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Home >Markets >Mark To Market >Godrej Consumer’s decent Q2 performance in India gets offset by diversification

Godrej Consumer Products Ltd’s (GCPL) second-quarter show is fine, and in-line with investor expectations. But the 10.8% y-o-y revenue growth did not impress the Street, leading to the stock correcting by about 1% post-results, primarily due to the sluggish growth in regions such as Indonesia.

Part of the India revenue growth , said analysts, was because of pent-up demand, and sales of hygiene products. Sales in Africa, the US and the Middle East grew by 10%, which could be due to some up-stocking. Growth here has been on a low base, but the company is also driving new product launches in the region. The management said that it’s looking at improving margins in the next two-three years across these markets. Latin America and Saarc (South Asian Association for Regional Cooperation) revenues grew by 41% y-o-y, but that was also on a low base.

However, revenue growth in Indonesia, coming in at about 3% y-o-y in constant currency, disappointed the Street. This was due to the imposition of the lockdown and social distancing norms in Indonesia. It seems like Indonesia’s sluggishness has offset other regions during the quarter, which has increased the volatility in overseas earnings for GCPL.

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Some analysts worry that the company is excessively diversified, with some regions offsetting the good growth seen in the key Indian market at some point or the other.

Growth in India was led by an impressive improvement in the hygiene segment. Its soaps and hygiene category grew at about 18% y-o-y. The increase in hygiene due to covid-19 is fairly evident, and could remain steady in the coming quarters.

However, one of the worries was the slower growth in household insecticides at about 4%. This category witnessed much slower growth than the Street was expecting. The company faced production issues in this category during the September quarter, but other companies showed much better growth. Overall, branded volume growth was about 5% in Q2 over the year-ago quarter, which is the same as last year.

With the gradual unlocking in India, the hair colour division showed a sequential improvement. The management is expecting better growth rates here in subsequent quarters.

The high revenue has translated into better operating leverage for GCPL. The company has ramped up its advertising spends this quarter, nearly doubling it sequentially.

Nevertheless, the firm’s operating margins came in at about 23.1%, which is higher by about 140 basis points over the year-ago period.

In the coming months, much will depend on how sales in insecticides and hair colour segments shape up.

The stock is still trading at about 12% away from its pre-covid highs. But it’s quoting at a high valuation of about 43 times FY21 earnings, and this may be a deterrent if growth stays lumpy geographically.

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