Markets
Input cost inflation weighs on GCPL in Q1; margin outlook improving
Summary
Godrej Consumer Products expects its India revenues to grow y-o-y by early double-digits in Q1FY23Godrej Consumer Products Ltd (GCPL) expects consolidated Ebitda margin to contract year-on-year (y-o-y), it said in its business update for the June quarter (Q1FY23). The Ebitda margin in Q1FY22 was 21.3%. The expected contraction is largely because of higher input costs, upfront marketing investments, and a weak performance in Indonesia. This also means Q1FY23 would be the fourth continuous quarter of a y-o-y drop in Ebitda margin.
However, margin outlook is improving. Prices of palm oil and crude oil are softening. Bloomberg data shows, on 5 July, the price of Malaysian palm oil was MYR4,344 a tonne, down about 46% from its March highs. One factor driving this fall is that Indonesia, a key palm oil producer, raised the commodity’s export quota. “Palm oil prices have sharply corrected and, hence, GCPL’s gross margin would expand in H2FY23 but advertising spends would increase," said analysts at Edelweiss Securities in a note on 6 July.
Note that, shares of fast-moving consumer goods (FMCG) companies such as GCPL, Hindustan Unilever, and Britannia Industries have risen so far this week by about 13%, 10% and 7%, respectively. Palm oil and its derivatives are among key inputs for these companies. Even so, the current palm oil price is about 10% higher y-o-y. GCPL expects its India revenues to grow y-o-y by early double-digit in Q1FY23. The personal care segment is likely to report strong sales growth whereas the home care segment could register a low single-digit sales drop.
Overall, rural demand is muted. Volumes continued to put up a weak show and are expected to decline by mid-single digit albeit on a high base given that growth in Q1FY22 stood at 15%. However, the three-year volume compound annual growth rate is close to mid-single digit, GCPL has said.
In the overseas business, Indonesia’s performance was weak mainly because of the high base last year in the hygiene portfolio. Thus, GCPL expects sales to drop in the high single-digit. The other international regions saw strong growth momentum. Overall, GCPL expects to clock high single-digit sales growth.
“While declining palm oil and crude oil prices are positively impacting investor sentiments, the business is yet to pick up especially in the household insecticides category and the Indonesia segment. This would aid margin enhancement and volume growth, which augurs well for the stock," said Sachin Bobade, analyst at Dolat Capital Market. As things stand, the GCPL stock is nearly 23% lower than its 52-week high seen on 15 September.
