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Growth drivers in place

The Godrej Consumer (GCPL) stock has corrected about 17% from its peak. We had earlier highlighted GCPL would have a weak Q2FY22 performance in India HI, Indonesia and margins. However we believe most of these issues are transitory. GCPL will benefit from: i) recovery in demand for personal care led by rising mobility; ii) rising dengue cases, which could drive HI business, but watch out for a harsh winter; and iii) strong performance in the Africa business while corrective actions in Indonesia (aided by soft base) should also help

We continue to be positive on the impact of the new MD & CEO, Mr. Sudhir Sitapati. Maintain ‘BUY’ with a TP of INR1,180.

Decoding the correction

Four reasons for the recent correction include i) In Q2FY22, Home care sales delivered muted growth of 5% YoY, due to a soft performance of HI impacted by extreme weather conditions. ii) Dabur entered liquid vaporisers. iii) Indonesia Sales saw a decline of 2% YoY due to company specific, macro-economic challenges. iv) Inflationary raw materials led to gross margin dip of 616bp while EBITDA margin dipped 201bp in Q2FY22.

New Leadership; growth drivers ahead

Mr. Sudhir Sitapati, new MD & CEO, comes with 22 years’ experience at Unilever. HUL’s systems and processes are a gold standard, and GCPL will benefit from his experience. His top five priorities could, in our view, include: i) Tackle illegal HI players and ramp-up more disruptive innovations in HI. ii) Dial up presence in salons to gain share from L’Oréal in urban India. iii) Close white spaces in health & hygiene. iv) GCPL is still under-indexed in rural. v) Drive more aggression on field, analytics and automation. The focus on bottom-of-pyramid products in HI will help recruit new consumers. New innovations in the HI segment including Jumbo Fast Card will aid revenue growth. Scale up of the personal repellent portfolio is likely too as outof-home consumption comes back.

Outlook and valuation: Just a blip; maintain ‘BUY’

GCPL has the right triggers in place to lead the next leg of growth in spite of a disappointing Q2FY22. Growing demand for personal care and the improving penetration and non-mosquito repellent awareness will help the company. Both home and personal care portfolios continue to see strong innovations at disruptive price points. A few recent examples are Jumbo Fast Card, a slew of launches under the Protekt brand, shampoo hair colour, powder-based hand wash, henna-based hair colour and natural neem incense sticks. Indonesia is likely to gradually recover, whereas Africa continues to perform well.

GCPL’s domestic business remains on a good trajectory as management has been taking corrective actions. We retain ‘BUY/SO’ with a TP of INR1,180.

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