Hold Godrej Consumer Products Ltd For Target Rs.1,030 - Emkay Global
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Indonesia update – Growth recovering gradually
* GCPL hosted an interaction with Mr. Akhil Chandra, Business Head - Indonesia, to give an update on the company’s performance and strategy in Indonesia. The Indonesia business, which contributes ~16%/20% to GCPL’s revenues/EBITDA, slowed down in FY21 due to macroeconomic/Covid-related headwinds. GCPL expects the business to recover gradually and achieve double-digit growth.
* Management highlighted steady performance and market share gains in home insecticides (HI) and the success of its Saniter brand in the hygiene space, which contributes ~10% of revenues. Air fresheners, which were hit hard, have been recovering since Q1, while high competitive intensity in wet wipes has been addressed through price/pack interventions.
* GCPL expects to defend its high operating margins (28%) through savings in media costs and the rising GT/e-commerce share (more margin accretive vs. MT) which is likely to offset inflationary pressures. GT direct reach is likely to increase from 160,000 to 200,000.
* Our estimates are unchanged as we already factor in a recovery in the Indonesia business. At 49x FY23E EPS, the stock appears fairly valued. Retain Hold with a TP of Rs1030.
Business recovering post second wave; management targets double-digit growth: Management indicated a steady HI business with market share gains. The focus is on democratization and premiumization in HI (upgrade consumers from coils) and also stepping up the non-mosquito portfolio. Saniter, its hygiene brand, has seen a wide success and now contributes ~10% of revenues. Management is expanding the hygiene portfolio under Saniter to sustain growth even after Covid-led demand wanes. The wipes business was affected by high competition, which was addressed through strategic sizing and pricing initiatives.
Margins expected to be steady: Management remains confident of maintaining high operating margins (28%; up 500bps in 5yrs). GCPL expects a consistent reduction in its media costs, currency gains, improving product mix and Project Pi-Cermat (cost savings initiative) to support operating margins ahead. The rising share of GT and e-commerce (margin accretive vs MT) is also expected to offset inflationary pressure and support margins.
Strengthening GT and E-commerce: Through Project Rise, management indicated an improvement in GT share by 200bps. GCPL expects to increase GT direct distribution from 160,000 to 200,000 while increasing its throughput in existing outlets. It remains focused on solidifying its pharmacy channel and driving e-commerce in both B2C and B2B segments. Ecommerce is likely to contribute 2% (from zero) of sales in FY22 and 3% in FY23. The use of analytical software has improved order booking, promotion planning and execution quality.
Fairly valued; retain Hold: Our forecasts remain unchanged and factor in the gradual recovery in Indonesia. Valuations at 49x FY23E EPS offer limited upside. We retain Hold with a TP of Rs1,030 (45x Sept 23 EPS).
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