Godrej Consumer Products' Q3FY20 results (Neutral) - Value growth remains elusive…

Q3FY20 result highlights

• Consolidated rev grew by 2.1% yoy to Rs27.5bn (est: Rs27bn); EBITDA grew by 3% yoy to Rs6.1bn (est: Rs5.9bn) and adj. PAT grew by 1.2% yoy to Rs4.23bn (est Rs4.1bn). Results were marginally ahead of our estimates but below street expectations (rev: Rs27.9bn, EBITDA: Rs6.5bn and PAT: Rs4.5bn).
• Cons. constant currency rev. grew by 6% yoy, with India business revenue growth at 1% yoy and International business CC sales grew by 11% yoy (reported international business rev grew by 3% yoy).
• Sharp deflation across categories in India with rev up just 1% yoy despite good volume growth of 7% yoy (est: 6% yoy). In terms of segments, HI rev. grew by 3% yoy. Soaps rev fell 4% due to heavy discounting; Hair color sales fell by 4% yoy. Indonesia/GAUM/Other geographies grew by 9%/6%/38% yoy in cc terms.
• Cons. gross margins were up 50p yoy (standalone gross margin up 20bp yoy). Cons. staff cost fell 2% yoy. Cons. A&P spends were down 5% yoy (standalone A&P down by 5% yoy). Resultant cons. EBITDA margins were up 20bp yoy at 22.1% (standalone EBITDA margins down 30bps yoy to 27.5%).

Key positives: India vol growth, uptick in International business margins.

Key negatives: Lower value growth in India business.

Impact on financials: Factoring weak performance, we cut FY21E sales/EPS by ~5%. Introduce FY22E earnings estimate.

Valuations & view

GCPL’s performance was much weaker than street expectations led by sharp deflation across categories which led to better volume growth but subdued value growth. Management is hopeful of converging value/volume growth over the coming quarters; however, we believe doing the same in HI category is at their will but in the Soaps category, it will depend on the market-leader who could decide to continue with consumer offers despite sharp raw material price inflation. As a result managing margins could also be a tall order next year, in India. International performance is pretty much on track as per management expectation and should continue to aid cons. performance. However, valuations at 42x/37x FY21/22E adequately captures the positives (implies India segment is already trading at >45x FY21E), hence we maintain our Neutral rating. We would monitor the pace of recovery in International business and further diversification of the India business, to change our stance.