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Improved quality of performance

GCPL’s 2Q report was overall as guided by management earlier but the construct is much better in terms of quality: 1) Marked improvement in gross margin (worst of inflation-hit likely behind) but significant resources deployed in A&P (upped 50%) to accelerate categorydevelopment which is the cornerstone of GCPL’s new playbook. 2) Cash from Operations grew c.70% in 1H despite double-digit decline in EBITDA – a function of better SKU management to reduce business complexity. The India HI piece is still WIP, though - job at hand here is to premiumise the category and accelerate LV and aerosols - not an easy task but size-of-prize could be large. Overall, management sounded confident that gross margin lost over the recent inflationary cycle can be recouped, but part of that would be used to structurally take up marketing investments; the hit on this front should be partly made up by savings in other costs. We believe the execution machinery being put in place will yield the desired results over the medium-term. GCPL remains one of our favoured picks.

* Inline overall but better quality; India GPM surprised positively: GCPL’s consolidated sales grew 7% to INR33.6bn; EBITDA, adjusted net profit fell 15.4% and 21.4% to INR5.7bn and INR3.8bn. Sales, EBITDA were broadly as guided earlier but quality was better. India sales grew 8% (entirely pricing-led; volumes down 5%) while International revenue grew 5% (INR terms). Consolidated EBITDA declined 15.4% with margin down 454bps - c.200bps hit from GPM plus c.240bps due to higher A&P. India EBITDA was down 5% but with marked sequential improvement in gross margin. International EBITDA decline remained as steep (-36%). India business arrested its gross margin decline to just 63bps vs -557bps in FY22 and a further 655bps decline during 1Q, and was 248bps better qoq helped by easing input-costs pressure (palm-oil prices swung from +50% yoy for Jun-Q to -9% for Sep-Q though there could be some lag before hitting the P&L). GPM uptick was, however, offset by a very steep hike in A&P (+50% with India +52%), which is inline with the stated strategy to go aggressive on category development.

* India business continued to be driven by Personal Care, no clear sign of recovery in HI just yet: Personal Care sales grew 17.7% with 3Y CAGR at 15.9% (better than 1Q’s 14.2%). Soaps continued to grow well but pricing-led. Hair colours tracking well and grew in high single-digit. The Home-care business, however, remained subdued and grew just 1.6% (3Y CAGR of 3.7% vs 9.6% in Jun-Q). HI uptick is still to be seen - Sep-Q was impacted by delayed monsoon in East and North. Also, there were pantry-stocking in HI during the pandemic in 1H LY - this should not be a challenge in 2H. Non-mosquitos & premium aerosols (c.55% of HI portfolio) saw strong growth momentum, indicating that much of weakness were in lower-end coils and also in LVs.

* Africa continues to track well; Indonesia is likely to take a full four-quarter cycle to start growing again: Africa continued to deliver on revenue with 13% CC growth (similar on 3Y CAGR basis) but EBITDA margin of 8.6% was a let-down though an improvement vs recent quarters. A 54% (140bps) step-up in working media impacted margin this quarter. Indonesia remained impacted by higher hygiene sales in the base. Sales fell 11% CC but was 8% higher for the core categories (vs -4% in 1Q). Scale deleverage, high-cost inventories and high marketing spends led to a margin compression of 930bps and another c.40% yoy decline in EBITDA for the quarter.

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