Markets
Godrej Consumer’s profit warning intensifies gloom in FMCG sector
Summary
- The stock dropped more than 8% on Monday after the company warned of weaker margin and volumes in Q3, dragging other FMCG stocks down with it.
Shares of Godrej Consumer Products Ltd’s (GCPL) plummeted more than 8% on Monday after it warned of weaker margin and volumes for the three months to December (Q3FY25). After market hours on Friday, GCPL said its India business is expected to report flattish volume growth this quarter. For perspective, in the first half of FY25 (H1FY25), GCPL’s domestic volume growth was 7-8%.
Q3 volume growth is expected to be adversely impacted by a poor show in the soaps and home insecticides (HI) segments. Soaps form a third of India business and the 20-30% on-year rise in palm oil and derivatives prices has been a menace. To offset surging costs, GCPL hiked prices, lowered the grammage of key packs, and reduced various trade schemes. This reduced inventory across wholesale and household pantry. Further, weather conditions (a delayed winter in north India and a cyclone in south India) have not been conducive to growth in the HI segment, which contributes a third of its India business.
Pressure on margins
Importantly, the inflationary environment is putting pressure on margins. Thus, standalone Ebitda margin is expected to be below the historically normal range of 24-27%. Notably, standalone Ebitda margin in the base quarter of Q3FY24 was quite high at about 30%, helped partly by favorable commodity prices.
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But investors should not lose sleep over margins. “GCPL’s raw material basket saw steep inflation in FY21/22 with sharp uptick in both palm oil as well as crude. As a result, we had seen standalone/consolidated gross margin compression of about 700-800bps over FY19-23," said a JM Financial Institutional Securities report dated 8 December. “Once the inflation cycle reversed, it recouped the majority of the losses in FY24 (standalone/consolidated gross margin expansion of about 600-700 bps). Currently, palm oil is inflationary while crude prices have been stable to benign," it added. What also helps this time around is that GCPL’s international business margins are in a relatively better shape.
GCPL’s Indonesia business is expected to deliver mid-single digit volume growth in Q3FY25. The GAUM (Godrej Africa, USA, and Middle East) organic business is expected to see volume drop.
Analysts cut estimates
GCPL’s update caused many analysts to cut their earnings estimates. Nomura Global Markets Research cut its FY25-27 forecast for earnings per share by about 8% to factor in lower volumes and operating profit margin pressure. The broking firm reduced the premium assigned earlier to GCPL’s India and international EV/Ebitda multiples to 39x and 35x (versus 41x and 37x previously) to arrive at a sum-of-the-parts-based revised target price of ₹1,450 ( ₹1,550 earlier), implying a target price-to-earnings multiple of 53x.
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As things stand, GCPL’s stock is down 27% from its 52-week high of ₹1,541.85 on 11 September. Needless to say, a recovery in soaps, especially in the light of elevated competition from Hindustan Unilever Ltd (HUL), and the growth trajectory of the HI category are key.
Meanwhile, GCPL’s commentary adds to the already subdued sentiment on the sector’s demand conditions, perhaps explaining why shares of other FMCG companies, including HUL, also fell on Monday. “The release from GCPL will likely raise concerns on the industry as a whole, given mixed signals on demand pick-up," said Jefferies India’s analysts. “Of course, GCPL’s management has attributed the pain points to specific issues in both categories, some of which would also impact peers. In addition, recent analyst meetings (HUL, Colgate) have not provided confidence in a recovery, at least as yet," they added in a report on 9 December.
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