Godrej Consumer Products - Africa Business Update - ICICI Securities

Interaction with Mr. Dharnesh Ghordon, Business Head (Africa, USA, Middle East) provided much needed clarity and insights around GCPL's Africa turnaround strategy. We like 1) focus on larger geographies and larger segments within categories (driving size and eventually scale), 2) focus on improving go-to-market GTM execution, 3) centralised category construct (ala MNCs) to drive cross pollination of marketing strategies (even more) efficiently, 4) building GCPL as an employer brand in Africa, 5) the recent entry / listing in Wal-Mart. GCPL is targeting double-digit revenue growth and mid-teens EBITDA margins for the region. We stay believers as early signs of turnaround in Africa business inspire confidence in consensus (and our) expectations of a sustainable turnaround under the new leadership. ADD.

- Focus on larger geographies (with better execution) and transformation in GTM strategy: The pillar to Africa turnaround strategy is focus on larger countries like Nigeria, South Africa, Kenya etc. by driving direct distribution (reduce dependence on wholesale, cash & carry etc.). Further, the plan is to be present in smaller tier II, III geographies with indirect distribution and transformation (to direct) to be attempted a tad later. The key word appears to be "discipline". While this strategy has been implemented in some of the focus regions (like Nigeria) it is still a work-in-progress in rest of Africa, atleast an 18-month journey to cover all focus markets. Management targets double-digit revenue growth in Africa.

- Some functions to have centralised construct: Management believes (and we agree) that functions like innovation, communication etc. need to have a central architecture - as there were a lot of overlaps in each geography. Execution will remain regional though. We agree that this may potentially drives scale, improved cross pollination of ideas and better execution.

- Attracting the right talent and building an employer brand of GCPL in Africa is critical: GCPL has a journey to cover to achieve a pre-eminent employer brand equity in Africa (compared with MNCs like HUL, Nestle etc.). However, it has been able to attract some good local talent which is important as they understand the culture and how business is done in Africa. Management indicated that it is focused on strengthening the employer brand equity in Africa (which is critical in the long-term) by providing right opportunities to the local talent. The focus has been to make the team more agile.

- Opportunity of Household Insecticide (HI) category in Africa: There are opportunities for HI category in Africa, however, there are some technical challenges in terms of regulations. However, management believes that Good Knight and HIT are strong brands with the right technology and product portfolio which has the potential to succeed in Africa if the execution is right. The HI category in Africa (in some developed markets) is not just about mosquitoes but also other insects like cockroach etc. Hi segment has witnessed some green shoots in Nigeria (distributor model) and some other small markets (direct distribution). The plan is to launch the products in rest of the regions as well.

- Margins: Management targets mid-to-high teens EBITDA margins in Africa in medium term (we reckon by FY2025). There is opportunity to premiumise in some parts of portfolio and also uptrading opportunity in hair extensions. In terms of recent inflationary trends, it is trying to mitigate inflation through calibrated price hikes and cost saving programs.

- GCPL has recently got entry / product listing in Wal-Mart for selling hair extensions (exclusivity for one year) through their stores and e-commerce platform. The category is also new for Wal-Mart as well. According to management, hair extensions were largely sold through the saloon and beauty products channel but with covid and consumers evaluating why do they have to visit different stores for different products when they can get all of them in one place. This has led to more and more modern trade players selling various products which they were not selling earlier (retailer consolidation?).

- Wet Hair category is witnessing a consumer preference shift towards natural positioning. GCPL appears under-indexed in this segment, in our view.

- It has witnessed an increase in preference towards 'Do it Yourself' (DIY) products in hair extensions as consumers are preferring to use these products themselves rather than visiting a salon.

- GCPL has introduced Magic Handwash in South Africa.

- Challenges: Some of the challenges in the African market are - 1) balance between governance and growth - it is easier to sell in Africa, however, difficult to collect cash without having right governance structures in place and 2) divergent distribution models across geographies.

- Valuation and risks: Our earnings estimates are largely unchanged; modelling revenue / EBITDA / PAT CAGR of 9% / 10% / 13% over FY21-23E. Maintain ADD with a SoTP-based target price of Rs750. At our target price, the stock will trade at 35x P/E multiple Mar-23E. Key downside risk is structural deceleration in India household insecticides.

Shares of GODREJ CONSUMER PRODUCTS LTD. was last trading in BSE at Rs.683.25 as compared to the previous close of Rs. 683.65. The total number of shares traded during the day was 44339 in over 2071 trades.

The stock hit an intraday high of Rs. 690.9 and intraday low of 675.65. The net turnover during the day was Rs. 30200131.

Source : Equity Bulls

Keywords