Household Insecticides (revenues +4%) and Indonesia (revenues +13%) inspire confidence of strong growth in the medium term, led by new product launches. However, Africa remains the missing piece of the puzzle – revenue declined 2% in constant currency terms with weak macro situation in West Africa.
We believe that a potential turnaround here will require huge macro tailwinds and improvement in execution (just relaunched Darling brand and plans to introduce affordable products). We also see new challenges in soaps (>5% volume growth translated into 4% value decline due to high competitive intensity and price cuts) and hair colours (impacted by slowdown). That said, India HI and Indonesia account for c.60% of SoTP value.
Q2FY20 – Comparable consolidated revenue / EBITDA and recurring PAT grew 2% / 9% / 11%. India business sales grew 1% with 7% domestic volume growth which was broad based across categories. India household Insecticides business recovered to 4% revenue growth with >5% volume growth driven by a set of new product launches. EBITDA grew 2% Y-o-Y as the EBITDA margin expanded 40 bps to 26.3% despite gross margin decline of 110bps due to lower ad-spends (-310bps).
Indonesia market performance recovered but Africa growth remained elusive: International business sales grew 7% in constant currency (cc) terms (-4% reported). Adj. EBITDA grew 30% with margin expanding 320bps YoY to 16.1%.
Valuation and risks: We increase our earnings estimates by 2% to incorporate higher-than-expected profitability in international business; modelling revenue / EBITDA / PAT CAGR of 8% / 12% / 17% over FY19-21E. Upgrade to ‘add’ with a SoTP-based revised target price of Rs 800 (earlier Rs 660).