Godrej Consumer gains on hopes of revival in Indonesia

Consistent growth across geographies, margin gain key to sustain stock rally

The Godrej Consumer Products (GCPL) stock gained over 6 per cent in early trade on Tuesday on the hopes of a recovery in its Indonesian operations, upsides from premiumisation of its household insecticides (HI) segment and expansion of its personal care portfolio. The stock, however, gave up most of the gains, ending about 1.5 per cent higher in a weak market.

Hopes of a recovery in Indonesian business, which accounts for 16 per cent of overall revenue and 20 per cent of operating profits, has been the latest trigger for the stock.

Since the second quarter of financial year 2019-20 (Q2FY20), the Indonesian constant currency sales growth has seen a declining trend, falling from 13 per cent growth to a contraction of 2 per cent in the Q3FY21. This was the result of macroeconomic challenges, intense competition and the impact of Covid-19.

While the geography has been underperforming its other key markets of India and Africa, the management expects it to bounce back to a double-digit growth trajectory. Growth is expected to be driven by expansion of its distribution through the general trade channel, product launches and foray into new categories.

The company is looking at a premiumisation strategy for the largest product segment, of HI which accounts for 35 per cent of sales, by upgrading them from coils and repellents to aerosols/electric products.

Its hygiene portfolio (Saniter brand) has gained market share and now accounts for 10 per cent of revenues. Given the impact on discretionary spends, the air freshener category (27 per cent of sales) will see a gradual recovery.

Despite the inflationary cost pressures, the company expects to maintain operating profit margins in the Indonesia business. Margins are at 28 per cent and have risen 500 basis points over the last five years. In addition to price hikes, the reduction in media costs, improving product mix, and higher share of general trade/e-commerce are expected to support margins.

Analysts led by Abneesh Roy of Edelweiss Research say GCPL’S strategy of launching innovative products at disruptive price points is set to bolster its growth amid tough macroeconomic conditions. They also expect India margins to benefit from supply chain efficiencies, led by Project Pi.

The stock has already rallied (up 48 per cent) since the appointment of Sudhir Sitapati as managing director and chief executive officer on expectation of sustained growth and improved capital allocation.

Analysts at Motilal Oswal Research believe that these gains are a first step in what could potentially be a massive revitalisation of both earnings and return ratios over the next few years, leading to a sustained re-rating as well.

Given the recent gains, investors should await consistency in growth and margins over the next couple of quarters before considering the stock.