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Godrej Consumer Products Ltd's stock trades at a valuation multiple of nearly 48 times trailing 12-month earnings. (HT)
Godrej Consumer Products Ltd's stock trades at a valuation multiple of nearly 48 times trailing 12-month earnings. (HT)

Investors hope for better times as Godrej Consumer charts course correction

Growth has been a concern for GCPL, more so with the stock underperforming peers in the last two years

Godrej Consumer Products Ltd’s (GCPL) June-quarter results fell slightly short of expectations. Its adjusted consolidated profit of 300 crore was lower than the Street’s estimate of 315 crore. The revenues were flat.

Gross margins of the manufacturer of household insecticides, hair colours and soaps contracted by 285 basis points (bps) year-on-year (y-o-y). One basis point is 0.01%.

Analysts are particularly worried about the firm’s Africa business, which reported a small Ebitda loss for the quarter.
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Analysts are particularly worried about the firm’s Africa business, which reported a small Ebitda loss for the quarter.

In keeping with the trend seen in the Q1 results of several consumer firms, GCPL too has curtailed its advertising spends. Advertising and publicity expenses declined 46% y-o-y, which helped Ebitda margin expand by 91 bps to 20.3%. Ebitda is earnings before interest, taxes, depreciation, and amortization.

Analysts are particularly worried about the firm’s Africa business, which reported a small Ebitda loss for the quarter.

Analysts from Kotak Institutional Equities note: “Africa needs a fix and the company acknowledges the same." In a 4 August report, they summed it up by saying, “GCPL’s optimism on revival in Africa is high, but the Street’s confidence remains low."

According to JM Financial Institutional Securities Ltd, “There is sequential (revenue) improvement, though, between April to June, but the management alluded to severe drag from execution challenges—these must be addressed now that the new CEO (Dharnesh Gordhon - ex-Nestle) has taken charge of the (Africa) business." Needless to say, investors will keep a close eye on the recovery in this portfolio, hereon.

The GCPL stock has lost about 3% on the NSE since the results were declared. But note that the shares are just about 11% lower than their pre-covid highs in January. This also means valuations are pricey. The stock trades at a valuation multiple of nearly 47 times trailing 12-month earnings.

To be sure, there are some bright spots in the Q1 results. For one, Indonesia did well, clocking a 9% revenue growth, with constant currency growth at 5%. The India business revenue growth stood at 5%, with an underlying volume growth of 3%. Here, household insecticides posted a robust 27% growth, whereas soaps and hair colours were muted, posting a 2% and 18% sales decline, respectively.

It’s important to note that GCPL has been in a rough patch and growth has been a concern. The stock has underperformed peers in the past two years. “The company is no longer in denial about its growth struggles and we believe course correction efforts will bear results," Kotak’s analysts said. How this plays out would determine the stock’s trajectory, going ahead. True, the domestic business has shown some encouraging signs in Q1FY21. Even so, the performance of soaps and hair colours are key monitorables, going ahead, and so would be the turnaround in the Africa business.

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