Performance trending ahead of expectations; promising outlook: Even before the new CEO has taken over, likely in Oct’21, GCPL has been performing consistently well in various large categories over the past year. As highlighted in our 1QFY22 results note, both key domestic categories of Household Insecticides (HI) and Soaps posted a double-digit two-year CAGR during the quarter.

The sales momentum is also leading to increased asset turns. Consequently, ROCE seems poised to cross 20% levels for the first time in a decade, after languishing in the mid-teens for most of this period. The outlook remains promising, with the possibility of significant improvements. ROCEs could improve further in case of a) the sales momentum picking up further under the new CEO, b) a further increase in the contribution of the higher margin, higher ROCE domestic business to sales (nearly 2x higher margins in domestic v/s international business), and c) continued efforts to boost margins and ROCEs in the international business. Maintain ‘buy’, with TP of Rs 1,250 (45x Dec’23 EPS). After reporting strong sales in the range of 15–16% in FY21, HI and Soaps (together comprising ~74% of domestic sales) reported double-digit sales growth once again in 1QFY22 (actual number not reported). HI reported peak sales growth of 0.9% in the four years ended FY20, withn three of these years seeing sales decline. Given this performance, the ongoing momentum over the past 15 months is a healthy development.

Soaps reported a disappointing 2.8% CAGR in the four years ended FY20. Accordingly, the current improvement is remarkable. There are no Covid-related factors at play now in the case of HI. In the Personal Wash category, even if the Covid impact abates, the habitual behaviour to maintain hygiene is leading to higher usage. The penetration in Hand Wash is likely to be ~2x pre-Covid levels even going forward.

As highlighted in our detailed note in Jun’21, the longer term track record for both HI and Soaps has been excellent, barring the FY16–20 period — with HI seeing a ~19% revenue CAGR and Soaps a ~11.5% CAGR particularly over FY10–16.

Balance sheet improving: After nearly a decade of ROCEs in the mid-teens, ROCE is likely to surpass 20% in FY22, led by: a) the recent revival in domestic topline growth, b) an increase in the share of the higher margin, higher ROCE domestic business (57% of consolidated sales in FY21 v/s 55% in FY20), c) the moratorium on big-ticket acquisitions, d) the better utilisation of capacity, and e) debt reduction.