Godrej Consumer Products' Q1FY19 results (Downgrade to Neutral) - A strong quarter; valuations limit medium term upside
Q1FY19 result highlights
- Consolidated revenues were up 12.7% yoy at Rs24.5bn (est: Rs23bn); EBITDA increased 22% yoy at Rs4.2bn(est: Rs4.1bn) and Adjusted PAT increased 36% yoy at Rs3.1bn (est Rs2.75bn).
- Comparable revenues increased by 11% yoy, with India business revenue growth of 14% yoy and International business sales growth of 9% yoy (constant currency growth of 7% yoy).
- India sales were led by 14% yoy volume growth. On comparable basis, HI/Soaps/hair colours/other brands sales increased by 17%/10%/12%/21% yoy.
- Consolidated gross margins were up 190bps yoy. Advertising spends increased by 9.6% yoy. Staff cost and other expenses increased by 23% and 11.5% yoy respectively.
- In international business, Indonesia, GAUM (Africa, US, ME) and Others (Latam/Europe/SAARC) sales increased by 10%/5%/8% on constant currency terms.
Key positives: Domestic volume growth and gross margin expansion
Key negatives: Weakness in international business performance
Impact on financials: Reduce FY19/20 earnings by 2%/1%.
Valuations & view
The beat on estimates has come from the India piece in Q1 while the international business remains volatile. The management outlook on demand recovery in domestic market remains positive which coupled with strong innovation pipeline and share gains across categories will drive domestic volume growth. However, given the higher gross margins in the balance three quarters in India, EBITDA growth in this geography will slow down from Q1 levels. Further, international business remains volatile and we expect margin improvement in this segment to be a challenge even in the balance year. We believe GCPL’s India business remains among the best in the business and will continue to be the key driver of strong growth; we are factoring a consolidated earnings CAGR of 19% for GCPL over FY18-21E. However, given the recent run up in stock price (16% in last 2 months) and continued volatility in performance of the International business (47% of sales), valuations at 43x/36x FY20/21E leave little room for upside from current levels. Downgrade to Neutral.
Godrej Consumer Products is a consumer goods company, manufacturing and marketing Household and Personal Care products. Co. is engaged in the manufacture and sale of soaps, cosmetics and detergents. Co.'s Personal Care products include Godrej No.1 - soaps; Cinthol - soaps, deodorants, talcs and shower gels; Godrej protekt - washes, a hand sanitiser and a personal mosquito repellent spray; and Godrej expert - creme hair colour in a sachet, powder hair colour with a unique gel technology, and herbal hair colour. Co.'s home care products include Good Knight - mosquito repellents; HIT - household insecticides; Godrej aer - home and car air fresheners; and Godrej Ezee - liquid detergents.
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