Markets
At Godrej Consumer, volumes are in focus
Summary
n its earnings call, GCPL acknowledged that it has made progress in HI but thinks that it is too early to declare success in the category in view of the expected potential.Godrej Consumer Products Ltd (GCPL) is maintaining the pace of increase in sales volume, clocking double-digit growth in the past two quarters. In the March quarter (Q4FY23) and Q1FY24, domestic volume growth was 11% and 12%, respectively. Here, the home care segment saw double-digit volume growth last quarter while personal care was in mid-single digits.
The household insecticides (HI) business sustained double-digit volume and value growth. In Q1, an extended season augured well for the HI business. Though, the company is treading carefully. In its earnings call, GCPL acknowledged that it has made progress in HI but thinks that it is too early to declare success in the category in view of the expected potential. It expects HI to be an accretive growth driver in the medium term. “Consistent performance in the HI business is crucial. If Q2 and Q3 continue the momentum seen in Q1, then the stock may get re-rated," said Sachin Bobade, an analyst at Dolat Capital Market.
The next few quarters would also reflect the maximum brunt of the devaluation of naira, the currency of Nigeria. This has been a pressing worry for the stock. In Q1, the GAUM (Godrej Africa, USA, and Middle East) segment’s revenue rose by 16% on a constant currency basis. However, reported revenue increased at a slower rate of 9% as the devaluation of naira played spoilsport to some extent.On account of this, GCPL expects about 200 basis points (bps) impact on sales at the consolidated level. On the other hand, it helps that the Indonesia business is on an improving trajectory.
Meanwhile, GCPL’s recent acquisition of the FMCG business of Raymond Consumer Care Ltd put up a weak show owing to down stocking, which is likely to continue in the ongoing quarter too.The vertical was consolidated around mid-May and clocked sales of ₹48 crore. This is far lower than the run rate of ₹75-80 crore based on FY23 full year revenue.
What is more, the increase in advertisement spends here led the vertical to post an Ebitda loss. As such, Raymond’s advertisement spends may remain elevated. However, GCPL has maintained its guidance of flat revenue for FY24 and high single-digit Ebitda margin.
To be sure, GCPL’s advertisement spending as a percentage of sales in the domestic business was 12.5% in Q1. Analysts at JM Financial Institutional Securities note that this is now higher versus any of its home & personal care peers including Hindustan Unilever Ltd. “This speaks of the seriousness of its category development intent," said JM Financial analysts in a report on 7 August. Having said that, GCPL’s margin path demands attention, especially when it said it won’t hesitate to increase media spends if they see good return on investment. Overall, GCPL’s consolidated Ebitda margin in Q1 expanded 273 bps year-on-year to 19.8%. In a bid to support volume growth and extract logistics-related savings, GCPL plans to invest about ₹900 crore in organic manufacturing capital expenditure in India over the next 18 to 36 months. “Step-up in media spends reflect growth agenda with hefty India capital expenditure suggesting management confidence on growth," said analysts at Jefferies India in a report on 8 August.
Investors are sitting on good returns as the GCPL stock is up by 15.5% year-to-date. The stock trades at 39 times its FY25 estimated earnings, according to Bloomberg data. Valuations are lower vis-Ã -vis some peers. Palm oil prices are monitorable. GCPL said the prices have strengthened a bit recently but they are lower year-on-year. Consistent momentum in HI business and improving metrics in Raymond are factors that investors would track ahead.
