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Our take

Godrej Consumer Products Ltd (GCPL) is a part of the 124-year-old Godrej Group; it was formed by the de-merger of the consumer products division of the erstwhile Godrej Soaps Ltd in April 2001. Although it was formed in its current form in 2001, it has been operating as Godrej Soaps for over 100 years, in the personal care segment. GCPL, today, has a strong presence in the FMCG industry—across three core categories - personal care, home care and hair care – with focus on three geographies - Asia, Africa and Latin America.

GCPL’s inorganic expansion over the past decade plus in Asia, Africa, the US and Latin America has enabled it to enjoy a diversified revenue profile, with international operations driving ~46% of its consolidated revenue in FY21. This expansion has helped the company in extracting synergies in terms of product cross-pollination and stronger distribution network, besides being able to diversify its product portfolio and geographical reach. Also, at a consolidated level, in FY21, GCPL derived 31% of its revenue from the hair care segment, 30% from the household insecticides (HI) segment, 20% from personal care segment, and 6% from the hair care segment, reflective of a diversified segmental presence.

Its brands such as Goodknight and Hit in home care, Godrej Expert in the hair colouring segment and Cinthol and Godrej No 1 in the personal care segment enjoy market leading positions in the domestic market. Similarly, in international markets, its brands Darling in the dry hair care segment in Africa and Mitu wet wipes and Stella air fresheners in Indonesia enjoy established market positions in their respective regions.

GCPL has a consistent track record of introducing new products to cater to shifting consumer preferences and expects that, going forward, its revenue growth will be driven by stable demand growth and introduction of new products across geographies. Supported by its portfolio of strong brands, constant innovation, and brand repositioning, the company has managed to maintain its competitive position in these key product categories and geographies. It will continue to benefit from its established position in domestic and international FMCG markets.

Valuation and recommendation

In the recent past, GCPL’s stock has underperformed its FMCG counterparts, which can be attributed to mediocre performance of its key domestic categories as domestic sales witnessed meagre growth at ~3% CAGR over FY16-20. However, it witnessed solid 14% growth in FY21, propped by COVID-led tailwinds for household insecticides (HI - up 16% YoY) and soaps (up 15% YoY). The domestic HI business, which has struggled due to rampant competition from illegal incense sticks (revenue declined 1% on CAGR basis over FY16-20), has seen a strong rebound owing to consumers’ increasing preferences for disease prevention products in the wake of COVID-19.

Recent innovations (such as Gold Flash LV, Good Knight Smart Spray, etc.) have been gaining encouraging traction. The high-margin hair colour business, which saw a poor year FY21 due to curtailed spends on discretionary products, is likely to make a strong comeback in H2FY22 with increased social outings as lockdown restrictions ease.

GCPL commands a leadership position in the Indian HI and hair care market; there are many growth opportunities in these two segments as there is a lot of scope to increase penetration levels. Its focus on premiumisation is margin accretive. The COVID-19 pandemic has been a shot in the arm for the hygiene sector and GCPL has left no stone unturned to make the most of this unusual situation, which is also an opportunity. With 45+ launches in the hygiene category (toilet & floor cleaners, hand-wash and sanitizers) scaled up to 4% of sales, it will continue to grow on the back of penetration gains.

On the international business front, Indonesia, which struggled in the past (~-3% CAGR over FY16-18) due to rising competitive intensity and challenging macroeconomic environment, grew at 12.6%/11.2% in FY19/FY20 while curtailed discretionary spends by consumers in air care and wet wipes led to growth falling to ~4% in FY21 though EBIT margins have witnessed a double-digit growth over past five years. Godrej Africa, the US, and the Middle East (GUAM) businesses had been the biggest pain points for GCPL over past few years; however, the appointment of the new CEO for GUAM, Mr. Dharnesh Gordhon, and right strategic initiatives could help it achieve >10% sales CAGR with margins scaling up to 17-18% over the next 2-3 years.

We believe the hiring of Mr. Sudhir Sitapati (from HUL) as the new CEO & MD would be a total game changer. His addition empowers the growth focus of the company and gives us more confidence on its earnings longevity. We expect consolidated topline and EPS to grow by ~12% and ~16% CAGRs respectively over FY21-24E with healthy expansion in RoCE. Also, sustained good performance could increase DII’s ownership (DIIs only hold 3.04% stake vs 14.2% in Nifty 100) and drive the stock’s rerating.

We believe GCPL’s improved execution and new leadership to translate into higher growth. We think the base case fair value of the stock is Rs 1,116 (45.5x Sept’23E EPS) and the bull case fair value is Rs 1,190 (48.5x Sept’23E EPS) over the next two quarters. Investors can buy the stock in the Rs 1,002-1,010 band (41x Sept’23E EPS) and add more on dips to Rs 879-887 band (36x Sept’23E EPS). At LTP of Rs 1,006, it quotes at 41x Sept’23E EPS.

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