Godrej Consumer Products - Growth priced in, downgrade to REDUCE - Kotak

FY2013 ended on a mixed note. While revenue growth remained strong, margins disappointed, hit by higher A&SP in domestic and one-offs in the international business division (IBD). Even as we model recovery in FY2014E (led by higher GMs in domestic, normalization in IBD) driving 29% CAGR in earnings over FY2013-15E, at P/E of 31X FY2014E EPS, valuations are stretched and margin volatility in IBD is a key risk.

We upgrade our target price to Rs795 (on roll-over) and downgrade the stock to REDUCE

After the analyst meet, we have marginally tweaked our estimates by 1-2% to model (1) increased traction in the domestic hair-color business and (2) better gross margins, led by a sustained drop in palm oil/PFAD prices, partially negated by (3) elevated A&SP (likely to remain high to support innovation) and (4) lower margins in IBD (though we model recovery, we expect margins to be volatile).

We continue to value GCPL on an SOTP basis as the company operates in multiple categories with varying growth characteristics and multiple geographies. Based on our SOTP (rolled over to June FY2014E), we upgrade our target price to Rs795 but downgrade the stock to REDUCE as at 31X FY2014E earnings, valuations leave little room for disappointment. Key risks remain—(1) betterthan-expected performance in IBD, (2) higher GM recovery against that modeled in the domestic business and (3) lower A&SP.

Source : Equity Bulls

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