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Quite a lot of work still needs to be done

GCPL’s Mar-Q report was weak with the entire disappointment vs our expectation emanating from a very weak margin profile in the Africa geo that had otherwise been remarkably steady so far. Indonesia remains a work-in-progress and management expects that 3QFY23 is when signs of recovery would be visible - this perhaps is a sign of the extent of the problem out there; the region appears to have totally ignored trade-related discipline (channel pipelines, etc) over the recent few years. There is a lot of anticipation about how the company would be re-staging the India HI business to spur growth therein - ‘category-development’ being the key theme set by CEO Sudhir Sitapati here, as it is for the company as a whole. We believe the market would hereonwards look for signs of positive turnaround in some of the businesses before it again starts to assign a ‘new CEO’-premium to the stock. We keep our faith – the execution machinery being put in place will yield fruits over the medium-term though stock is likely to be lacklustre till some signs of success start to become visible.

Weak overall earnings delivery during Mar-Q: GCPL reported 7% growth in sales to INR 28.9bn but EBITDA and adjusted net profit declined 12.6% and 9.4% to INR 5bn and INR 3.4bn. Profits were 8-9% below expectations with nearly half of the shortfall emanating from inventory pilferage in South Africa. In fact, the entire shortfall vs our EBITDA forecast emanated in the Africa geo due to a very weak margin profile therein (details below). GCPL’s overall EBITDA margin declined 388bps to 17.4% vs 21.2% LY (21.4% in 3Q) with c.80bps impact due to the pilferage in Africa. India EBITDA margin expanded 98bps yoy (vs very sharp compression seen in each of the last four quarters) but was down qoq. As per management, the pain in India margin would have been behind had commodity costs not flared up further in March due to the geo-political tensions plus the ban on palm oil exports by Indonesia (decision on reversal of the ban taken earlier today). Hyperinflation in some of the key commodities notwithstanding, management continues to target margin expansion for FY23 on the premise that some of the costs would come off through the course of the year (our forecasts assume c.60bps margin decline in FY23E

Three key factors to watch out for: 1) Indonesia delivered a shock in Mar-Q with CC revenue down 16% and EBITDA down 48%. Margin came off from 35% LY to 21.2% during the quarter. GCPL’s CEO did allude to the issues in Indonesia even on earlier occasions; he, in fact, called out the region as a problem-area three times in three earlier interactions. Given that it is an area that seems definitely top of his mind, we reckon that finding a solution to the same would already be a task that is high on the priority list. 2) Africa continued to deliver double-digit CC growth (14% in 4Q) but margin was a big letdown this time. Compared to double-digit levels seen in most of the recent quarters, the region reported just 1.1% margin this time round – down 900bps yoy of which 300bps was due to the pilferage, 300-350bps due to commodity costs pressure not yet passed on to consumers and balance 250bps on account of higher marketing spends (Exhibit 2). The company continues to target 300-400bps of margin expansion in the region over the coming few years. 3) HI continued to underperform in the India business. A lot more initiatives to drive growth in the category are expected to be unveiled over the coming few months. This is one area that needs a quantum-leap in order for it to drive overall company-level growth.

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