GCPL is the market leader;

b) High complexity as having many SKUs leads to a lack of focus on the core business. GCPL’s inventory is at 1.7x higher than ideal levels and hence SKU reduction will be a key focus area. The India business has 500 SKUs, but most stores maintain only 12 SKUs;

c) Inadequate global collaboration on successful launches; and

d) Culture of frugality in investments: Investments have been lower, particularly in advertisements, than Indian and global peers.

* Margin improvement and inventory reduction: The management guided at an EBITDA margin improvement of 150-200bp and significant inventory reduction in the medium term.

* Areas of progress: Two areas where he has seen impressive progress of late is: a) healthy domestic volume growth in the last 18 months, and b) GAUM (Africa) and LatAm businesses are turning around – both of which were problem areas earlier. While he did call out significant underperformance in FY16-20 on an overall basis, the areas of encouragement are: a) the Soaps business in India, which continues its record of market share gains, and b) impressive progress in the Dry Hair business in various parts of Africa, especially Ghana.

Valuation and view

* After maintaining a Neutral view on GCPL for 10 years, we turned bullish on its prospects earlier in FY22 as highlighted in our upgrade note of May’21. We reiterated our view in our detailed note of Jun’21.

* Even before Mr. Sitapati took over the reins, there has been some bright spots with: a) an impressive improvement in the last 18 months of double-digit volume growth accruing in the high margin and high RoCE domestic business, and b) signs of a recovery in Africa and LatAm. Capital allocation has also seen a significant improvement in recent years, with RoCE expected to touch nearly 20% for the first time in a decade in FY22E.

* Mr. Sitapati has taken cognizance of strengths in its portfolio and is set to undo mistakes made in the past. We believe the management’s target of double-digit volume growth is achievable, given: a) increasing investments to drive penetration levels, b) rising marketing spends, and c) reduction in current complexity caused by a large portfolio.

* After the May’21 announcement of Mr. Sitapati’s appointment as CEO, the stock touched a high of INR1,139 in mid-Sep’21 and has subsequently corrected by ~22%. Subsequently, valuations of 40.4x FY23E EPS are attractive, given the potential earnings growth of over 15% (after a breather in the near term on account of transient commodity cost pressures). Valuations are at a significant discount to its Staples’ peers on an average.

* There is no change to our EPS forecasts. We maintain our Buy rating on the stock with a TP of INR1,150 per share (valuing it at 45x Mar’24E EPS), implying an upside of 30% from current levels.

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