Godrej Consumer Declines After Q4 Results As Inflation Seen Afflicting Near-Term Margin
But analysts are optimistic on Godrej Consumer's long-term growth perspective, on both revenue and margin fronts.
Shares of Godrej Consumer Products Ltd. fell the most in a month as analysts expect its near-term margin to remain under pressure because of high input cost inflation.
The maker of Good Knight mosquito repellent and Cinthol soaps saw its revenue grow at the slowest pace in four quarters. Its profit fell 1% due to severe pressures in Indonesia and Africa, while India business surprised positively. Margin contracted to 16% from 20.1%.
The company, however, gained market share in 85% of the categories.
Analysts, however, are optimistic on its long-term growth perspective. Revenue and margin, they said, will improve in subsequent years by efforts as a part of the strategic review by the new chief executive officer.
Also, the newly appointed Indonesia CEO, who has worked with Hindustan Unilever Ltd. for more than two decades, is expected to take corrective actions.
The company’s Indonesia business posted a 16% drop in revenue in constant currency.
Shares of Godrej Consumer declined as much as 4.2%, the most since April 25, around noon on Friday. Of the analysts tracking the company, 31 maintain a ‘buy’, three suggest a ‘hold’ and one recommends a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 23.1%.
Here's what brokerages made of Godrej Consumer’s Q4 FY22 results.
Nomura
Maintains ‘buy’, cuts target price to Rs 950 from Rs 1,150, implying an upside potential of 19%.
The company is on track with the GCPL 3.0 road map.
The brokerage expects the new CEO to take corrective measures in plugging portfolio gaps; dialling up general trade distribution; investing behind the core and increasing penetration. Albeit, given the weak market context, the growth revival would be gradual and over the medium term.
Near-term margin will remain impacted due to high input cost inflation.
A new strategy for the household insecticides segment is in the works, to be implemented in the next few months before its peak monsoon season. A slower household insecticides growth, however, remains a key risk.
Jefferies
Retains ‘buy’ at a target price of Rs 970, implying an upside potential of 16.9%.
In his first full quarter as the CEO, Sudhir Sitapati faced a tough environment, reflected in a sharp Ebitda decline. However, his candour on acknowledging the issues and addressing them proactively was quite refreshing.
Several structural steps have already begun, be it new hires (Indo CEO, business transformation and digital head), renewed focus on access packs (without worrying about potential cannibalisation), inventory correction, step-up in market development efforts, etc. More steps are underway.
Near-term outlook remains challenging, especially on the margin front. The first quarter should see a margin decline, however, GCPL confident of a recovery thereafter and is gunning for slight margin expansion in FY23.
Initiatives on category development and green shoots in Indonesia, should drive better outcomes in the second half of FY23.
Volatility in cross currencies could affect reported growth rates.
Motilal Oswal
Maintains ‘buy’ with a target price of Rs 975 apiece, implying upside potential of 23%.
Domestic and consolidated sales growth has crossed double-digit in the last two years, far better than the 4.1% sales CAGR between FY16 and FY20.
The new senior management appointee from Unilever is a welcome move. Significant steps appear to have been taken to reduce complexity and SKUs, with the introduction of low unit packs in household insecticides and hair colour to drive category growth.
With investments by the new CEO focused on boosting growth in the high margin, high RoCE domestic business, its medium-term earnings growth outlook is strong.
While input cost inflation can affect FY23 earnings per share, GCPL has the potential to deliver mid-to-high teens earnings growth beyond that.
Edelweiss Securities
Maintains ‘buy’, cuts target price to Rs 1,005 from Rs 1,135, implying an upside potential of 26.2%.
Inflationary pressures would take a toll on its performance in the near term. The lifting of ban on palm oil export by Indonesia from May 23, however, will aid margin.
E-commerce channel continued to strengthen and now contributes 6% of branded sales. Recognising the dynamic sales channel mix may keep GCPL ahead of the curve.
GCPL’s strategy of launching innovative products at disruptive price points is set to bolster growth amid tough macroeconomic conditions.
Besides, the company’s focus on improving distribution productivity and reach including deploying more sales force will lend impetus to profitability.
A slowdown in rural demand due to lower government spending or a monsoon failure as well as a depreciating rupee, Indonesian rupiah and Argentine Peso could impact the company’s revenue significantly.