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Event update: FMCG - Emerging market currency devaluation; Low overall impact but GCPL the most vulnerable

Emerging market currencies trending weak

Over the last on month, the macro environment in Turkey, South Africa and Argentina has turned for the worse. With two consecutive quarters of decline in GDP, South Africa has officially entered into recession. Argentina is also trying to negotiate a bailout and the government there is also announcing a string of austerity measures to salvage the economy. Turkey was impacted by a worsening macro-economic situation in the country as well as higher tariffs imposed by US. Consequently the currencies of all the three countries have seen sharp depreciation and continue to trend weak. At the current exchange rate, the Argentinian peso, Turkish Lira and South African Rand are down 50%, 38% and 6% compared to FY18 averages. Among our coverage universe, GCPL, Dabur and Marico have presence in some of these geographies. We assess the impact for these companies given their local presence in these markets.

GCPL, Dabur and Marico have exposures to these markets

Godrej Consumer – For GCPL, South Africa constitutes ~20% of the Africa + USA business. Argentina in turn is ~60% of the Latin America business. On an overall level, affected geographies account for ~8% consolidated sales.

Dabur – Dabur has presence in Turkey through its two subsidiaries (Hobi Kozmetik and RA Pazarlama) which account for ~16% of international business revenue, while South Africa business is relatively small accounting for 0.6% of international business. On an overall level, affected geographies account for ~5% of consolidated sales.

Marico - For Marico, South Africa business accounts for 9% of its international business revenues, translating into 2% of consolidated sales.

Impact and View

We are factoring in the currency impact now in our estimates for the above three players. However, the demand impact in these geographies is still uncertain. However, given that the contribution of these geographies is small even for affected players like GCPL and Dabur as their EBITDA contribution is lower than sales contribution. We expect a 0-1% negative earnings impact on currency devaluation for the above players; a larger impact will be on sales if demand also starts to further weaken from current levels. While the overall impact is low, GCPL remains the most vulnerable to the volatility in emerging markets given its higher salience. We maintain our Outperformer rating on Dabur India and Neutral rating on GCPL and Marico.