Earnings growth momentum likely to remain strong; company’s focus on gaining scale and exploiting synergies key to its prospects
Overall consolidated revenue/Ebitda/Clean PAT increased c7%/20% /18%, y-o-y, respectively. For its India business, revenue and profits grew by 0% and 12% y-o-y respectively. Domestic business: (i) Home Insecticide (HI) sales declined by c11% y-o-y (ii) Hair Colour business registered sales growth (4% y-o-y) (iii) Soaps business sales grew by 1% y-o-y. International business: (i) Its organic constant currency (CC) revenue grew by 6% y-o-y.
Key points from the conference call: (i) Demand environment has been subdued but GCPL hopes for improvement in the second half; (ii) HI business was impacted by the late start of monsoons, but this is temporary and trends started looking up June and July; (iii) Hair colour growth should accelerate on the back of new product launches and media campaign for powder hair colour; (iv) Soaps volume growth has been excellent and promotion led. In H2FY17, GCPL is likely to withdraw some of its promotions and look for price increases; (v) Indonesia business revenue weakness is macro led, and margins have likely peaked. Earnings growth in Indonesia is essentially revenue growth-led, which GCPL hopes will recover during the year; (vi) Africa continues to be strong and y-o-y margins expansion can still continue; (vii) Latin America margins should also improve as GCPL has taken price increases to offset currency impact; (viii) Overall, GCPL remains relentless in its innovation across its portfolio, which is core to its strategy for growth momentum and value creation. It remains focussed on its core categories, and its strategy is centred on gaining scale and exploiting its global portfolio synergies, which in our view is the key long-term appeal in GCPL’s investment case. We maintain our Buy rating and increase our TP to R1,690.
Domestic business net sales growth was flat. The Ebitda margin of the India business improved by 239bp—primarily due to lower staff costs—and Ebitda grew by c14%.
Domestic soaps: Soaps business revenues grew by 1% y-o-y, as double-digit volume growth was offset by deflationary pressure.
Home insecticide: HI sales declined by 11% y-o-y.
Hair colour: GCPL hair colour segment sales growth of c4% was aided by double-digit volume-led sales growth in Godrej Expert Rich Crème Hair Colour.
Despite a challenging macro environment, the international business showed organic top-line growth of 2% y-o-y in Q1.
Megasari (Indonesia) business :
The Indonesia business recorded top-line growth of 8% y-o-y in the reported currency in Q1.
Africa business: Africa grew by c14% y-o-y in organic CC terms, while its margins expanded by 330bp.
Latin America: This segment grew by c10% y-o-y in local currency terms, aided by market share gains. However, reported revenue declined c16% y-o-y due to adverse currency.
We revise our estimates post Q1 results as we increase FY17-19e earnings estimates by 1-2%, while we have long-term positive view on GCPL’s earnings growth potential. Change in accounting standards (from Indian GAAP to IND-AS) results in top-line declines of c6%, although the impact on bottom line is negligible.
Valuation and risks
We use DCF methodology to derive our TP and assume a cost of equity of 9.5%, which includes a risk-free rate 3%, MRP of 6.5%, and beta of 1, and terminal growth of 3%, all unchanged. We also roll forward our fair value estimate to July 2016 from April 2016. On the back of these estimate changes and rolling forward our valuation, we raise our TP to R1,690 from R1,550. We maintain our Buy rating as we believe earnings growth momentum is likely to remain strong.