Godrej Consumer (GCPL) is one of our top pick from our Staples Coverage Universe over a one-year horizon. We present here our investment rationale: Increasing traction in the domestic business should improve margins and return ratios. The focus on profitability improvement in the African region (GCPL’s second largest sales contributor) and continued discipline in capital allocation will reduce the historical drag on the overseas businesses. Among staples, GCPL is the key beneficiary of the recent reduction in material costs. Palm oil prices have come off significantly, and even if a reasonable share of this gain is spent on advertising, it will boost Ebitda growth from Q4FY23 onward. While the company’s target of achieving sustainable double-digit sales growth in household insecticides (HI) could be delayed, its other domestic segments are showing signs of promising traction.
After a few years of lull in the latter half of the last decade, GCPL’s domestic business has been reporting a double-digit CAGR over FY20-FY23e. Salience of the domestic business, where margins are more than 2x that of the international business and ROCE is several times higher, has risen significantly from 52% of sales in FY17 to 56% of sales in FY22 and is poised to reach close to 60% of sales in the next few years, elevating consolidated margins, earnings growth and return ratios.
GCPL’s domestic businesses had demonstrated strong sales growth in the first half of the last decade, before losing steam in the second half. Domestic and consolidated sales growth crossed double digits in the last two years and appears to do so in FY23 as well. We expect GCPL to be the key beneficiary of the sharp reduction in raw material costs over the next few quarters.