Godrej Consumer Products' Q2FY19 results (Neutral) - HI and international business drag overall performance

Q2FY19 result highlights

• Consolidated revenues were up 5.8% yoy at Rs26bn (est: Rs27bn); EBITDA decreased 12% yoy at Rs4.7bn(est: Rs5.8bn) and Adjusted PAT declined by 2% yoy at Rs3.6bn (est Rs4.1bn).
• Comparable revenues increased by 7% yoy, with India business revenue growth of 10% yoy and International business sales growth of 4% yoy (constant currency growth of 6% yoy).
• India sales were up 5% yoy volume growth (Kerala floods & CSD impacted sales growth by 1%). Soaps/hair colors/Other brands sales increased by 11%/21%/36% while HI sales declined by 2% yoy.
• Consolidated gross margins were down 360bps yoy. Advertising spends increased by 21% yoy. Staff cost declined by 2% yoy and other expenses increased by 3%yoy.  Resultant EBITDA margins declined by 350bps yoy to 17.8%.
• Indonesia, GAUM (Africa, US, ME) sales increased by 14%/4% on constant currency terms while Others (Latam, SAARC) grew by 2% yoy (adjusted for Europe divestment) in constant currency terms.

Key positives: Healthy growth in Soaps, hair colors. Gross margin expansion in domestic business

Key negatives:  Weak domestic volume, muted international business performance

Impact on financials: We have cut FY19-21E earnings by 9-10%.

Valuations & view

GCPL 2QFY19 results were below estimates, largely on account of weak domestic volumes and muted international business performance. The management outlook on demand recovery in domestic market remains positive & domestic volumes are expected to recover in 2H, margin expansion in India business is expected to moderate given the higher gross margins the base as well as recent uptick in crude linked  input costs. Further, international business performance remains below par. While management has guided for a better performance in 2H, given the challenges in Africa, Latam business we believe, margin improvement is likely to be more gradual and visibility on the same remains low compared to domestic business. We believe in GCPL’s innovation led domestic growth outlook, however, we await positive trends on the domestic HI business and international margins. Maintain Neutral.