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Pieces of the growth puzzle coming together

GCPL is a leading household & personal-care company with presence in India and other countries like Indonesia, Africa, US, Middle East, Etc.

New leadership offers scope for transformative change:

We view Mr. Sudhir Sitapati’s appointment as MD and CEO of GCPL as a potentially transformative event in the fortunes of the company. Under his leadership Hindustan Unilever Ltd (HUVR) built up its Foods and Refreshment (F&R) business as one of the largest in India. It also included the USD5b merger and integration of GlaxoSmithKline Consumer Healthcare (GSKB) with HUVR, the largest deal of its kind in the FMCG sector in India. The underpenetrated Household Insecticides (HI, ~70%/50% penetration in urban/rural) and Hair Color (~30% penetration) categories could greatly benefit from Mr. Sitapati’s past experience, where GCPL has struggled to boost penetration.

Connecting the other growth puzzle:

A few other pieces of puzzle have also fallen into place in recent years, namely: a) Improved Capital allocation: moratorium on big ticket acquisitions and far better capital allocation in recent years, particularly in the international business (~45% of sales); b) Restructuring International Business: sale of the UK business, potential sale (in our view) of the LatAm business, appointment of Mr. Dharnesh Gordhon (former head of Nestle Nigeria) as GCPL’s Africa business head over a year ago, with good initial results. c) India business: the company has emerged as the second largest player in soaps, strengthened its lead in HI, and introduced and scaled up products in the Car/Room Freshener market.

Huge potential tailwinds in Soaps going ahead leading to growth in domestic market:

After many years, FY21 was a good year for GCPL on the domestic sales (55% of consolidated sales) front, with ~14% topline growth, led by its two largest components: Soaps (~33%/~18% of domestic/consolidated sales) and Household Insecticides (~41%/~22% of domestic/consolidated sales). Both these segments grew 15-16% in FY21. GCPL has emerged the second largest player in this category led by higher usage of Soaps and premium Personal Wash products like Hand Washes due to COVID-19. We believe that habit formation over a reasonably pronged period of time is likely to ensure high usage and premiumization of Soaps. Hand Wash penetration has more than doubled to nearly mid-30s from mid-teen levels due to Coivd. All these would significantly contribute to the growth and margin trajectory of GCPL’s second largest domestic business segment.

Valuation and view:

We think that the changes in top management along with: a) better capital allocation efforts in recent years, b) initial good results in GAUM (largely Africa) business in FY21, and c) potential tailwind in Soaps and Personal Wash products - are likely to unlock sustainable topline/earnings growth and revitalization RoCE over the next few years, leading to a sustained re-rating as well. We have seen transformative changes on all these fronts in the past with companies like BRIT, NEST, JUBI, and HUVR. Therefore, maintain our positive outlook on the stock.

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