Godrej Consumer Products Limited - Focus on premiumisation and emerging categories - Antique

We met with the management of Godrej Consumer Products Ltd. (GCPL) to get an update on the company's performance and its future strategies. We understand that the company's broader strategy will be to drive growth through premiumisation and emerging categories. In soaps, the focus will be on premiumisation through Cinthol, while in hair colors the key objective would be to create an affordable crème category (estimated to be 25% of the total category) between powder hair dye and fashion colors. In insect repellants, growth would be led by innovation. Additionally, the recent launches in air fresheners, deodorants, and shower gels will drive medium to longer term growth. Deodorants amongst the newer categories are expected to witness higher focus and marketing in the summer quarters going ahead. In the International business, Darling's incremental consolidation of 20% (arising from Kenyan operations) during 3QFY13 would drive revenues, while in the Latam operations, cost cutting measures primarily through higher automation would aid the geographies margins by about 300bps in the next two years.

We rollover our to FY15e earnings to arrive at a target price of INR747 (implying PE of 23x FY15e). Though we remain positive on the growth prospects of the company, we believe a majority of the positives are factored in the current valuations, and hence maintain a HOLD recommendation on the stock.

Hair crème launch, important for GCPL

According to the management, the initial trade response has been strong for the hair crème launch. The principal objective of the launch is to capitalise on the category opportunity priced between the powder hair dye and fashion colors, estimated to be about 25-30% of the hair color market.

Soaps expected to grow at 15-16% led by premiumisation, insect repellants to grow at +15%

Growth in soaps is targeted to be led by premiumisation (through Cinthol) in addition to the continued benefits from the distribution integration with GHPL. Insect repellants in the next 2-3 years are expected to grow at about +15%.

Palm oil prices to aid gross margins during 4QFY13

The correction in gross margins would be reflected during 4QFY13 as the company is currently carrying some high cost inventory.

LATAM margins to improve by about 300bps in the next 2 years

According to our understanding, LATAM margins could improve by about 300bps over the next two years, led by cost cutting and higher automation due to the current high manpower cost.

Valuation and outlook

Though we remain positive on the growth prospects of the company in the medium to longer term, we believe that a majority of the positives are factored in the current valuations. We rollover our target price to FY15e earnings to arrive at a target price of INR747 (implying PE of 23x FY15e) and maintain our HOLD recommendation on the stock.

Source : Equity Bulls

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