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Near double-digit India sales growth led by price hikes

GCPL released its pre-quarterly update for 1QFY23. Here are the key highlights:

* Macros: The Indian FMCG industry continued to remain soft, due to unprecedented commodity inflation, led by price hikes, which impacted volume. GCPL was also impacted by high commodity inflation and underperformance in the Indonesia business. Rural business grew slower than the urban business in 1QFY23. However, a recent correction in commodity prices and the forecast of a good monsoon are encouraging.

* In India, GCPL expects to deliver early double-digit sales growth on a high base and three-year CAGR in early double-digits

* Volumes are expected to drop by mid-single digits on a high base, with a three-year volume CAGR close to mid-single digits.

* Both Personal Care and Home Care categories saw a mixed performance. While the Personal Care category continues to clock strong double-digit growth trajectory, with a two-year CAGR in double-digits, led by Personal Wash and Hair Colors, the Home Care segment witnessed a low single-digit sales drop on a high base, with a two-year CAGR in high single-digits.

* In Indonesia, sales in the Hygiene category sales to decline by high singledigits, led by waning COVID-19 cases and a high base effect. However, sales performance, excluding Hygiene, was largely flat.

* The management continued to see positive sales growth, excluding the Hygiene category in 1QFY23.

* In GAUM (Godrej Africa, the US, and the Middle East), it saw growth momentum across key countries, and is expected to deliver double-digit sales growth in 1QFY23.

* In LatAm, GCPL expects to deliver high teen constant currency sales growth.

* At the consolidated level, GCPL expects to deliver a sales growth in high single-digit and a three-year CAGR in double-digits.

* The management expects to deliver lower operating margin on a YoY basis, led by input cost inflation, upfront marketing investments to drive category development, and a weak performance in the Indonesia business.

* The management also expects a recovery in consumption and gross margin in upcoming quarters, led by softening of inflationary pressures and significant correction in key RMs: palm oil derivatives and crude oil.

Valuation and view

* With investments by the new CEO focused on boosting growth in the higher margin and high RoCE domestic business, its medium-term earnings growth outlook is strong.

* Valuations at 37.4x Mar’24E EPS are attractive, given the potential earnings growth of ~11% (after a breather in the near term on account of transient commodity cost pressures). There is no change to our EPS forecasts. We maintain our Buy rating with a TP of INR975/share (45x FY24E EPS).

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