Hold Godrej Consumer Products Ltd For Target Rs.910 - Emkay Global
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Weak margins drive earnings miss
GCPL posted in-line sales growth of 8% to Rs33bn in Q3. EBITDA/PAT fell 1-2% and were 5-7% below our estimates. India sales rose 8%, but EBITDA fell 3%. Africa sales/EBITDA grew by 13%/18%. Indonesia reported flat sales and a 16% decline in EBITDA.
Management plans to maintain its focus on category development for the next 12 months. It expects India volumes to improve ahead, with healthy gross margin expansion and moderate gains in EBITDA margin in FY23. We estimate a 130bps gain over FY23-24.
Africa is seeing a consistent improvement, and distribution expansion in the region remains GCPL’s priority. Indonesia remains weak, and while the core business is seeing a revival, high comparables of the hygiene segment are likely to result in muted growth in the near term.
Near-term earnings growth is likely to remain muted due to high cost pressures and weak consumption demand. Maintain Hold with a TP of Rs910 on 38x Mar’24E EPS (vs. 40x Dec’23 earlier). We marginally reduce the target multiple to account for higher COE.
Steady 8% domestic growth (2-year CAGR 9%) led by personal care: Consolidated sales rose 8%, with 13%/10%/8% growth in Africa/Latam/India. Indonesia saw flat sales, affected by weak macros and high comparables of the hygiene segment. India growth was led by 12% growth in personal care, largely driven by strong pricing in soaps. Hair colors had a soft quarter due to a sharp price increase and a high base. Home care grew just 3% on high comparables, which were influenced by Covid tailwinds. Management plans to focus on category development and expects volumes to improve ahead. In Indonesia, core is growing well but a high base of the hygiene segment continues to affect sales growth.
Margin pressure due to high palm oil prices; expects medium EBITDA margin expansion in FY23: Gross margins were down 440bps yoy/up 90bps qoq, led by 600bps decline in India gross margins. Overhead costs and ad spends were flat yoy for the quarter. Africa margins continued to see an improvement, up 60bps yoy, driving 18% EBITDA growth. Indonesia margins declined 410bps yoy, resulting in a 16% decline in EBITDA. Indonesia margins are expected to improve sequentially in Q4 but will be lower due to a high base in Q4FY21.
Concall highlights: Overall, management expects healthy expansion in gross margins and moderate gains in EBITDA margins in FY23, as some spending will be increased toward brands. Indonesia is seeing green shoots of revival in the core business. Excluding hygiene, sales grew in mid-single digits; HI and air freshners remained positive, whereas baby wipes faced challenges. In India, HI and hair colors gained share during the quarter. The focus will be on category development for the next 12 months
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