Incoming CEO of GCPL drives hope, rerating
Stock gains 22%; better financial metrics key to sustain the rally
In a weak market, Godrej Consumer Products (GCPL) shot up 22 per cent, its single biggest daily gain, after brokerages upgraded the stock. The rally is based on hopes that Sudhir Sitapati, who is set to take over as managing director and chief executive officer on October 18, 2021, will be able to reverse the sluggish growth trajectory of its key segments and bridge the gap in capital efficiency with peers.
Inconsistent growth and weaker return ratios reflected on its valuation; prior to the rerating on Wednesday, the stock was trading at an 18 per cent discount to peers with similar market capitalisation.
The hope rally rests on the premise that Sitapati’s vast experience (over 22 years) in the food, skin cleansing, and laundry segments at Unilever will be useful in transforming the fortunes of the domestic business, which accounts 55 per cent of the company’s consolidated revenues. Edelweiss Research highlights the fact that a professional manager can be a gamechanger for consumer companies.
The brokerage cites the examples of Varun Berry at Britannia, Suresh Narayanan at Nestlé India, and Sunil D’souza at Tata Consumer Products to underscore this point. The subsequent improvement in the financial performance of these companies led to significant rerating of these stocks.
The underperformance of GCPL has been largely due to the muted net profit growth over FY15-20 at under 10 per cent, as compared to 21 per cent growth in the preceding five years (FY10-15). Analysts at Motilal Oswal Research say the sales slowdown in the domestic business and continued inability to scale up margin and improve return on capital employed in the international business have had an adverse effect on GCPL’S pace of earnings growth.
Investors hope for better times under the new head.
In an investor call, Nisaba Godrej, the current chairperson & managing director, indicated that the company would not make many portfolio changes or get into new categories. The focus for the new CEO would be to expand the existing businesses and improve the growth trajectory, she added. After Sitapati’s induction at GCPL, Godrej would continue as executive chairperson.
In the domestic business (55 per cent of revenues), the company would look to increase the penetration in the household insecticide segment where it is by far the market leader and soaps where it is Number 2. The two segments account for 70 per cent of domestic sales. Both segments grew strongly in the March quarter on lower bases by 33-41 per cent with the hair colour segment (its third-largest) growing at 25 per cent.
The company, however, indicated that the hair colour business could face headwinds given the impact of the second wave of infections on discretionary spending. While the sales growth trend in April was a continuation of the March quarter, the company refrained from giving a near-term outlook.
The bigger challenge going ahead will be in the international business, especially Africa which accounts for over 55 per cent of the international business. The operating profit margin in this geography has halved over the past six years. There are, however, some signs of an improvement with a new CEO taking over last year. In the March quarter, the Africa business operating profit quadrupled YOY on a low base. The Street would also track the Indonesian business, which is facing macro challenges; the geography grew 4 per cent against a decline in the December quarter.