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New leadership offers scope for transformative change

We view Mr. Sudhir Sitapati’s appointment as MD and CEO of GCPL as a potentially transformative event in the fortunes of the company.

* Mr. Sitapati comes with impressive experience in heading HUVR’s F&R business and as part of the senior management team in the Detergents business, which have done very well under his tenure and where marketing campaigns in both segments have had a high value impact.

* His appointment as MD and CEO for five years, as well has his relative young age (mid-40s), gives him adequate time to formulate and implement strategic changes.

* The underpenetrated Household Insecticides (HI, ~70%/50% penetration in urban/rural) and Hair Color (~30% penetration) categories could greatly benefit from Mr. Sitapati’s past experience, where GCPL has struggled to boost penetration.

* GCPL’s consolidated performance has been weak for the past five years, both financially as well as on the stock price return front. As highlighted in our detailed note a couple of years ago, the company has had a problem with continued weak growth, sub-10% RoCEs in the international business (~45% of sales), and slower growth in its domestic business in recent years.

* Valuations, which are deservedly at a discount of ~10% to largecap Staples peers, given the weak growth and lower RoCE, will change with the potentially transformative changes that Mr. Sitapati can usher in. The impact of these would first be visible in the form of higher multiples and then subsequently in terms of earnings as well.

Upgrade to Buy

* As highlighted in our Mar’21 note, there are early signs of the laggard African business turning around in recent quarters under a new divisional CEO who took over in FY21. The Indonesia business currently faces macro headwinds, but is a better run business both on margin and RoCE compared to the rest of the international business. While margin were lower than expected in its 4QFY21 result declared on 11th May’21, topline growth and debt repayments are impressive. There is no material change to our operating estimates.

* If Mr. Sitapati is able to strongly grow the domestic business and usher better capital allocation, the impact on GCPL’s prospects can be immense. Over the last 13 years, there have been several examples in the Consumer sector where induction of a new CEO, with a fresh perspective, has had a transformative effect on prospects of those businesses. After more than a decade of being Neutral on the company (downgraded to Neutral in Aug’10), a stand that has been vindicated particularly in the past five years, we are upgrading the stock to Buy. It is admittedly an early call, but if its businesses start to perform and there is further rationality in capital allocation, there could be significant gains for investors, with a significant re-rating as well. We upgrade the stock to Buy with a TP of INR870 (40x FY23E EPS instead of 35x earlier).

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