Buy Godrej Consumer Ltd for the Target Rs. 1,450 by Motilal Oswal Financial Services Ltd
Playbook remains unchanged; slow margin recovery
* Godrej Consumer (GCPL) reported consol. net sales growth of 6.3% YoY to INR35.9b (est. INR36.3b). Organic sales rose 7% YoY in INR terms. Consolidated organic volumes for 4QFY25 grew 6% YoY, led by a 4% YoY volume growth in the India business and a 5% YoY volume growth in the Indonesia business. This led to a full-year organic volume growth of 4% YoY for GCPL’s consolidated business, 5% for the India business, and 6% for the Indonesia business.
* In India, the home care business registered 14% revenue growth, driven by a favorable season. GCPL recorded a strong volume performance in Household Insecticides (HI), which grew in double digits, while personal care recorded revenue growth of 4%. Personal wash volumes declined by mid-to-high single digits during the quarter as a result of volume-price rebalancing. This was compensated by high single-digit price growth. GCPL continues to witness cost pressures due to inflation in palm derivatives.
* In the international business, Indonesia's revenue rose 1% YoY in both INR and CC terms. EBITDA margin continued to expand, led by gross margin expansion of ~210bp YoY. GAUM’s organic revenue grew 23% YoY. Its EBITDA margin stood at 16.9%, expanding ~250bp YoY, led by the expansion of gross margin, mix improvement, and reduction in controllable costs.
* The near-term impact of RM inflation is expected to sustain; however, the company remains focused on growing both its core and new products. In the analyst meet, management reiterated its playbook of expanding the TAM and strengthening product penetration by widening the product price range. Various products are repositioned at a value price point to drive the customer base. Under project Vistaara 2.0, the company plans to double its outlet coverage and triple its village coverage. The company has issued slightly more cautious revenue guidance for FY26 vs. earlier, but still expects high single-digit revenue growth and double-digit EBITDA growth. Given its growth-centric focus, we remain constructive on GCPL and reiterate our BUY rating with a TP of INR1,450 (based on 50x FY27E EPS).
Operationally muted but in-line performance
Consolidated performance
* In-line volume growth: GCPL reported consol. net sales growth of 6.3% YoY to INR35.9b. Organic sales rose 7% YoY in INR terms (adjusted to sell off a part of the Africa business). Consolidated organic volumes for 4QFY25 grew 6% YoY, led by a 4% YoY volume growth in the India business and a 5% YoY volume growth in the Indonesia business.
* RM inflation led to GM pressure: Gross margin contracted 360bp YoY to 52.5%, while EBITDA margin contracted 140bp YoY to 21.1% (est. 20.2%), as employee expenses declined 19% YoY, while ad spends rose 1% YoY and other expenses grew 9% YoY. EBITDA remained flat YoY and QoQ at INR7.6b. PBT stood at INR6.7b (est. INR6.6b), down 4% YoY. Higher taxes (35% ETR) hurt adj. PAT (reported exceptional loss last year), which declined 25% YoY to INR4.3b (est. INR5.1b).
* FY25 performance: In FY25, net sales, EBITDA, and APAT were up 2%, down 2%, and down 4% YoY, respectively. The Board declared an interim dividend of INR5/share.
Standalone performance
* Net sales (including OOI) grew 7% YoY to INR21.8b in 4QFY25.
* The India business reported underlying volume growth of 4% YoY.
* GCPL stated that demand conditions in India have continued to be impacted by headwinds in urban consumption. A surge in palm oil prices by more than 50% is adversely impacting its EBITDA margin.
* The home care business registered 14% revenue growth (4% in 3QFY25), while personal care recorded a 4% revenue growth (2% in 3QFY25).
* Gross margin contracted 590bp YoY to 51.9%. GP was down 4%. EBITDA margin contracted 400bp YoY to 22.6%.
* EBITDA declined 9% YoY to INR4.9b (in line).
International performance
* Indonesia's revenue rose 1% YoY in both INR and CC terms with volume growth of 5%. In Indonesia, Hair Color recorded a strong double-digit volume growth, led by Shampoo Hair Color. Household Insecticides delivered teens-level volume growth on a two-year CAGR.
* EBITDA margin for the Indonesia business continued to improve, led by gross margin expansion of ~210bp YoY. EBIT rose 10% YoY. GAUM’s organic revenue grew 23% YoY.
* GAUM’s EBITDA margin at 16.9% expanded ~250bp YoY, led by gross margin expansion, mix improvement, and a reduction in controllable costs. Absolute EBITDA at INR1160m grew 37% YoY.
Category-wise highlights
* The home care business registered 14% revenue growth (4% in 3QFY25), supported by a favorable season for HI. GCPL recorded a strong volume performance in HI, which grew in double digits.
* Fabric Care delivered strong double-digit volume growth. Godrej Fab has been scaled up nationally and continues to gain market share.
* Personal care recorded revenue growth of 4% (2% in 3QFY25). Personal wash volumes declined by mid-to-high single digits during the quarter, as a result of volume-price rebalancing. This was compensated by high single-digit price growth. GCPL continues to witness significant cost pressures due to inflation in palm derivatives and is implementing significant price hikes across the portfolio.
Valuation and view
* We cut our EPS estimates by ~2% for FY26/FY27, respectively, on account of margin pressure and slow urban demand.
* GCPL faced demand headwinds in its India business during the quarter, driven by an 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 drive growth. Additionally, pricing actions are anticipated to help restore domestic margins. We reiterate our BUY rating with a TP of INR1,450 (based on 50x FY27E EPS).
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