Street awaits GCPL’S Africa biz recovery

Domestic business grew 5% in the June quarter; the fall in Africa biz was 22%

Not only was Godrej Consumer Products’ (GCPL’S) June 2020 quarter’s (Q1) pretax profit better than Street expectations, its India business reported 5 per cent yearon-year (YOY) growth, compared to 18 per cent fall in the Q4 of 2019-20 (FY20). The strong demand for household insecticides and hygiene segments led to 3 per cent growth in domestic volume.

On a consolidated basis, GCPL’S profit before tax and exceptional items grew 5.8 per cent YOY to ~396.4 crore versus expectations of ~391.9 crore, according to Bloomberg consensus estimates. However, its consolidated revenue was down 0.9 per cent YOY to ~2,327.3 crore and was a tad below analysts’ estimates of ~2,330 crore.

While a sharp cut in advertising spends protected the company’s bottom line, the 9per cent YOY fall in international business, led by Africa, pulled down overall revenue.

The GCPL stock was down 2.2 per cent on Wednesday, while the broader market indices were almost flat.

Following the 17.6-per cent YOY fall in Q4FY20, GCPL’S revenue from Africa business further declined 22.2 per cent YOY in Q1 and it reported ~29.4 crore operating loss. Over 50 per cent contribution of Africa in GCPL’S overall international revenue (45-46 per cent of consolidated business) clearly justifies Street’s worries. A 9 per cent revenue uptick from Indonesia restricted the fall.

Analysts at JM Financial said in their Q1 report on GCPL that “we are, however, rather disappointed with the way Africa has been shaping up,” adding, “Africa needs to necessarily turnaround before the stock resumes its strong run”.

In fact, the stock has already rebounded about 57 per cent from its March lows, outperforming the 33-per cent rise in the Nifty FMCG Index during the same period. Lack of proper execution has been a crucial issue for GCPL’S Africa business, which the company’s management also alluded to.

Analysts at Edelweiss Securities say growth and margin expansion of GCPL’S international business will be key. Some analysts are hopeful of revival in Africa business under the new leadership of Dharnesh Gordhon (ex-chief executive officer at Nestlé Nigeria) and the management indication of a sequential improvement in Africa business during April-june.

The jury is out if this recovery sustains. Investors should wait until signs of structural recovery in GCPL’S international business emerge.