Investors were taken aback by Godrej Consumer Products Ltd’s December quarter results. The maker of Hit insecticides saw flat sales for the December quarter for its India household insecticides segment. The sales were hit due to deficient rainfall in the south and growth of illegal incense sticks in eastern parts of the country, said the company.
But soft growth in the insecticides segment wasn’t Godrej Consumer’s only problem in the December quarter. Growth in the soaps and hair colours segments was subdued as well. As a result, overall branded volume growth for the India business came in at a mere 1%. However, the company countered with the fact that the two-year compound annual growth rate (CAGR) was at 10%.
However, analysts were not too inclined to look at the two-year CAGR, given that the base quarter included the adverse impact of demonetization. A three-year CAGR, therefore, makes more sense.
Analysts from Jefferies India Pvt. Ltd pointed out that on a three-year basis, which nullifies both demonetization and the impact of the goods and services tax implementation, volume CAGR is only about 5%.
According to Kotak Institutional Equities, on a three-year CAGR basis, “household insecticides growth has been an anemic 1%, soaps a slightly-better-but-not-great 6% and hair colours a respectable-but-not-spectacular 9%".
On the international front, Godrej Consumer’s Indonesia business performed better, helped by acceleration in the household insecticides portfolio. The company’s performance in South Africa was disappointing.
Overall, on a consolidated basis, Godrej Consumer managed to maintain its Ebitda margin at 22.4%. Ebitda is earnings before interest, tax, depreciation and amortization. On a paltry revenue growth of 3.5%, pre-tax earnings fell about 3% year-on-year, as other income declined and finance costs increased at a much faster pace.
Evidently, investors on Wednesday punished the stock, taking it down by 7.7%. But what’s more worrying after the December quarter results is that the outlook doesn’t get better in a hurry. Analysts from Jefferies India expect the pressure in the household insecticides segment (~50% of India business) to ease only gradually. “On the other hand, international business remains volatile and, despite recovery, external factors such as currency impacts performance," they added.
Besides, it’s not as if valuations were appealing. Even after the sharp drop on Wednesday, the Godrej Consumer stock trades at around 38 times estimated earnings for the next fiscal year, according to Bloomberg data.