Buy Godrej Consumer Products Ltd For Target Rs. 1,350 By JM Financial Services
Analyst meet takeaways
GCPL’s FY25 performance was below its stated guidance both on volume (mid-single digit vs. guidance of high-single digit) and profitability (EBITDA decline of 2% vs. mid-teen growth). This performance was predominantly dragged by Personal wash (volumes & profitability impacted by steep inflation in palm oil). We see this issue as more transient in nature & with recent moderation in palm oil prices, gradual improvement should follow in the coming quarters. On the positive side, the momentum in most of the key growth levers (HI, Aircare, Liquid detergents, Bodywash, Sexual wellness, Deodorants) for India business has been strong – a function of GCPL’s strategy to come out with disruptive innovations, provide value to consumers and back it up with investments both in media & distribution expansion. International business is now in better shape with topline related corrections & profitability reset done; focus will now be on accelerating growth. While near term gross margins could be under pressure due to high cost inventory, interventions are underway to improve the same (price hike in incense stick, extracting media & supply chain efficiencies). A combination of above should drive high-single digit growth on consolidated basis (with mid-high single digit volume growth in India) & double digit EBITDA growth in FY26. The guidance is tad lower than our expectation of low double-digit sales growth led by lower growth in Soaps and some downgradation in HI. Having said that, we like Sudhir’s execution on getting the portfolio and positioning right, which provide confidence on GCPL’s ability to navigate near term challenges & deliver a much better medium term performance vs. FY25. Factoring 4Q performance, we have cut earnings by c.4%. Retain BUY with unchanged TP of INR 1350; sharp dips should be used as opportunity to add.
* Volume growth key priority for India business: India business FY25 performance was miss on both volume & profitability vs. the guidance, impacted by Personal wash (low-single digit volume growth & steep palm oil inflation). Home care did much better (high-single digit volume growth) led by sustained momentum in new growth engines (Air care/FabLiquid detergents) & strong recovery in HI in 4Q. For FY26, management has guided for mid-high single digit volume growth – a function of high-single digit growth in HI & midteens growth in other Home & Personal care (ex-Soaps where growth is likely to c.2%). GMs in the 1H are likely to remain under pressure due to high cost inventory & lower pricing growth (vs. inflation), however, cost efficiency in media (c.150bps saving) should aid low double-digit EBITDA growth in our view.
* HI – portfolio in place, focus will be to improve volume growth, curtail downgradation & balance profitability: Launch of portfolio with new RNF molecule sees green shoots in 4Q (double-digit volume growth in GK electrics with c.200bps market share gain, GK incense stick now INR 1bn sales with c.8% share). In HI, the category growth (7yr CAGR in midsingle digit) is not the challenge. However, it has seen downgradation with very strong double-digit growth in incense sticks (c.25% of the market) while other formats have grown flattish, thereby impacting UVG for GCPL in this category. Focus for FY26 is to turnaround volume growth (targeting c.7%), look for right balance between growth in premium portfolio & incense sticks in order to ensure that downgradation doesn’t accelerate for category & profitability also improves. Management believes premiumisation in HI will accelerate (mid-teens growth potential) once incense stick growth plateaus. While this will be a gradual process, the good part is that GCPL has the right portfolio in place across formats & is taking interventions (increased prices in incense stick from INR 10 to 15 in South, lower trade margins to channel) to improve profitability too.
* Scale up categories of future: Apart from HI, another key volume driver for GCPL (expects mid-teen volume growth in FY26) will be the high growth categories (Air freshener, Liquid detergents, Hair colors, Bodywash, Deodorants & Sexual wellness). In Air freshener GCPL has seen clear success (UVG CAGR of 25%+, MS gain of 1100bps) led by disruptive innovations. Similarly, Fab Liquid detergent (ARR of INR 2.5bn) is seeing explosive growth (35% CAGR for industry) led by superior product at attractive price point. In Bodywash & Hair colors, the focus is to drive upgrades. In RCCL portfolio – revenue performance (+10%) was weaker than envisaged (due to challenges in Deodorant portfolio), while profitability (EBITDA margin of c.18%) has been healthy. Interventions are underway (dedicated CEO/sales team in place, improving access by providing better value to consumer- KS spark @99 vs. INR 249 earlier by reducing trade benefit, innovations like Amazon woods, Bloq Anti-perspirant) to drive growth (targeting double-digit volume growth) & profitability (achieve EBITDA margin similar to India margins) here.
* International business on strong footing: In International business, focus is to further strengthen the business metrics. In Indonesia – structural issues have been solved (distribution scale up, step up in innovations & media spends, seeding products from India) and range bound performance should continue along with uptick in margins. In GAUM, despite macro volatility, GCPL has achieved success in resetting the profitability (c.600bps improvement in EBITDA margins to 15%) faster than expectation led by several interventions (optimising supply chain & fixed overheads, strategic pricing). With most of the topline related correction done and cost savings being structural in nature, focus is to maintain leadership in profitable manner in Hair care, scale up FMCG portfolio through global blockbusters (Aer pocket, GK LV, Issue hair color shampoo) & continue to drive cost efficiencies. Latam too has seen improvement on similar lines as GAUM. Going ahead, mgmt. expects growth trajectory to improve with improvement in margins (although pace of improvement will be lower vs. high expansion seen in FY25).
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