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Tracking well on numbers and even better on quality

GCPL’s 1QFY24 report was healthier on quality overall. To quote CEO Sudhir Sitapati, EBITDA margin of the business is now slightly higher than four-year ago level even though gross margin is relatively lower and ad-spends in the business are higher. GCPL’s domestic A&P of 12.5% of sales is now higher vs any of its HPC peers including HUL – this speaks of the seriousness of its category development intent. Domestic organic volume growth of 10% was on a soft base but 4-year volume CAGR at c.5% was still amongst the highest in the sector – HI had double-digit volume growth this time, helped by a favourable season and sustained market-development activities. Both Africa and Indonesia had accelerated growth alongside margin improvement. The overall gross margin recovery was also much sharper especially in India where GPM expanded 11ppt – a significant part of which was used to fund the higher A&P. On the flip side, the newly acquired Raymond FMCG is still a WIP and likely to stabilise only in 2H. Plus, currency issue in Nigeria would create some headwinds in FY24 financials. Be that as it may, we believe the execution machinery being put in place is yielding good results with improvement in underlying metrics across geographies alongside higher cash generation. GCPL remains a favoured pick.

* Inline revenue; sharper recovery in GPM was used to fund a steep step-up in ad-spends: GCPL’s 1QFY24 consolidated sales, EBITDA and adjusted net profit grew 10.5% (8.9% ex-M&A), 28% and 19.3% to INR34.2bn, INR6.8bn and INR 4.1bn. India sales grew 8.7% (6% organic) with underlying volume growth of 10% (base was down 6%). International business saw further recovery with revenue growth of 13% (CC growth >20%) – Indonesia is starting to perform well after the structural interventions taken in recent times. Africa’s financial metrics would, however, face some headwinds going forward due to the severe depreciation of the Naira - management estimates this to have a 200bps impact on consolidated growth. GCPL’s overall gross margin progression was way ahead of our forecast, with GPM up 726bps yoy during the quarter led by India where GPM expanded 1129bps due to easing input-costs and better sales-mix. A large part of the benefit was, however, invested back with A&P spends being stepped up further in India (nearly doubled vs year-ago level). Consequently, operating margin expansion of 274bps yoy to 19.9% was lower than what we expected. India EBITDA grew c.20% while International EBITDA growth was much higher at c.57% helped by good recovery in both Indonesia & Africa margins.

* Most businesses did well during the quarter with the exception of the newly-acquired Raymond consumer business which is still WIP for now: 1) India organic growth of 6% was led by Home-Care with HI growing both volumes and value in double-digit. Soaps growth, on the other hand, was impacted by price-unwinding to pass on input costs savings to consumers. 2) The newly-acquired Raymond business is still WIP for now. Revenue was impacted by sales returns and lower primaries to streamline distributor inventories, and the business clocked a loss that nearly equalled the quarter’s revenue. These adjustments could still take another quarter or so. 3) Indonesia’s growth appears to be back on track after the structural initiatives taken last year. 4) Africa grew well (+16% CC) in 1Q with good recovery in margin but currency-related issues would be steeper in the coming quarters.

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