Markets
Investors watch what GAUM would spell for GCPL
Summary
- Besides GAUM margins, meaningful triggers for the GCPL stock would be better growth in Indonesia and the India HI business.
Godrej Consumer Products Ltd (GCPL) shed light on its business strategy in the key Godrej Africa, US, and Middle East (GAUM) segment in a call with the analysts on Wednesday. A troubling factor relating to this business has been its margin performance. In the June quarter (Q1FY23), GAUM’s revenue contributed 25% to GCPL’s consolidated operating revenue. However, the segment formed a mere 5% of overall earnings before interest and tax (Ebit).
Investors are closely tracking the margin movement in the GAUM business. GCPL’s management expects a 150 basis points (bps) year-on-year expansion in near to medium term. Operational efficiencies, better product mix and higher capacity utilization would aid this goal. But the expected margin expansion seems smaller considering the improving product mix. The adverse impact of the currency exchange rate hasn’t helped matters. If not for this, margins would have currently been higher by 600-700 bps, as per the company.
GCPL’s efforts to drive revenue growth holds it in good stead. It aims to increase the reach and quality of distribution and also optimize its portfolio. Further, the number of stock keeping units have been cut down by half in Kenya. This would enable cost optimization. The company also plans to bolster its household insecticides (HI) portfolio and Africa remains a crucial market for that.
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Meanwhile, apart from GAUM’s margins, meaningful triggers for the GCPL stock would be better growth in Indonesia and the India HI business. In Q1, Indonesia revenue had fallen by 2% on a three-year compound annual growth rate basis (constant currency), while the India HI performance was impacted by the muted season and high base.
“For the company at large, we expect the personal care segments (soaps, hair colours and air fresheners) to witness good momentum in Q2FY23E, whereas the HI segment might underperform," said analysts at Edelweiss Securities in a report on 28 September. As such, the sharp drop in palm oil prices from their recent peaks augurs well from a margin perspective. Accordingly, H2FY23 is expected to see better margins. With softening raw material prices Nomura Global Markets Research expects GCPL’s margins to recover faster than peers.
Shares of GCPL have risen by 38% from their 52-week lows seen in March, suggesting that investors are factoring in a good part of the optimism. The shares trade at nearly 40 times their FY24 estimated earnings, according to Bloomberg data.
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