GLOBAL BUSINESS WORRY COULD LIMIT UPSIDE FOR GCPL STOCK

Domestic volume, revenue growth prospects remain strong for Godrej arm

Prior to the recent correction among scrips of fast-moving consumer goods (FMCG) due to valuation concerns, the stock of Godrej Consumer Products (GCPL) had gained 56 per cent. This was on account of a strong June quarter performance and steps it was taking to boost volume revenue growth. In fact, GCPL has been registering better sales growth than many of its peers over the past two years.

The strong performance was also visible in the June quarter, the first (Q1) of this financial year. Net sales rose 12.7 per cent over last year to ~24.5 billion, led by 14 per cent domestic volume growth. Net profit increased 80 per cent to ~4.1 billion.

However, its international business, around 40 per cent of consolidated revenue, has been a drag. This and the stock’s high valuation (43 times the FY20 estimated earning) would limit the scrip’s upside, say analysts.

Indonesia and the Africa cluster (Africa, the US and West Asia) together account for a little over 75 per cent of international business revenue, with about 35 per cent of consolidated revenue in 2017-18. The Africa cluster remains a concern, with only five per cent constant currency growth in Q1. It was impacted by weak disposable income in South Africa amid high fuel prices, rise in value added tax and a transporters’ strike.

GCPL regained market leadership in household insecticides in Indonesia and grew 10 per cent on constant currency terms after four quarters of decline. Its adjusted operating margin expanded by 220 basis points year-on-year to 22 per cent. While the management expects this momentum to continue, analysts are skeptical. A UBS Securities report states it will be difficult for the company to deliver margin surprise in the Indonesian business, given the high base, market expectations and high competitive intensity in a subdued demand environment.

The company is taking steps to boost its international business through product innovation, investment in marketing and advertising spending. Beside, it recently divested all the stake in its wholly-owned UK subsidiary for £34 million or ~3.1 billion. Analysts see this as a positive step. “Divestment in the UK business (strategic misfit) is positive for GCPL, given the limited growth and margin potential in the business. With key focus on emerging markets, we believe rotation of resources will impact the focused geographies positively,” says Nitin Gupta, analyst at SBICAP Securities.

In the domestic business, however, the company is expected to continue its outperformance, given demand and product innovations. Analysts say it could get a boost from the potential in rural penetration, new product pipeline and brand extensions.

While the domestic growth story looks strong, upsides from the international business will help it boost the earnings. The recent correction in the stock price is a buying opportunity for long-term investors.