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Weak India margins lead to earnings miss

* GCPL’s topline grew 27% to Rs27.3bn, in line with estimates, led by 35%/30% growth in India/Africa on low comparables (2-year CAGR of 5.2%/3.6%). Weak India margins led to low growth in consolidated EBITDA/APAT at 21%/20%, missing estimates by 7%/15%.

* Besides low comparables in Mar’20, India business grew strongly by 24% in Jan-Feb’21. Margin decline was higher on account of input cost pressure (320bps) and higher staff and A&P spends, resulting in a 480bps decline in EBITDA margins. Input cost pressure is likely to continue but we expect sequential improvement on pricing actions.

* Africa performance was steady with 30% growth, though margin gains were slightly lower. Indonesia improved qoq with 5% growth. Portfolio and distribution expansion in Africa and improvement in Indonesia macro environment should sustain the improvement ahead.

* We slightly tweak FY22E/23E EPS by -2.5%/+0.5%. The stock’s recent underperformance and hiring of Sudhir Sitapati (ex HUL) as CEO may increase optimism and drive near-term upsides. We await more visible improvement in growth. Retain Hold with a TP of Rs780.

* Overall growth driven by India/Africa growing by 35%/30% on low comparables:

Domestic business grew 35% (2-year CAGR of 5.2%), led by 29% volume increase vs. 15% volume decline in Q4FY20. The HI business grew 34%, led by growth in premium and burning formats. Personal care grew 41%, driven by market share gains and scale-up of new soap launches. Hair Care grew 25% on a base of a 23% decline last year. While the hygiene category may witness tailwinds from Covid-19 again, the hair care category expects headwinds due to its discretionary nature. Indonesia saw qoq improvement with sales growth of 5% (vs. flat sales in Q3). Africa performance was steady with 30% growth on low comparables. Sales in LATAM & SAARC grew 31%. We expect Indonesia to see a gradual recovery, while benefits of portfolio and distribution expansion in Africa should drive better growth and profitability in FY22, in our view.

* India weakens overall margins due to high input prices:

Gross margin declined 200bps to 56% (domestic decline of 322bps), largely impacted by high palm oil prices. EBITDA margins declined by 110bps. Domestic margin decline was higher at 480bps due to higher staff costs and ad spends. Ad spends increased 51% on low comparables and staff costs increased 38% due to bonus reversals last year. With scale leverage and cost saving initiatives, international business saw an increase of 290bps to 19% in operating margin, led by an increase of 260bps/750bps in Indonesia/Africa.

* Await more visible improvement in growth; retain Hold:

We marginally tweak FY22/23 EPS estimates by -2.5%/+0.5%. The stock’s recent underperformance and the hiring of Sudhir Sitapati (ex HUL) as CEO may increase optimism and drive near-term upsides. We, however, await more visible improvement in growth. We retain Hold with a TP of Rs780 (from Rs750), based on 35x Jun’23E EPS.

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