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All round sales growth proving elusive

* Overall sales growth was in line with our expectation. While sales in Soaps and the Africa business was healthy, the same in Household Insecticides (HI) disappointed for the second consecutive quarter. Macroeconomic worries are affecting performance in Indonesia. While FY21 initially promised to be stellar due to favorable outlook for Soaps, Hygiene products and HI, it now seems barely likely to cross double-digit growth despite a weak base in FY20. In its analyst meet in Dec’20, the company indicated that more work needs to be undertaken for all-round growth.

* With gross margin pressure due to steep palm oil cost increase not fully passed on and likely higher ad spends going forward (after a 140bp reduction YoY in 9MFY21), operating margin is unlikely to sustain close to record highs of recent quarters.

* The single-digit EPS trajectory over the past five years is not expected to change materially over the next few years. RoCE at less than 20% is also much lower than its peers and is unlikely to improve materially going forward. Thus, our valuation of 41.4x/35.7x FY22E/FY23E seems fair. Maintain Neutral.

Sales in line; India business volumes grew 7%

* Consolidated net sales grew 10% YoY to INR30.6b (in line). EBITDA grew 12.6% YoY to INR7.1b (v/s our estimate of INR6.7b). PBT grew 14% YoY to INR6.4b (v/s our expectation of INR6.1b), while adjusted PAT grew 10.2% to INR5b (v/s our estimate of INR4.7b).

* Consolidated comparable constant currency (CC) sales grew 11% YoY.

* Gross margin contracted 160bp YoY to 55.1%. As a percentage of sales, higher ad spends (up 10bp YoY to 7.5%), lesser other expenses (down 200bp to 14.9%), and lower staff costs (down 30bp to 9.4%) led to an EBITDA margin expansion of 60bp to 23.3% (v/s our estimate of 22.2%).

* India branded business volumes grew 7% YoY. Sale of Soaps/HI/Hair Color were up 15%/7%/14% YoY.

* International business: On a CC basis, Indonesia declined 2% YoY, while Africa, the US and Middle East (GAUM) together grew 17%. Others (LatAm, Europe and SAARC) grew 35% YoY.

* In 9MFY21, sales/EBITDA/PAT grew 7%/12.1%/8.3% YoY.

* Key Balance Sheet data:

     * NWC days increased by one day YoY to 17 days.

     * Total debt decreased 43.4% YoY to INR20b. Cash and cash equivalents fell 36.7% YoY to INR9.7b. Net debt-to-equity stood at 0.14x at the end of 3QFY21.

Highlights from the management commentary

* The management said it will continue to prioritize growth over margin.

* It is disappointed by the 5% growth in HI in India. The burning format did not work as well as it had expected and is banking on innovations to revive category sales.

* Indonesia was affected by weak macro and high competitive intensity due to new players adopting a price-volume strategy in the Wet Wipes segment.

Valuation and view

* The topline growth outlook appears hazy for both domestic and international businesses. There is no indication of any material improvement in the pace of earnings growth at 13.3% CAGR over FY20-23E (despite the weak base of 9.8% EPS CAGR for the preceding five years). This, despite the favorable factors creating a tailwind in FY21 for Soaps and HI: the company’s two largest domestic businesses.

* For the first half of the decade, it reported 21.7% EPS CAGR, which halved in the second half. GCPL delivered a meager (9.8%) earnings CAGR, with an even more modest (3.7%) sales CAGR during FY15-20. Neither the 3QFY21 result, nor the management commentary, indicates a sharp revival in earnings momentum.

* In addition to the sustained weak earnings growth, GCPL's RoCE of less than 20% is far lower than its peers.

* We maintain our Neutral rating with a TP of INR800/share (40x Dec'22E EPS)

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