Q1FY21 was an unprecedented period due to the spread of the coronavirus pandemic across the globe. While the company saw impact of the lockdown in the earlier part of the quarter, Godrej Consumer Products (GCPL) displayed strong agility in ramping up production and resolving logistical challenges.
It also leveraged technology, strong relationships with channel partners and was agile in meeting end-consumer demands. The demand trends were mixed for categories and geographies of its operations. In India, resurgence in the household insecticide (HI) category continued with strong underlying consumer demand.
GCPL witnessed strong momentum in the hygiene category as well. However, demand for hair color and air freshener was muted, being temporarily impacted by the lockdown. The company expects close to mid-single digit volume-driven sales growth in the quarter.
In Indonesia, despite the disruptions caused by the coronavirus, GCPL expects close to mid-single digit constant currency sales growth. It is witnessing robust demand in HI and strong traction in the hygiene category. In GAUM (Godrej Africa, the US and the Middle East), GCPL expects sales decline in early-20s in constant currency terms. Amid disruptions caused by the coronavirus, most key countries were in a standstill mode in April/early-May, which resulted in sales loss. GCPL has seen strong recovery from mid-May-June across most markets that it operates in.
Within the ‘other’ geographies, performance in Latin America is expected to be steady in constant currency terms. However, in INR terms, GCPL expects the performance to be weak. Performance in SAARC countries remains steady. At consolidated level, the company expects absolute sales to be marginally lower compared to the base quarter in INR terms.
Over FY10-20E, GCPL posted healthy growth on all fronts. However, domestic sales slowdown in recent years and continued inability to scale up margins and improve weak RoCEs in the international business have adversely affected GCPL’s pace of earnings growth.
Apart from the Covid-19 led lockdown challenges, which is more of a short-term phenomenon, the loss of dominance in hair colour, the advent of unorganised incense stick players in HI and weak execution in the Africa business remain points of worry. Also, based on the management commentary above, there is no indication that pace of earnings will improve vis-à-vis the past five years. Given the weak earnings outlook and inferior RoCE v/s peers, valuations of 44x FY22E EPS appear fair.
