Godrej Consumer Shares Rise As Brokerages Cheer Growth Plan
Shares of Godrej Consumer Products Ltd. gained after the company said it expects a rebound in its business in Indonesia, a key market that has so far trailed India and Africa in recovering from the pandemic-led disruption.
“In FY21, the performance in Indonesia was disappointing. But the business is seeing a gradual recovery after the significant second wave [Covid-19] impact,” Akhil Chandra, business head (Asean) at the owner of Good Knight and Cinthol brands, told analysts in a conference call. “Cost inflation and subsequent margin pressure aside, we are confident of growing in double-digits [in Indonesia],” he said, adding that the company expects to sustain margins in the medium term.
Indonesia, that contributes roughly 16% to Godrej Consumer’s overall business, was impacted by a tough macroeconomic environment, he said.
The Indonesia business has seen 2% growth in the last six quarters in constant currency terms. “Even as a recovery is underway, the bounce-back is much weaker than that witnessed in India.”
Weak demand and price wars cloud the Indonesian market’s near-term outlook. But the company, according to Chandra, expects a robust expansion in distribution, digital analytics— for tracking orders, promotion, planning and execution—and new launches to aid profitable and sustainable growth there.
In hygiene, the ‘Saniter’ brand, launched in Indonesia last year, contributes close to 10% of category revenue. It has surpassed Dettol with nearly a 50% market share. The company is now extending the Saniter brand to personal care with the launch of soaps and hand wash.
In household insecticides, including coils and repellents, Chandra said the company has been gaining 50- to 100-basis-point share annually over the past three-four years in Indonesia, while the No. 2 SC Johnson & Son, Inc. has been losing market share.
The recovery in air fresheners has been gradual given its discretionary nature. The category accounts for 28% of sales, while household insecticides contributing about 35% in Indonesia.
Godrej Consumer said it continued to see heightened competition and an unabated price war in the wet wipes category. The company has lost market share and salience of this category has dropped by at least 400 basis points from about 15% in 2018.
Its hair care portfolio, accounting for 3% of Indonesia sales, is growing well.
The consumer goods maker has decided to shift its strategy to compete against local players such as Miranda and Samantha instead of a head-on-head battle with L’Oreal and Garnier in Indonesia.
It’s focusing on driving business through general trade.
Given weak macros, product price hikes have been limited to a few categories that face limited risk on downtrading.
According to Chandra, the next phase of growth will come from broadbased general trade, launches in hygiene and hair care, tapping new-age channels such as e-commerce and pharmacy.
Distribution outlets for general trade, which is more margin accretive than modern channel in Indonesia, will be increased from 1.6 lakh to 2 lakh in Indonesia, the company said.
The company expects the share of e-commerce in Indonesia sales to jump from about 2% now to 10% in three years.
It also plans to defend its high operating margin (28%) through savings in media costs.
GCPL Indonesia, however, is not looking at M&A opportunities in the short term, it said.
Maintains ‘buy’, with a price target of Rs 1,095 apiece.
There is significant pressure across FMCG categories in Indonesia. Nielsen data pointed to growth being in a low single-digit even pre-pandemic and no quick bounce-back is right away visible.
Penetration levels in some categories are higher versus India, which accentuates the slowdown.
The job on hand doesn’t appear too different from what the company’s India household insecticides business is out to achieve.
Unemployment, reduced tourist inflows also have had impact on income levels, leading to some downtrading in consumption. All these factors make businesses take a cautious view on price hikes despite the commodity costs pressures.
The conscious move to increase the share of revenue from general trade, however, would help margin to some extent, given that reduced dependence on hypermarkets would help release some trade spending.
Besides, ongoing cost-effectiveness programmes are also expected to continue playing their role.
Maintains ‘Buy’, with a price target of Rs 1,041.91 apiece.
The research house forecasts 12% annual growth in revenue over FY21-24E, which is volume-led, along with a slight Ebitda margin.
Forecasts earnings to rise at a 15% CAGR, partly impacted by a sharp input inflation in FY22.
Downside catalysts remain — uncertainty on international geographies including Indonesia and Africa; weak macro which impacts consumer sentiment and stagnates growth in spending; volatility in cross-currencies which could affect reported growth rates; investor preference for net-cash balance sheet.
Input inflation is short-lived and price hikes are able to offset it quickly.
Scaling up non-mosquito portfolio (roaches and rodents) is also a key focus.
A slowdown in rural demand due to lower government spending or a monsoon failure could impact the company’s revenues significantly.
Godrej Consumer has also seen “good growth” in Africa and India.
Godrej Consumer’s ability to gain market share in soap segment could be adversely affected by the aggression of Hindustan Unilever Ltd., ITC Ltd., Wipro Consumer Care & Lighting Ltd., among others.
A depreciating rupee, Indonesian rupiah and Argentine peso can impact profitability.
The company’s strategy of launching innovative products at disruptive price points is set to bolster its growth. A few recent examples of launches are in the liquid vaporiser segment, under the Protekt brand, shampoo hair colour, powder-based hand wash, henna-based hair colour and natural neem incense sticks, among others.
Its domestic business continues to track a robust trajectory as management has been taking corrective actions. Rolling forward valuation to March 2023, the brokerage raises target price to Rs 1,200 from Rs 1,135.
The change in top leadership adds to the brokerage’s conviction. The company said it has appointed Sudhir Sitapati as managing director and chief executive officer for five years effective Oct. 18.
Shares of Godrej Consumer rose as much as 6% to Rs 1,102 early on Tuesday but pared most of the gains to close the session with gains of 1.5%. That compares with a 0.2% decline in the benchmark Nifty 50.