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Market share gain amid weak demand

Godrej Consumer Product (GCPL) remains cautious based on the urban demand outlook as the industry is witnessing a slowdown while rural market demand is gradually improving. Consumer downgrading was visible in the household insecticides (HI) and air care categories. However, GCPL has been gaining market share amid slower growth in soaps and HI. We expect volume and realization growth to improve in the domestic business from Q4, supported by continued market share gains and price increase in soaps. Despite near-term challenges, we projec t a 12% EBITDA CAGR during FY25E-27E, driven by high single-digit sales growth and margin expansion in the domestic and international businesses. Considering near-term challenges, we cut our target P/E to 48x (from 50x) and lower our TP of INR 1,260 as we roll forward to FY27E. We reiterate Accumulate.

Muted performance in HI and personal wash in the domestic business:

Q3 net sales grew 3% YoY to INR 37.7bn, 1.4% ahead of our estimates, dragged by weak performance in India and the African Union (AU) business. In India, sales rose 4%, with flat volume hit by the urban slowdown, inflation-led price hikes in soaps causing trade destocking, and a poor season for HI. While air care and fabric wash achieved double-digit volume growth, and hair color saw mid -single-digit growth, HI was negatively affected by a weak season and muted growth in premium format sales. However, newly launched incense sticks reported robust growth, reaching a high single-digit market share from 5% in Q2. The new liquid vaporizer rolled across channels and is likely to be completed by March 2025 and Q1FY26 would provide more clarity on consumer response. Personal wash faced mid-to-high, single-digit volume decline due to trade destocking amid price hikes but outperformed the industry. Internationally, Indonesia grew 8% on constant currency terms with 6% volume growth, while the AU, the US, and the Middle East (GAUM) saw 1% growth in constant currency.

Demand stress continues in urban;

Q4 to witness improved performance: GCPL rural market growth outpaced urban markets, driven by van operations. In urban regions, the company is experiencing slower growth in modern trade (MT) and its premium portfolio, alongside a downtrading in the HI segment. It anticipates a recovery in domestic volume, with high single-digit growth in the next couple of quarters, with Q4 volume and value growth showing an improvement from Q3 levels. GAUM is likely to see improved sales growth from Q4 as the trade stock reduction is largely completed.

Weak India margin weighs on profitability:

In Q3, EBITDA margin contracted 290bp YoY to 20.1%, as we had expected, dragged by 710bp contraction in India. GCPL expects Q4 India business margin to remain similar to Q3, due to the mismatch in price hike and higher palm oil prices. For FY26, it projects India margin at the lower end of the 24-26% range.

Retain Accumulate with a lower TP of INR 1,260:

We cut our EPS by 1.7%, 5.2% in FY26E and 3.8% for FY27E, due to lower-than-expected margin. We reiterate Accumulate with a lower TP of INR 1,260 from INR 1,330 on 48x (from 50x) P/E due to near-term demand challenges) as we roll forward to FY27E. Key risks are increased competition in the soap segment and lower-than-estimated growth in HI.

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