Home / Markets / Mark To Market /  Margin pressure continues to worry Godrej Consumer Products

Godrej Consumer Products Ltd’s (GCPL) results for the March quarter (Q4FY22) have been rather subdued. International business performance was a sore point. Indonesia Ebitda margin contracted sharply year-on-year (y-o-y) because of higher commodity inflation, adverse mix, and a high base. Ebitda is earnings before interest, tax, depreciation and amortisation. Africa business Ebitda margin excluding one-off inventory pilferage fell by 630 basis points (bps) y-o-y on higher costs and rise in advertisement spends. One basis point is 0.01%.

The bright spot has been the margin expansion in India business even as volumes fell by 3%. Growth was weak in the domestic homecare segment and household insecticides (HI) performance was soft.

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Overall, consolidated revenue, including other operating income, rose by 6.8% y-o-y to Rs2,916 crore, driven by pricing. Reported Ebitda margin fell by 407 bps to 16%.

Understandably, investors were discouraged. On Friday, the stock fell by 4.7% on NSE compared to the 2% rise in the sectoral Nifty FMCG index. For FY23, GCPL anticipates double-digit revenue growth with low-single digit volume growth. Analysts remain upbeat on GCPL’s growth prospects under the leadership of new managing director and chief executive officer (CEO), Sudhir Sitapati who took charge in October. The GCPL stock had staged a smart run after Sitapati’s appointment was announced in May 2021.

However, amid rising cost pressures, GCPL’s shares are now down by 33% from the 52-week high seen on 15 September on NSE. Valuations are lower now. The stock trades at 39.4 times estimated earnings for FY23, according to Bloomberg data. Peers trade at higher valuations. This measure for Hindustan Unilever, Marico, Britannia Industries, and Dabur India stands at 55.6 times, 47.4 times. 46.4 times and 43.4 times, respectively.

However, margin pressures are likely to cap substantial near-term gains in the GCPL stock. The company expects to see some margin expansion in the second half of FY23. This would also depend on the moderation in palm/crude oil prices from current levels.

Further, category development growth is in focus with new offerings at attractive price points in HI and hair colour. “There is a lot of anticipation about how the company would be re-staging the India HI business to spur growth therein, ‘category-development’ being the key theme set by CEO Sudhir Sitapati here, as it is for the company as a whole," pointed out JM Financial Institutional Securities Ltd analysts. Hereon, investors will watch for signs of positive turnaround. “The execution machinery being put in place will yield fruits over the medium-term though stock is likely to be lacklustre till some signs of success start to become visible," said JM’s analysts.

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