Maintain ADD on Godrej Consumers - Miss in 4Q margin; inspiring addition to team - HDFC Securities

Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities and Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

GCPL's 4QFY21 was a mixed bag with in-line revenue but a miss in EBITDA. Consolidated revenue registered 27% YoY growth (HSIE 26%). Domestic revenue/EBITDA grew by 35/10% YoY, while international revenue/EBITDA grew by 20/34%. Domestic/international revenue posted 5/6% 2-year revenue CAGR. Domestic volume growth was at 29%, 4% 2-year CAGR. Cost restoration was quicker than expected in 4Q; hence, EBITDA margin contracted by 108bps YoY to 21% (HSIE 23%) despite a favourable base. EBITDA grew by 21% YoY (flat 2-year CAGR) vs. HSIE 32%. GCPL was on margin expansion trajectory and posted 100bps YoY EBITDA margin expansion during 9MFY21, but missed in 4Q. However, the hiring of the new CEO Sudhir Sitapati (from HUL) was the showstopper. He brings vast experience (22 years) in working with one of the world's most well run companies - Unilever. Sudhir can introduce various required changes in GCPL management, which are necessary to drive both domestic and international business. Since the past one year, GCPL has renewed its focus on growth and market share gain. Thus, the addition of Sudhir to the team further empowers the growth focus of the company and gives us more confidence on earnings longevity. Hence, we increase our target P/E multiple to 42x (38x earlier) on Mar-23E EPS and drive TP of INR 925. Maintain ADD.

In-line revenue, GUAM & LATAM standout: Consolidated revenue up by 27% (HSIE 26%) with domestic up by 35% (HSIE 30%) and international up by 19% (HSIE 21%). Home Care posted 34% YoY growth (6% 2-year CAGR), Soaps 41% YoY growth (4% 2-year CAGR) and Hair Colour 25% growth (-2% 2-year CAGR). The Indonesia business remained slow and clocked 5% YoY growth. GUAM sustained momentum and posted 30% growth (36% cc). LATAM and SAARC registered 30% growth (54% cc). In FY21, revenue grew by 11% (-4% in FY20) with domestic growth of 14% (-4% in FY20) and international growth of 8% (-4% in FY20). In FY21, HI clocked 15% growth, Hygiene 24%, Hair Colour 14% while others category was down by 8%.

Miss in margin: Gross margin contracted by 198bps YoY to 55.7% (-97bps in 4QFY20, -167bps in 3QFY21) vs. HSIE 56.9%. Employee cost was up by 38% YoY (-16% in 4QFY20), A&P 51% YoY (-20% in 4QFY20) and other expenses 8% (-5% in 4QFY20). EBITDA grew by 21% YoY (flat 2-year CAGR) vs. HSIE 32% growth. Indonesia and GUAM EBITDA margins expanded by 230bps and 710bps YoY. LATAM & SAARC EBITDA margin contracted by >400bps YoY. EBITDA margin expansion was strong in 9MFY21 with 100bps YoY expansion. Despite challenges in FY21, EBITDA registered 14% growth.

Call and BS/CF takeaways: (1) The company remains growth focused, and the mandate for the new CEO will be the same; (2) launch pace will continue; (3) HI growth was across premium and burning formats; (4) e-commerce saliency at 4%; (5) hygiene growth driving by a structural change; (6) market share gain continued in soaps, where the company is now the second largest player (low teens share); (7) FCF was INR 18.5bn vs. INR 14.4bn in FY20.

Shares of GODREJ CONSUMER PRODUCTS LTD. was last trading in BSE at Rs.874.8 as compared to the previous close of Rs. 715.95. The total number of shares traded during the day was 1290309 in over 38062 trades.

The stock hit an intraday high of Rs. 894.9 and intraday low of 750.15. The net turnover during the day was Rs. 1118182116.

Source : Equity Bulls

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