Godrej Consumer Products Limited - Rich valuations - downgrade to SELL - Antique

GCPL has posted one of the better sales performances within the FMCG space, primarily on the sales growth front (organic sales growth). However profitability continued to be under pressure despite a benign raw material cost environment. The impact on profitability was due to higher marketing initiatives (in both domestic and international business) and certain increase in costs like minimum wage hike (in Indonesia), loss of manufacturing days and restructuring (in Africa). Though Africa operations is expected to witness an profitability improvement in the coming quarters, as the impact on margins were of temporary nature, the increase in staff cost in Indonesia would impact profitability during the next three quarters of FY14. Additionally profitability in the LATAM operations may also continue to be under pressure during the coming quarters as the impact of issues like tougher regulatory norms on imports, capital flows, high on ground inflation in Argentina and hyper competitive activity would be gradually absorbed.

Outlook and Valuation

At the CMP of INR836, the stock is trading at a PE of 32.2x FY14e and at 26.9x FY15e. We value the stock at 24x FY15e EPS, as this company has one of the higher growth potential within the sector. We believe that the current stock price is ahead of the requisite valuations and hence we recommend a SELL at the current levels with a target price of INR737.

Source : Equity Bulls

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