Analyst Corner: ‘Hold’ on Godrej Consumer Products with TP of Rs 807

By: | Published: December 6, 2018 2:18 AM

To focus more on Asia, Africa and Latin America and improve profitability, GCP recently divested its UK business.

We retain our ‘Hold’ recommendation.

With its focused strategy, 3*3 (three categories—hair-, home-, personal care—and three continents—Asia, Africa, Latin America), Godrej Consumer strives to keep its growth momentum going. Further, innovations, premiumisation and deeper penetration are driving market share gains. We retain our ‘Hold’ recommendation.

GCP continues to focus on hastening the pace of its launches (margin accretive), driving rural-area penetration through wider reach and affordable SKUs, and premiumisation powering profitable growth. The growth momentum in hair colour and soaps would continue with more launches and mounting consumer demand. Recovery is expected in household insecticides, aided by expanding and developing the non-mosquito category, increasing out-of-home use, and rural and urban consumption through innovations and deeper penetration.

To focus more on Asia, Africa and Latin America and improve profitability, GCP recently divested its UK business. After seven quarters of sluggish growth its Indonesia business recovered in H1 FY19 (low base, easing competition). Management believes this will continue in FY20 despite the high base, helped by greater investment in brands, innovations and go-to-market strategy. The Darling brand re-launch in Nigeria is gaining traction, and the company intends to extend the brand to Kenya and South Africa. We believe that, following the re-launch and selective price hikes, the Africa business will recover, though adverse macro-economic factors and currency devaluation may be short-term drags.

Its greater brand investment, innovation and premiumisation lead us to project a 12% revenue CAGR over FY18-21, driving a 17% earnings CAGR. We roll forward our target to FY21 and retain our ‘Hold’ rating, with a revised TP of `807, based on 35x FY21e EPS. Risks: Change in consumer preference, greater synergies and faster scale-up of acquisitions.Driven by double-digit volume growth, GCP’s soaps-division revenue grew 10.5% in H1 FY19. The good show was fuelled by effective micro-marketing measures and the focus on new states.

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