Godrej Consumer Products: Cautiously optimistic on HI

8 May 2023 , 10:35 AM

Recommendation: Buy

Target Price: Rs. 1,035

Analysts at IIFL Capital Services are optimistic, as Godrej Consumer Products (GCPL) has launched new products as well as changed communication and increased ad spends. However, past failed launches, historic volatility in growth, and long-term industry growth being a bit slow — call for some caution as well. Consistent 8-10% HI growth will be necessary not only to achieve the high teens EPS CAGR FY23-25, but also to justify the 40x FY25 PE multiple.

Reasons to be optimistic

The company is doing three things: (1) Increasing affordability of LVs in order to drive penetration by introducing small pack at half the price. (2) Launching a water-based no-gas product, which can expand current single-digit penetration of HIT spray by augmenting occasions of use and improved affordability. (3) Increasing ad spends and changing communication from a problem-solution category to a regular-habit category.

Reasons to be cautious

(1) In past, there has been buzz around products (eg: Fast Card, Gold Flash, Power Chip), which have not changed medium-term growth much. (2) Historically, sales have been quite volatile and hence, couple of good quarters may not necessarily mean growth is back. (3) Even in good times (FY10-16), category growth has lagged overall FMCG growth. (4) Illegal incense sticks threat may be down, but not out.

Raymond’s acquisition not that important

Acquisition is one of the lesser important factors in the investment evaluation framework. Execution in the core portfolio is key, given that the stock is trading in line with peers such as Marico and Dabur (~38-40x FY25). Consensus expects FY23-FY25 EPS CAGR of 20.6% (IIFL estimates are at 17.8%). Consistent growth in HI will be needed not only to achieve EPS, but to affect PE multiple also.