Godrej Consumer Products: Primed for growth

12 May 2023 , 11:00 AM

Recommendation: Buy

Target Price: Rs. 1,125

GCPL has spent the past 4-6 quarters becoming fit for growth – removing costs that consumers do not see, increasing media spends, bringing down trade pipelines, reducing working capital and reducing complexity. Moreover, it has launched a few innovations that are aimed at increasing penetration and are supporting these efforts via sampling. Simultaneously, input costs are dropping, which gives them leeway to invest in the business and yet grow profit margins. Analysts at IIFL Capital Services have upgraded their EPS estimates by 6-8%; FY23-26 EPS CAGR of 19%.

India business

Focus for India business will be to drive volume growth via affordable pack sizes, sampling (3mn samples in HI this year, rising to 6mn next year) and higher media investments (SOV up ~1,400 basis points in FY23 versus FY21). As high-growth categories such as hair colors, deodorants and air fresheners start becoming a higher share of revenue, product mix improvement will drive faster growth. Moreover, with input cost coming down, EBITDA growth will be robust despite higher investments.

International business

In Indonesia, focus is on expanding general trade distribution; the company has moved to S&D model similar to that in India. In Africa, the company’s action areas are to reduce working capital and SKU complexity further, while trying out a large distributor model in Nigeria to improve distribution reach. Analysts at IIFL Capital Services believe that margins in both geographies have bottomed out, and Africa in particular can see material margin expansion over the medium term.

19% EPS CAGR FY23-26

Going forward, sales growth will be largely volume-led; with cost-saving measures coupled with gross margin expansion, analysts at IIFL Capital Services expect EBITDA margin expansion of 390 basis points over FY23-26. RCCL acquisition provides a running start into the high-growth deodorant category, with strong brands bearing high-teens market share, with significant opportunity to save cost in overheads and trade margins.