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Recovery evident, long way to go for a turnaround

After the analyst meet to discuss the domestic business in Dec’20, the management of Godrej Consumer Products (GCPL) conducted another analyst meet to discuss the progress in its Africa business with Mr. Dharnesh Gordhon, who joined as Business Head – Africa, Middle East and USA on 1st Apr’20. Before joining GCPL, he was President, Director, and CEO of PT Nestle Indonesia and Managing Director and CEO of Nestle Nigeria.

Key highlights from the interaction

* The Africa business has reported a promising rebound, led by macro factors; better Go-to-Market (GTM) initiatives, leading to better terms for retailers; and getting the price-to-value equation right.

* Mr. Gordhon admitted that a lot of work still needs to be done. Work on turning around core geographies would be an 18-month process, with others scheduled for the next stage after that.

* The target is to first achieve double-digit sales growth and eventually 17-18% margin in 4-5 years (using levers like pricing, operating model changes, scale, and premiumization), thus ensuring that the business is not dilutive to consolidated margin (21.6% in FY20).

* From a geographical perspective, he feels the company needs to grow further in Nigeria as it is the largest market in Africa. He wishes to tap the US market better by catering to the African American population. He also sees a lot of under-realized potential in South Africa.

* Mr. Gordhon believes in placing a lot of onus on local management teams across geographies due to their local knowledge. He wants to encourage a mindset of collaborative work and discipline. He sees change as a natural process and looks to achieve more with less. He aims to ensure that there is discipline in execution.

* There are no changes to our forecasts. For a business that has: a) seen substantial deceleration in the pace of earnings growth in recent years, and b) where medium-term prospects aren’t considerably better and RoCE (~15% in FY20) consistently below peers in recent years, valuations of 38.3x/33x FY22E/FY23E are fair. As highlighted in our detailed note in Jun’19, GCPL’s performance across geographies has been patchy, with overseas businesses performing particularly poorly on the RoCE front. Pace of domestic sales growth has weakened in recent years, including a patchy performance in 9MFY21 when two of its key segments – Soaps and Household Insecticides (HI) – witnessed favorable tailwinds. Maintain Neutral.

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