Stock corner: Upgrade Godrej Consumer to ‘add’, target price Rs 800

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Published: November 8, 2019 4:06:26 AM

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).

Stock corner, Godrej Consumer, Household Insecticides, EBITDA, India household Insecticides businessIndia household Insecticides business recovered to 4% revenue growth with >5% volume growth driven by a set of new product launches.

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).

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