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In line result, investment case remains strong

* GCPL’s 2QFY22 result was in line with our expectations. While rising material costs could lead to a sequential EBITDA margin contraction in 3Q, the management is positive of a more normalized margin by 4QFY22, given the forthcoming price increases.

The investment case as highlighted in our upgrade note in May’21 and a detailed note in Jun’21 is intact. The positive trend on double-digit domestic sales that was restarted in FY21 (after a lackluster second half in the previous decade) has continued in 1HFY22. The good work on the Balance Sheet front in recent years also continued in 1HFY22, with RoCE crossing 20%. The Africa business recovery, albeit at an early stage (only 1o.5 years int its five-year plan), is also encouraging. All of this makes the task of the new CEO relatively easy, enabling him to focus on further driving domestic growth.

* With the stock retracing some of its gains, valuations at 44.7x FY23E EPS are attractive. GCPL remains our top pick in Staples. We maintain our Buy rating.

Results in line; volumes in the India Branded business grew 4%

* Consolidated net sales grew 8.5% YoY to INR31.6b (in line). Two-year sales CAGR was healthy at 9.7%. EBITDA/PBT was flat YoY at INR6.8b/INR6.1b (in line), while adjusted PAT grew 4.8% to INR4.8b (in line).

* Consolidated constant currency (cc) sales grew 9% YoY in 2QFY22.  Home Care/Personal Care grew 5%/10% YoY.

* Gross margin contracted by 620bp YoY to 49.8%. As a percentage of sales, lower ad spends (-120bp YoY to 6%), staff costs (-100bp to 8.1%), and other expenses (-200bp to 14.2%) led to an EBITDA margin contraction of 160bp to 21.5% (in line).

* Sales/EBITDA/PAT grew 15.6%/12.6%/6.6% YoY in 1HFY22.

Highlights from the management commentary

* The management has taken calibrated price increases in the Soaps and nonSoaps portfolio, which will benefit GCPL in 3QFY22. The sales mix will also be better in 3QFY22, with liquid Detergent sales being higher in winter. Further price increases will come into effect in Dec’21. The management said these increases in Dec’21 will be ‘bolder’.

* As the steep increases (over 50%) in palm oil prices will be difficult to completely pass on in Soaps, higher price increases in other segments could help mitigate the margin impact to some extent.

* EBITDA margin will be back to normalized levels by 4Q after a possible impact in 3QFY22. Gross margin though may have troughed in 2QFY22.

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