Management Speak: Godrej Consumer Products (Neutral) - Godrej Indonesia – Accelerating growth in a challenging market

We visited Indonesia and interacted with the Godrej management there to get a perspective of on ground dynamics. The geography contributed ~14% of Godrej Consumer Products Ltd’s (GCPL) consolidated revenues and ~16% of EBITDA as on FY18. We gather Indonesia’s FMCG market is much more challenging than India’s. Factors like diverse distribution platform, spread out population and no MRP-based pricing make the market demanding. We come back confident on management’s ability to maintain its targeted double-digit revenue growth momentum (as in Q1FY19) and sustain FY18 record high EBITDA margin of 24%. Key initiatives that will drive the growth are 1) doubling general trade and direct distribution sales in the next 3 years, 2) increase in innovation intensity across the portfolio and targeting white spaces in existing categories, 3) continued cost optimization, which would help the company maintain FY18 EBITDA margin. While we remain positive on GCPL’s long-term growth outlook, current valuations at 45xFY20E/38xFY21E earnings leave little room for upside. Maintain Neutral.

Growth rebounding in Indonesia’s FMCG market: Indonesia’s GDP is significantly indexed to household consumption, of which, FMCG accounts for 10-12% of total spend. GCPL, a market leader in 85% of its portfolio in the country, returned to double-digit growth in Q1FY19 after 4 quarters of decline. Indonesia’s recovering FMCG market, GCPL’s market share gains in HI and an overall reduction in competitive intensity aided the rebound.

GCPL to drive revenues through innovation and distribution: Management is confident of doubling revenue growth in the medium term through its two-pronged strategy: 1) Doubling both, direct distribution (~110,000 outlets currently) and sales from general trade (30% revenue salience currently) over the next 3 years, 2) Increasing innovation in sub segments of all core categories; the company has few launches lined up over the next 2-3 months.

Cost optimization benefits still flowing through: Project Cermat and sharp savings in media spends will continue to fuel further investments in innovations, in our view. GCPL’s EBITDA growth has been surpassing its revenue growth since the company’s entry into the Indonesian market; management is confident of sustaining these margins with cost-saving initiatives across the organization.