Godrej Consumer Products' Q1FY20 results (Neutral) - Weak start to the year

Q1FY20 result highlights

• Cons. rev. fell by 4.9% yoy to Rs23.3bn (est: Rs25.2bn); EBITDA grew by 4.5% yoy to Rs4.4bn (est: Rs4.6bn) and Adjusted PAT declined by 7% yoy to Rs2.9bn (est Rs3.2bn).
• Comparable constant currency cons. rev. grew by 4% yoy, with India business rev. growth at 1% yoy (est: 2.5%) and International business comparable CC/comparable/reported sales grew by +9% yoy/+3% yoy/ fell by 11% yoy respectively.
• India rev up 1% yoy with volume growth of 5% yoy (est. 5% yoy). HI sales fell by 4% yoy due to share of growth getting diverted to incense sticks. Soaps grew by 3% yoy; Hair color sales was flat yoy and other brands continued good run at 20% growth yoy.
• Indonesia/GAUM had a weak start and grew by 4%/2% CC yoy. Other geographies comparable CC growth of 56% yoy led to better overall International comparable CC growth of 9% yoy.
• Consolidated gross margins were up 150bp yoy (standalone gross margin improved by 50bp yoy). Standalone staff cost fell sharply by 18% yoy. Cons. A&P spends fell by 8% yoy (adj. for Europe business in the base, cons. A&P was flat), standalone A&P fell by 2% yoy. Resultant cons. EBITDA margins were up 170bp yoy at 18.9% (standalone EBITDA margins up 190bps yoy to 21.9%).

Key positives: India volume growth.

Key negatives: India value growth, weak start in Indonesia/GAUM.

Impact on financials: We cut our FY20E/21E earnings by 2.5%/2.4%.

Valuations & view

GCPL’s challenges in HI (weak category growth & shift to incense sticks where it is yet to scale up) and price corrections in the Soaps category (on input cost deflation) will restrict the revenue growth. Further international business (~47% of consol sales) performance remains volatile and we believe recovery will be more gradual. GCPL organically created ‘Air Care’ as the fourth category, which is commendable but we await it to get aggressive to significantly scale up its category diversification agenda (to lower dependence on HI & Soaps). We factor in 15% earnings CAGR over FY19-21E, and valuations at 38x/32x FY20/21E appear fair, considering lower earnings visibility/return profile compared to peers. Maintain Neutral.