Godrej Consumer Products - Stock Update

Godrej Consumer Products

Focus on increasing market share in core categories and health care segments

Executive Summary

Godrej Consumer Products Limited (GCPL)’s Q4 FY2020 performance was affected by supply disruption in Africa and India businesses fueled by the lockdown from March-end till April 2020.

GCPL’s consolidated operating revenues and PAT declined by ~12% and 27% respectively in Q4FY2020. Revenue from Indian operations declined by 18%, while those of the African business declined by 16%. Indonesia didn’t have any major impact of COVID-19 and posted constant currency sales growth of 6%.

Higher input prices and lower operating costs led to a 151 bps decline in OPM to 22.3%. The company witnessed some recovery in the household insecticide (HI) segment in April-May with sales rising during 40 days of operations

Nearly 80% of distributors have started operations but product supply to retailers is affected by non-availability of labor /reluctance of entering containment zones. With lockdown norms easing, the company expects operations to normalize by H1 of FY2021. Indonesia is expected to perform well due to higher demand for HI products while Africa would deliver sluggish performance due to an uncertain macroeconomic environment in FY2021.

Gaining market share in core categories like consumer and healthcare segments, innovations and expanding the distribution value chain remains the key growth strategy for the medium term.

SWOT ANALYSIS

Key Strengths

• GCPL gained 0.90% market share in the HI category and 60% market share in the soaps category in the domestic market.
• Indonesian business registered constant currency growth of 6% due to better performance of HI category.
• April-May saw growth in the domestic HI business segment

Key Weakness

• Domestic sales volumes declined by 15% in Q4FY2020.
• India and Africa business witnessed decline of 18% and 16%, respectively
• Company has postponed dividend plans to retain cash in an uncertain macroeconomic environment, which may impact shareholder sentiments

Wolf''s Call - We retain our buy rating with a revised price target of Rs. 620: We have lowered our earnings estimates by 17% and 10%, respectively, for FY2021 and FY2022 to factor in the impact of supply disruptions in India and the global economy. Good quality products in each category and health & hygiene products (forming about 70% of GCPL’s product portfolio) is essential in nature and will help in posting recovery in the coming quarters. The revival in HI category and market share gains in other categories would help the company to deliver good growth in the medium to long term. The stock has corrected by 16% in the last three months and is trading at a discounted valuation of 31x its FY2022E earnings (discount to its last three years historical average of 46x). In view of a favourable risk-reward and strong positioning in key markets, we maintain our Buy recommendation on the stock

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