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Building blocks; outperformance to sustain

Godrej Consumer Products (GCPL) has adopted a growth-oriented strategy that includes pursuing acquisitions, cross-selling, entering new categories, and expanding the Total Addressable Market (TAM) for existing products. Additionally, it has increased reinvestments, particularly in marketing (+36% YoY in FY24). The company has made strategic moves, such as improving inventory management in RCCL and Indonesia and exiting non-core businesses, to drive consistency in its performance and improve the earnings growth trajectory. In FY24, GCPL delivered a healthy performance across various regions, reporting consolidated sales growth of 6% YoY (21% in CC terms), led by volume growth of 10% (7% organic). The EBITDA margin has shown improvement across geographies, expanding 270bp YoY to 21.8%. We expect the operating margin to expand by 100bp over FY24-FY26 due to benign raw material costs, margin recovery in the GAUM region, a return to normalized operating margins in Indonesia (around mid-20s), and structural cost savings in India. EBITDA and Adj. PAT grew by 21% and 13% YoY in FY24. We expect the company to deliver Sales/EBITDA/Adj. PAT CAGR of 9%/11%/18% over FY24-FY26E. The earnings growth trajectory is the strongest among its peers (refer to Exhibit 38). The stock trades at 66x and 54x P/E in FY25E and FY26E, respectively. We reiterate our BUY rating with a TP of INR1,700.

Strategies for growth

* GCPL’s FY24 strategy was focused on: a) expanding existing categories by innovating products in different sizes and at multiple price points, while broadening distribution to enhance consumer reach; b) streamlining operations through radical simplification by reducing SKUs, personnel, and processes; and c) prioritizing sustainability and social responsibility alongside profitability under the principle of ‘People and Planet alongside Profit’.

* For FY25, GCPL has outlined a three-pronged strategy: 1) premiumization, which involves launching premium innovations, entering new premium categories, and expanding premium channels; 2) efficiency improvement, wherein GCPL plans to enhance efficiency by investing in manufacturing capabilities and increasing media investments; and 3) affordability in rural markets, wherein the company aims to drive growth in rural areas by introducing access packs to cater to price-sensitive consumers.

Strong focus on innovation

* GCPL has consistently introduced innovations across its categories. In FY24, the company launched (1) Goodknight Agarbatti (Jan'24) using the RNF molecule, (2) Godrej Fab Liquid Detergent priced at INR99, and (3) Godrej Aer O car freshener. Each of these products is expected to generate over INR1b in revenue in FY25. The new products together contribute ~4% additional volume growth for FY25. While the success of these innovations has varied, GCPL’s robust pipeline of new products and effective go-to-market strategy provide a competitive advantage, especially in underpenetrated categories.

Volume-led growth in the Indian business

Since FY21, GCPL’s domestic business has shown early signs of revival following the sales slowdown experienced during FY17-FY20 (5% revenue CAGR). Factors such as innovations in the underpenetrated HI category, robust growth in personal care driven by shifts in consumer behavior post-pandemic, and a strong position in the mass hair color category—which experienced recovery as pandemic restrictions eased—contributed to the growth observed during FY21-FY24 (10% revenue CAGR). In FY24, GCPL experienced domestic revenue growth of 10% (4% organic) and UVG of 13% (6% organic).

Improving momentum for the RCCL business

Although RCCL revenue declined ~25% in FY24 due to its simplification initiatives, the underlying business momentum remains strong. GCPL is targeting to achieve INR6.0-INR6.5b revenue in FY25. The company has gained significant market share in modern trade, e-commerce, and rural areas but has experienced a decline in its share of urban General Trade (GT). The management is returning to RCCL’s previous strategy of focusing on GT channels, recognizing that cosmetic stores require more active selling efforts than distribution. GCPL aims to achieve an EBITDA of ~INR1.4- 1.5b in FY25.

Improvements in international operations

GCPL has made progress in its international operations, particularly in emerging markets such as Indonesia, Latin America, and Africa. The company has adopted a "Think Local, Act Global" approach, allowing it to tailor its strategies to local market conditions while leveraging global efficiencies to maintain its competitive edge. This has resulted in a focus on category leadership, simplification of operations, and strategic exits from less profitable markets, such as the East African market. The management targets to reach ~14-15% operating margins over the next two years from the average 10% for GAUM regions. In Indonesia, GCPL plans to improve its return on capital employed to double-digit within the next 2-3 years. The company is also reducing its manufacturing footprint by around 40% to streamline operations and increase profitability globally. Medium-term aspirations The consolidated business will deliver high single-digit volume growth with midteens EBITDA margin in FY25. Over the medium term, the company is looking to achieve high single to low double-digit volume growth in India with a healthy mix of pricing. EBITDA margin is expected to be in the mid-to-high 20s. International business will continue to improve its operating profitability by reducing overhead costs and closing down non-performing businesses.

Valuation and view

* GCPL has experienced improved growth in sales volume in its Indian business during FY24 and is likely to record a double-digit EPS growth over FY24-26E. Factors such as the implementation of disruptive innovations, introduction of access packs, expansion into new growth categories, and increased advertising expenditure will continue to deliver sustainable earnings growth.

* The company is consistently working toward expanding the TAM for its Indian business, along with product innovation to drive frequency. Besides, it has made consistent efforts to bridge the gaps in profitability/growth for its international business. We reiterate our BUY rating with a TP of INR1,700 (based on 60x Jun’26E EPS).

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