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MOSL: GODREJ CONSUMER (Neutral)-Balance sheet improving, earnings revival awaited

Godrej Consumer: Balance sheet improving, earnings revival awaited

(GCPL IN, Mkt Cap USD9.7b, CMP INR663, TP INR700, 6% Upside, Neutral)

 

We met the management of GCPL and had a detailed look at the company’s segmental and balance sheet performance in recent years. Key takeaways:

• The worst seems to be over on the domestic volume growth front, but strong revival will take time.
• Despite muted growth of the past three years, we believe GCPL’s domestic business is of high quality with attractive long-term growth prospects. It should grow faster on expected recovery in demand environment, traction on new products (also significantly margin accretive), and better utilization of expanded distribution (now at ~6m outlets, direct reach of ~1.3m outlets).
• Balance sheet performance —a key concern area in the past— has been fairly good in recent years, particularly on the cash conversion cycle front, which declined from 47 days to 14 days in the past three years (on average basis) and from 60 days to 11 days on year-end basis. If not for earnings slowdown of the past three years (PBT growth of 7% CAGR), ROCE improvement (from 16.5% in FY16 to 17.7% in FY19) would have been more impressive.
• Nevertheless, while the stock price is down nearly 30% from its peak, there are no clear indications that earnings slowdown (7% PBT growth in the past three years) will turn around materially in FY20 to anywhere close to earlier levels. Between FY08-16, the company reported over 20% CAGR growth on all fronts — Sales, EBITDA, PAT and EPS.
• The other factor is that majority of the CCC cycle improvement has come in from higher creditor days. GCPL’s efforts to reduce inventory days, particularly in the African business are yet to make a substantial impact at the consol. level. Valuations of 34.7x FY21, while cheaper than peer average, offers limited upside on considering weaker than best of breed peer earnings visibility and less than peer ROCE levels (at least currently). Maintain Neutral.