Buy Godrej Consumer Products Ltd For Target Rs. 1350 By JM Financial Services
International business resilient, weak India business impacts earnings print
GCPL’s 3QFY25 earnings print was weak, as highlighted in its pre-quarter update. India business performance was below expectations – due to higher than expected weakness in Soaps (trade destocking, grammage cuts, urban slowdown) and weaker margins. Within India business, a) performance of Soaps (flat sales yoy) doesn’t suggest market share loss for GCPL, post new formulation based launch by HUL, b) results have been encouraging so far for RNF molecule based HI products (share gains in incense sticks & LV machines), more conclusive result on product success will be known by end of FY25, c) margin delivery was weaker than HUL. On outlook; volumes unlikely to go back to H1 levels but expected to be better than Q3 with faster growth in rural, likely better HI season and destocking impact reducing for soaps. International business did better – led by strong Latam business performance while Indonesia/Africa delivery was inline; outlook wise too, commentary was positive with Indonesia business being steady, Africa sales growth likely to turn positive from 4Q and Latam business being on strong footing. We cut our est. by c.3-5% over FY25-27E, factoring weaker India margins. Recent correction & valuation closer to LT avg., restricts downside. Maintain BUY with revised TP of INR 1,350 (50x Dec’26 EPS).
* Sales inline; weaker India margins drives earnings miss: Consol sales grew 3.5% yoy (organic 6%) to INR 37.5bn while EBITDA and net profit fell 10.1% and 14.3% yoy to INR 7.6bn and INR 5bn respectively. India sales grew c.4% with flat volumes owing to weakness in both HI (weak season/urban slowdown) and Soaps (destocking/grammage cut). International sales grew c.4% on reported basis – Africa sales were down 16% (cc: - 7%), offset Indonesia (+9% yoy) & Latam sales (+2.6x yoy). Consol. GM was down 154bps yoy to 53.9% due to compression in India margins by 409bps (palm oil prices up >40%) while International GMs were up 238bps yoy. Staff cost, A&P & other overheads grew by c.6-7% yoy. Hence, EBITDA margin fell 304bps yoy to 20.2% (vs JMFe 20.8%). India EBITDA declined 20.9% yoy owing to GPM compression and scale deleverage, while International EBITDA grew c.32% yoy led by uptick in margins across geographies
* India business disappoints, International business continues to outperform: 1) Home-care sales grew 4.6% yoy aided by double-digit volume growth in Fabric-care and Airfresheners. HI was impacted by poor season – while Goodnight Agarbatti outperformed, premium formats were impacted by urban slowdown.
* Personal-care sales (+0.9% yoy) was weaker – flat sales in Soaps as mid-high single digit volume decline was compensated by commensurate price hikes. Anticipating further pricing actions in Soaps, management expects growth to improve in the next couple of quarters.
* RCCL business which was impacted due to challenges faced in urban general trade improved while operating margins moved to mid-teens.
* Indonesia clocked CC growth of 8% yoy (UVG of 6%) led by strong double-digit volume growth in Hair Colours while HI sales were lower due to high base. EBITDA margins improved c.60bps yoy driven by GM expansion.
* Africa’s sales in reported/cc terms declined by 16%/7% yoy (organic reported/cc sales were -8%/ +1% yoy). EBITDA margins expanded c.390bps to 14.8%, mgmt. sees scope of another c.100-200bps margin expansion, focus will be on driving revenue growth now.
* Latam delivered another strong qrtr – sales up 1.6x yoy with double digit EBITDA margins.
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