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Building blocks in place to capitalize on recovery

The management of Godrej Consumer Products (GCPL) held an Analyst Meet with Mr Akhil Chandra to discuss the progress in its Indonesia business.

Here are the takeaways:

Key highlights from the interaction

* The Indonesia business has been seeing gradual recovery in demand post the second COVID wave despite a tough macroeconomic situation.

* Given the recent bold economic reforms implemented by the Indonesian government, Mr Chandra is confident GCPL has the building blocks in place to capitalize on these reforms and deliver double-digit profitable growth over the medium term.

* The management aims to drive growth in its largest segment, Household Insecticides (HI), through democratization and premiumization. Furthermore, it would do so by gradually occupying whitespaces within the category by migrating consumers to aerosols and electrical products, wherein it has a stronger presence.

* Hygiene now accounts for 10% of GCPL Indonesia’s sales – fairly impressive given GCPL Indonesia’s recent entry into the segment. The management is now leveraging its Saniter brand and moving into personal care categories, such as soaps and personal wash with powder-to-liquid and liquid formats.

* Project RISE seeks to dramatically increase GCPL’s direct reach as well as SKU throughput per outlet. GCPL’s direct reach now stands at 160,000 outlets (from 100,000 earlier). It also has a distribution strategy in place using agents/distributors that now cover 40,000–50,000 outlets. The management believes a 200,000 outlet direct reach is ideal.

* While there has been an increase in some input costs, the scope for price increases is limited, and the management has focused on cost savings and a better mix to offset inflation.

* There are no changes to our estimates. As highlighted in our recent note, GCPL has been performing consistently well in various large categories in the past year, even before the new CEO has taken over (likely in Oct’21). Mr. Sitapati’s appointment is an important piece of the puzzle, unlocking the path to strong earnings growth for GCPL. This comes along with a) better capital allocation efforts in recent years, b) the appointment of a new head in the – erstwhile, significantly underperforming – GAUM business (largely Africa), with good initial results in the first year of his tenure in FY21, and c) potential tailwinds in domestic soap and personal wash products – led by more frequent usage since COVID-19 – and a sharp increase in domestic penetration levels in the Hand Wash category.

* Maintain BUY, with TP of INR1,250/share (45x Dec’23E EPS).

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