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MOSL : GODREJ CONSUMER: Sales momentum encouraging; RM worries receding

.  GODREJ CONSUMER: Sales momentum encouraging; RM worries receding

(GCPL IN, Mkt Cap USD11b, CMP INR858, TP INR1080, 26% Upside, Buy)

• For GCPL, the improvement in sales growth trajectory is quite encouraging with the company now attaining double-digit three-year CAGR in sales. The management has maintained its double-digit sales growth guidance with mid-to-high single-digit volume growth.
• Material cost pressures are likely to abate markedly in 2HFY23 but higher media spends, to aid innovation and deepen penetration over the long term, will result in more gradual EBITDA margin improvement in ensuing quarters.
• Sales growth has improved noticeably in recent years along with renewed initiatives because of the to drive category growth in India, as well as expand distribution and reach in GUAM. A sales recovery in Indonesia from 2HFY23 onwards can improve the trajectory further in subsequent years. With the worst of the material cost pressures seemingly behind, FY24E earnings appear to be robust. We maintain our BUY rating with a TP of INR1,080 (premised on 45x Jun’24E EPS)

Sales and operating profit in line with our estimates

• Consolidated net sales grew 8% YoY to INR31.3b (in line) in 1QFY23. Two-year sales CAGR was also healthy at 15.9%.
• Gross profit declined 3.6% YoY to INR14.6b (in line). EBITDA decreased 12.8% YoY to INR5.3b (in line), PBT dropped 15.9% to INR4.6b (in line), and adjusted PAT contracted 16.4% to INR3.5b (in line) in 1QFY23.
• Consolidated sales in comparable constant currency (CC) rose 9% YoY.
• Gross margin contracted 560bp YoY to 46.6% (est. 48.5%).
• As a % of sales, higher ad spends (up 140bp YoY to 6.4%), lower staff costs (down 170bp to 8.3%), and other expenses (down 110bp to 14.8%) led to a 410bp YoY contraction in EBITDA margin to 17% (est. 16.8%).
• Volumes (consolidated) declined 5% YoY; the three-year CAGR stood at 3%.