Buy Godrej Consumer Ltd For Target Rs.1,400 by Motilal Oswal Financial Services Ltd
Near-term demand pressure sustains
* Godrej Consumer (GCPL) reported a 3% YoY increase in consolidated net revenue to INR37.7b (est. INR37.5b). Constant currency organic revenue growth was at 2% YoY. Consolidated EBITDA declined 16% YoY (est. -13%).
* India’s revenue growth was at 3% YoY with a flat volume growth. Home Care delivered 4% revenue growth, impacted by the weak seasonal demand for HI, coupled with a slowdown pressure in urban. Air Fresheners and Fabric Care delivered strong double-digit volume growth.
* Personal Care portfolio posted a 2% YoY revenue growth. Personal Wash volume declined to a mid to high single digit, impacted by price hike/grammage reduction due to high PFAD prices. Hair Color volume grew in the mid-single digit. Deodorants and Sexual Wellness delivered doubledigit volume growth.
* International revenue was up 4%. Indonesia continuously delivered a healthy performance with revenue growth of 9% YoY (8% in CC) and UVG of 6%. GUAM organic revenue declined 8% YoY (+1% in CC).
* India’s EBIT declined by a sharp 20% YoY due to the steep palm oil inflation and calibrated price hike. International EBIT was up 24% YoY due to strong profitability improvement in GUAM and LATAM.
* Given the high inflationary impact on revenue and margin, operating print is expected to be weak in the near term. The company is on the track to expand its TAM and strengthen its core portfolio. Under project Vistaara 2.0, the company plans to double its outlet coverage and triple its village coverage. Given the growth-centric focus, we remain constructive on GCPL and reiterate our BUY rating with a TP of INR1,400 (based on 50x Dec’26E EPS).
Domestic weaker than expected; Indonesia recovery sustains
* Consolidated performance
* Flat volume growth in 3Q: Consol. net sales grew 3% YoY to INR37.7b (est. INR37.6b). Organic sales were up 6% YoY (adjusted for the sale of part of the Africa business). Consolidated constant currency sales grew 2% YoY (4% organic). Consolidated organic volume growth was flat YoY and India volume growth was also flat YoY.
* Pressure on margins: Consolidated gross margins contracted 180bp YoY to 54.1% (est. 54.9%). Employee expenses were up 7% YoY, Ad spends were up 6% YoY, and other expenses were up 20% YoY. EBITDA margin contracted 470bp YoY to 20.1% (est. 20.9%).
* Miss on profitability: EBITDA declined 16% YoY to INR7.6b (est. INR7.8). PBT declined 13% YoY to INR6.9b (est. INR7.3b), and Adj. PAT contracted 14% YoY to INR5.0b (est. INR5.5b).
* International performance: Indonesia’s revenue grew 9% (8% in CC terms), driven by a 6% volume growth. The EBITDA margin for the Indonesia business expanded 60bp YoY to 21.5%, with EBITDA growth of 12%. GAUM organic revenue declined 8% (grew 1% in CC terms). GAUM EBITDA margin expanded 340bp YoY to 14.8%. Absolute EBITDA grew 9% to INR 1140m. LATAM reported 165% YoY growth (28% cc terms). EBITDA margin was up 1460bp to 11.4%.
* Standalone performance: Net sales (including OOI) grew 3% YoY to INR22.6b in 3QFY25. The Indian business reported flat volume growth. Home Care business registered 4% revenue growth (12% in 2QFY25) and Personal Care 2% (3% in 2QFY25). Gross margin contracted 440bp YoY to 54.7%. GP was down 5%. EBITDA margin contracted 680bp YoY to 22.7%. EBITDA declined 21% YoY to INR5.1b.
Highlights from the management commentary
* There is a slowdown in urban consumption, particularly in the modern trade and premium product segments. However, rural demand has outpaced urban demand, driven by the success of GCPL's Van Program, which has significantly enhanced rural penetration and growth.
* The company implemented a mid-single-digit price hike in 3Q, with further price increases expected in 4QFY25 to offset the RM inflation.
* Palm oil prices have corrected ~20% from their peak, but PFAD (a key derivative) has only declined 7-8%, delaying the expected input cost relief.
* EBITDA margins in the Raymond business remain steady in the mid-teens and will expand further going forward.
Valuation and view
* We cut our EPS estimates by 4% each for FY25/FY26 on account of margin pressure and slow urban demand.
* GCPL faced demand headwinds in its India business during the quarter due to the urban slowdown and a surge in RM prices, which impacted margins. However, the company’s disruptive innovations, introduction of access packs, expansion into new growth categories, and increased advertising expenditure are anticipated to contribute to the growth trajectory. Additionally, pricing actions are helping restore domestic margins.
* Besides, there has been a consistent effort to fix the gaps in profitability/growth for its international business. We reiterate our BUY rating with a TP of INR1,400 (based on 50x Dec’26E EPS).
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