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Price hike to counter inflation and margin pressure

Godrej Consumer Products Ltd (GCPL) is one of India’s leading home-grown household & personal care company. It also has presence in other countries like Indonesia, Africa, US, Middle East, among others

* Revenue grew 6.8% YoY to Rs. 2,916cr in Q4FY22 driven entirely by pricing. 3

* EBITDA margin declined -380bps YoY to 17.2% due to higher commodity inflation and weak performance in Indonesia. GCPL posted Q4FY22 PAT of Rs. 384cr (-10.7% YoY).

* We expect the business to continue its growth momentum with improvement in the margins as the company has taken measured price hikes to counter inflation. Hence, we upgrade our rating to BUY on the stock with a revised target price of Rs. 878 based on 39x FY24E adj. EPS.

Sales growth driven entirely by pricing

Revenue grew by 6.8% YoY to Rs. 2,916cr in Q4FY22. The growth within the quarter was driven entirely by pricing. Home Care declines by 7% (2-year CAGR 8%). Strong growth momentum continues in Personal Care with 18% growth (2-year CAGR 22%). Geographically, Domestic revenue grew by 9%, with a two-year CAGR of 21%. Sales was largely driven by pricing. Indonesia delivered a particularly weak performance with sales declining at 15%, driven by tough market conditions. LATAM and Africa witnessed strong growth with LATAM growing upwards of 30% and Africa growing in the mid-teens..

Margins shrink due to inflation

EBITDA decreased to Rs. 502cr in Q4FY22 (-12.6% YoY) as EBITDA margin was down by 380bps YoY to 17.2% due to higher commodity inflation and weak performance in Indonesia. The silver lining in India however has been that EBITDA grew by 14% with EBITDA margins expanding by 100bps to 23.6%, while gross margins declined by ~410 bps, again due to higher commodity inflation. Indonesia EBITDA margin declined to 21.6% with operating EBITDA at a loss of Rs. 48cr. Africa, however, had very poor margins due to an unfortunate theft of inventory in South Africa. Overall EBITDA margins in international business decreased by ~820 bps YoY to 10.7% owing to weak performance in Indonesia

Key concall highlights

* In April, Co. launched Godrej Expert Rich Cream at INR15 to drive penetration of the creme format by recruiting the early grey consumer moving in middle in rural India and accelerating new trials with first time users. 

* Company has dropped Good knight Jumbo Fast Card price from INR15 to INR10 to drive recruitment in the category as nearly a third of new trials are entering the category through incense stick.

* GCPL expects the recent inflation brought about by the Ukraine crisis to hit P&L majorly only in Q1 and expect a relatively sharp drop for this quarter.

Valuation

We expect Company to grow steadily in domestic market as there are early signs of the Indonesian market recovery. Inflation in commodity prices remains a concern, however company has taken measured price hikes to counter inflation. We expect the business to continue its growth momentum with margin expected to improve in future. We expect earnings to grow at healthy 15% CAGR over FY22-24E. We upgrade our rating to BUY on the stock with a revised target price of Rs. 878 based on 39x FY24E adj. EPS.

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