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India business seeing headwinds, pace of recovery in volumes will be key

GCPL’s business update for Q3FY25 points to weaker than expected performance. India business is expected to report flat volumes (vs +7-8% in 1H) due to likely volume decline in Soaps (pricing actions impacts wholesale/HH inventory) and moderation in volume growth for HI (delayed winter in North/cyclone in South). While mgmt. had called out possible volume impact on Soaps in its Q2FY25 concall, unfavourable weather led impact on HI came as a negative surprise. The impact on India EBITDA margins is also likely to be higher than envisaged (temporary downward breach of normative margin range of 24-27% vs earlier commentary of 24-25% margins in near term). Other India businesses and International business performance remains on expected lines. We cut our FY25-27E earnings by 4-7% to factor in weak (margins) Q3. 4QFY25E will be a key quarter for Soaps (how volumes shape up considering pricing actions & competitive intensity from HUL) and HI (mgmt. hoping to see conclusive results of new molecule based LV from 4Q). In our view, current challenges are more transient in nature. We keep our faith – the execution machinery put in place will yield fruits over the medium-term though stock is likely to be lacklustre till some signs of success start to become visible. Maintain BUY with revised TP of INR 1,415 (50x Sep’26E).

* India volumes likely to be flat impacted by weakness in Soaps & HI: GCPL has undertaken several measures in Soaps (price hikes, grammage reduction and cut back on trade schemes), to partially offset the impact of inflation in palm oil & derivatives (+20-30% yoy). While it does not impact consumption, it leads to inventory reduction across wholesale and household pantry - GCPL mgmt. did allude to this in its 2QFY25 earnings call & expects normalization over next few months. This apart, HI sales also have been soft as category growth has been impacted by delayed winters in North and cyclone in South India. We believe volumes for soaps have declined in mid-high single digit, while HI volumes are likely to be flattish in Q3. Rest of the business is expected to see double-digit volume growth for the quarter. As a result, India volumes is expected to be flat which along with price hikes should lead to mid-single digit sales growth for the standalone business (c.63% of sales in 1H).

* Impact on India margins higher than earlier expectations: In 2QFY24, GCPL clocked peak EBITDA margins of c.30%, in its standalone business, much higher vs normative range of 24-27%, benefiting from benign RM. Post sharp inflation in palm oil, in its Q2FY25 earnings call, management had highlighted that it does not intend to pass on entire cost increase to consumers, hence pricing growth will lag RM inflation and progressively increase in Q3/Q4FY25E. Moreover, the strategic investments behind brands have continued, hence, EBITDA margins for the quarter are likely to see temporary downward breach of normative range (vs earlier commentary of 24-25% margins in near term).

* International business performance steady & on expected lines: International business (c.37% of sales) continues to perform inline with strategic objectives. Indonesia business is expected to outperform with mid-single digit volume growth and high-single digit sales growth. GAUM organic business is expected to see volume decline due to reduction in trade stocks and portfolio simplification. The effects of these actions would be largely completed in Q3FY25E & geography is likely to revert to growth from 4QFY25E. Margin trajectory continues to remain healthy for this piece. Delivery on International margins over past three quarters has been a positive surprise led by Africa & Indonesia. We reckon that International GMs (Consol less standalone) are now similar to Consol/India GM vs being c.500/700bps lower in FY24) and continued execution here will be key for consol EBITDA margin expansion over FY25-27E.

* GCPL was able to recoup margins once inflation cycle reversed in the past, International business margins in better shape: GCPL’s RM basket saw steep inflation in FY21/22 with sharp uptick in both palm oil as well as crude. As a result we had seen standalone/consol GM compression of c.700-800bps over FY19-23. Once inflation cycle reversed, it recouped majority of the losses in FY24 (standalone/consol GM expansion of c.600- 700bps). Currently, palm oil is inflationary while crude prices have been stable to benign. Moreover, International business margins are in much better shape (c.15-16% in1HFY25E vs c.14%/10%in FY22/23) vs moderation seen over FY21-23, which is a positive.

* What to watch out in near term: In our view, RM inflation and adverse weather led challenges are more transient in nature. Having said that, pace of recovery in Soaps volume (especially in context of competitive intensity from HUL) and acceleration in HI sales (mgmt. had highlighted that if the new molecule based LV succeeds, it expects HI category volume growth to accelerate to high-single digit and value growth to low double-digit) will be critical monitorables in the near term.

* What are we building over medium term: We are currently building c.10-11% sales growth in FY26/27E led by high-single digit sales growth in Soaps, low double-digit growth in HI along with recovery in Africa. On margins, we are factoring standalone (India) EBITDA margins of c.24.4% for FY25E and expect it to recoup the losses by FY27E (building in EBITDA margins of c.26-27% similar to the average India EBITDA margins over FY19-24 of c.26.5%). This along with steady improvement in International margins will aid mid-teens EBITDA growth in FY26/27E for consolidated business. Stock is likely to remain under pressure in near term, till we see some signs of normalization in Soaps & acceleration in HI. However, we remain positive on new CEOs execution machinery, maintain BUY with revised TP of INR 1,415 (50x Sep’26E, based on its 5 yr average PE).

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