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Not many signs of a turnaround just yet but keeping the faith

GCPL’s Jun-Q’s profitability was way lower than we anticipated. India HI, and Indonesia businesses remained very weak, which along with steep input-costs pressure (India far worse vs International) and sustained uplift in A&P spends impacted operational profitability for the quarter in quite a significant manner. Management had earlier alluded to costs-moderation in 2H driving margin expansion and that aspect is playing out fine (palm-oil prices since down >35%). The other aspect on 2H is also that the pain in Indonesia would be behind and the geo should be off to a fresh start by then. These aspects, along with sustained benefits from costs-savings, should turn margin into a tailwind in 2H vs a headwind so far. More importantly, however, GCPL needs to definitely win this ‘special situation’ (viz. ‚new CEO-led business turnaround?) through a decisive uptick in business fundamentals on the plank of the ‚category-development? theme. We expect the execution machinery being put in place to yield the desired results over the medium-term. GCPL remains one of our favoured picks

Steeper-than-expected compression in gross margin drove ebita to a way lower level vs our forecast:

GCPL’s 1QFY23 consolidated sales grew 8.1% to INR30.9bn while EBITDA and adjusted net profit fell 12.8% and 16.5% to INR5.3bn and INR3.5bn respectively. Sales was in-line with what management guided to earlier. India grew 11.9% yoy (entirely pricing-led as volumes fell 6% yoy) while International growth was just 3.3%. EBITDA, however, declined 12.8% yoy (>10% below our forecasts) with margin down 413bps - a function of a much sharper degree of compression in gross margin (-558bps vs JMFe -375bps; India GPM significantly worse-off at -655bps due to very steep inflation in the Soaps business). The other factor was A&P spends that rose 36.8% during the quarter - India A&P +42.8% and International +27.9%. A&P growth, whilst way higher than our forecast of a 20% increase, is in-line with management’s stated objective of driving category development. The pressure from A&P was offset by focused-savings from other overhead lines that fell by 4% in aggregate – Staff Costs lower by 10.6% and Other Expenses flat yoy.

The positives: Africa, India Personal Care continued to grow well:

1) Africa continued its steady performance with 12% CC growth (3y CAGR in double-digit at 11%). EBITDA margin of 7.7% was still disappointing, whilst much better vs Mar’22-Q’s 1.1%. Management attributed the sub-normal margin to higher marketing investments. 2) India Personal Care sales grew 25.3% with 3y CAGR at 14% and was helped by deepened penetration, innovations and share gains in Soaps, and elements of category-uptick in Hair-Colour. Growth was, however, pricing-led given the steep price-hikes necessitated in the Soaps business. India business, in fact, had a blended pricing-growth of c.19%

The negatives: India HI remained a weak spot and Indonesia continued to deteriorate

1) Indonesia remained weak and was down 12% in CC terms. High component of hygiene sales in the base was one factor, but even on ex-Saniter basis, the geo’s revenue declined 4% CC. Scale deleverage, commodity inflation and high marketing spends led to an EBITDA margin compression of 800bps yoy and 620bps qoq to 15% - the lowest reported since FY15 for the geo that has had margins >30% in a few quarters in the past. 2) India Home Care revenue down 3.5% due to sustained weakness in HI. The muchawaited re-stage and new initiatives on HI are yet to be unveiled.

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