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Sales momentum encouraging; RM worries receding

* For GCPL, the improvement in sales growth trajectory is quite encouraging with the company now attaining double-digit three-year CAGR in sales. The management has maintained its double-digit sales growth guidance with mid-to-high single-digit volume growth.

* Material cost pressures are likely to abate markedly in 2HFY23 but higher media spends, to aid innovation and deepen penetration over the long term, will result in more gradual EBITDA margin improvement in ensuing quarters.

* Sales growth has improved noticeably in recent years along with renewed initiatives because of the strategic refresh to drive category growth in India, as well as expand distribution and reach in GUAM. A sales recovery in Indonesia from 2HFY23 onwards can improve the trajectory further in subsequent years. With the worst of the material cost pressures seemingly behind, FY24E earnings appear to be robust. We maintain our BUY rating with a TP of INR1,080 (premised on 45x Jun’24E EPS).

Sales and operating profit in line with our estimates

* Consolidated net sales grew 8% YoY to INR31.3b (in line) in 1QFY23. Twoyear sales CAGR was also healthy at 15.9%.

* Gross profit declined 3.6% YoY to INR14.6b (in line). EBITDA decreased 12.8% YoY to INR5.3b (in line), PBT dropped 15.9% to INR4.6b (in line), and adjusted PAT contracted 16.4% to INR3.5b (in line) in 1QFY23.

* Consolidated sales in comparable constant currency (CC) rose 9% YoY.

* Gross margin contracted 560bp YoY to 46.6% (est. 48.5%).

* As a % of sales, higher ad spends (up 140bp YoY to 6.4%), lower staff costs (down 170bp to 8.3%), and other expenses (down 110bp to 14.8%) led to a 410bp YoY contraction in EBITDA margin to 17% (est. 16.8%).

* Volumes (consolidated) declined 5% YoY; the three-year CAGR stood at 3%

Highlights from the management commentary

* For FY23, the management continues to guide for double-digit topline growth with low-to-mid single-digit volume growth.

* Indonesia will have a steady-state high single-digit sales growth v/s doubledigit growth in India and Africa (on the same basis).

* Africa business is doing well on topline; however, profitability needs to improve.

* Management expects margin improvement in 2HFY23 led by decline in commodity costs and cost savings.

* There was a disruptive launch of powder-based body wash at INR45. One of the key reasons for low usage of body wash was that it was highly priced at 3x the cost of soaps. However, with this launch, it is now at the same price bracket (i.e. INR45). It will be a margin-accretive product even at this price.

Valuation and view

* Changes to our model have led to 4.2%/7.9% increase in FY23/ FY24 EPS estimates led by gradually improving margin outlook going forward, as intense commodity costs pressures abate and continued double-digit sales drive operating leverage.

* As highlighted in our detailed notes published on Jan’22 and Jul’21, GCPL’s domestic businesses had demonstrated a track record of strong sales growth in the first half of the last decade, before losing their way in the second half.

* Better capital allocation, a moratorium on acquisitions, and improved GAUM performance were already being witnessed before the new CEO joined in Oct’22. Domestic and consolidated sales growth has crossed double-digits in the last two years, far better than the 4.1% sales CAGR between FY16 and FY20.

* With investments by the new CEO focused on boosting growth in the highmargin, high-RoCE domestic business, its medium-term earnings growth outlook is strong. Valuation at 36.3x FY24E EPS is inexpensive. We maintain our BUY rating with a TP of INR1,080 (premised on 45x Jun’24E EPS).

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