Management Speak: Godrej Consumer Products (Neutral) - Commentary better than peers

We met the management of Godrej Consumer (GCPL), following are the key takeaways:

No signs of incremental moderation in domestic business – Contrary to its peers, GCPL highlighted that it has not seen incremental slowdown and is likely to maintain domestic volume/value growth similar to 1QFY20. The steady performance is a function of continued focus on volume driven growth, innovation coupled with recovery in Household Insecticide (HI) (~40% of domestic sales) and Hair color segment.

Recovery in HI/hair colors, deflation impact in Soaps to continue – HI business which has been a key drag on the domestic business has started to see a gradual recovery aided by a) reduction in pace of growth & stagnation in saliency of incense sticks, b) scale up of its incense stick product & effective media communication and c) better monsoons. This coupled with key new launches expected in the next 4-6 weeks should drive growth in this segment in the upcoming season. In hair colors, roll back of consumer offers (from April’19) has been absorbed by the market & growth is expected to be better than 1QFY20 in Q2FY20E; price cuts in Soaps will result in value growth being lower despite steady volume growth in the quarter.

Recovery in Indonesia & margin improvement in Africa to aid international business – Indonesia business which was impacted by slowdown in modern trade, has seen recovery with restocking by hypermarket and initiatives on expansion in GT channel. Better scale, improvement in channel mix & cost saving programme will continue to aid margins. On Africa, while challenges on sales growth continue, margin trajectory will improve led by improved mix, implementation of cost saving programme and favorable base.

Our view

GCPL’s commentary is better compared to peers with domestic business not seeing moderation in growth qoq. A favorable base coupled with recovery in HI, hair colors & no major challenges on margins will continue to aid domestic performance. Moreover, up-stocking led recovery in Indonesia and margin improvement in Africa, albeit on low base will aid the consolidated performance in coming quarters. We maintain our earnings estimates, however, raise our target multiple to 39x (from 35x), as we assign higher multiple to domestic business given improving growth visibility. However, at 37x FY21E, upside is capped as we await structural recovery in International business and further diversification of the India business. Maintain Neutral.