FREE

Godrej Consumer Products' Q3FY19 results (Neutral) - India volumes and international margins disappoint

Q3FY19 result highlights

• Consolidated revenues were up 3.6% yoy at Rs26.9bn (est: Rs27.5bn); EBITDA increased 3% yoy at Rs5.9bn(est: Rs6.05bn) and Adjusted PAT declined by 1% yoy at Rs4.18bn (est Rs4.6bn).
• Comparable revenues increased by 7% yoy, with India business revenue growth of 6% yoy and International business sales growth of 9% yoy (constant currency (cc) growth of 2% yoy).
• Domestic volumes increased by 1% yoy. In terms of segments, HI sales were flat yoy. Soaps grew by 2% while Hair colors sales were flat yoy owing to a high base.
• International business saw constant currency growth of 10% yoy.  Indonesia/GAUM sales grew by 9%/14% with a cc growth of 7%/4% yoy. Other geographies sales declined by 3% (cc growth of 41% yoy). Adjusted EBITDA margin declined by 300 bps yoy to 15%, driven by temporary impact of crude oil and currency depreciation.
• Consolidated gross margins were down 90bps yoy (standalone gross margin down 70bps yoy). Advertising spends decreased by 4% yoy. Staff cost were flat and other expenses increased by 5%yoy.  Resultant EBITDA margins declined by 10bps yoy to 21.9%.

Key positives: Expansion in domestic margins, recovery in Africa margins

Key negatives: Weak domestic volumes. Muted HI performance

Impact on financials: We cut our FY19/20/21E earnings by 6%/4%/4%

Valuations & view

GCPL 3QFY19 results were below estimates, largely on account of weak domestic volumes and mixed international business performance. While domestic volume growth is likely to improve in coming quarters, we believe challenges in HI (weak season & shift to incense sticks where it is yet to scale up) and moderation in pricing growth will restrict the revenue growth. Further international business (~47% of consolidated sales) performance remains volatile and we believe recovery will be more gradual. We remain positive on GCPL’s innovation led growth agenda, ability to drive cost efficiencies and factor in 19% earnings CAGR over FY19-21E, which adequately captures the positives. Further valuations at 42.5x/36x FY20/21E appear fair, considering lower earnings visibility and return profile compared to mid-cap peers. Maintain Neutral.