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Broad-based growth in domestic Home Care and Personal Care

GCPL released its pre-quarterly update for 3QFY22. Here are the key highlights:

* Macros: Demand trends remained stable in GCPL’s categories and across the key countries that it operates in. The quarter saw high input cost inflation, with lower volume growth and higher price growth.

* In India, GCPL expects to deliver near high single-digit sales growth (doubledigit two-year CAGR), mostly driven by price increases. Sales growth was broad-based in the Home Care and Personal Care categories.

* In Indonesia, GCPL expects a marginal decline in constant currency (CC) sales. The management continues to drive category development. It expects to achieve a gradual recovery in GT distribution in the short term.

* In GAUM (Godrej Africa, the US, and the Middle East), the growth momentum continued across most key countries that it operates in. It expects to deliver CC sales growth in teens (double-digit two-year CAGR), with a focus on driving sustainable profitable sales growth.

* At the consolidated level, GCPL expects to deliver near high single-digit sales growth, with a double-digit two-year CAGR. It remains on track for achieving double-digit sales growth as seen in 9MFY22.

* Operating margin is expected to improve sequentially, but remain lower YoY due to unprecedented cost inflation. With a focused strategy of driving category development, the quarter would see higher marketing spends, which would result in a pressure on operating margin.

* Valuation and view: GCPL has been performing consistently well in various large categories in the past year. Even before Mr. Sitapati took over the reins, there have been some bright spots with: a) an impressive improvement in the last 18 months on double-digit volume growth accruing in the high margin and high RoCE domestic business, and b) signs of a recovery in Africa and LatAm. Capital allocation has also seen a significant improvement in recent years, with RoCE in FY22E expected to touch nearly 20% for the first time in a decade.

* As highlighted in our recent analyst meet note, CEO Mr. Sudhir Sitapati has taken cognizance of GCPL’s portfolio strengths and is set to correct past mistakes. His targets of double-digit volume growth are achievable, given: a) increasing investments to drive penetration levels, b) raising marketing spends, and c) reduction of complexity currently caused by a large portfolio.

* Valuations at 37x Mar’24E EPS are attractive given the potential earnings growth of over 15% (after a breather in the near term on account of transient commodity cost pressures). Valuations are at a significant discount to the average of its Staples’ peers.

* There is no change to our EPS forecasts. We maintain our Buy rating on the stock, with a TP of INR1,150 (valuing it at 45x Mar’24E EPS), an upside of 21%.

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