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Motilal Oswal
Godrej Consumer (Neutral)
CMP: ₹659.1
Target: ₹700
Key takeaways: a) The worst seems to be over on the domestic volume growth front, but strong revival
will take time. b) Despite muted growth of the past three years, we believe Godrej Consumer Product’s domestic business is of high quality with attractive long-term growth prospects. It should grow faster on expected recovery in demand environment, traction on new products (also significantly margin accretive), and better utilisation of expanded distribution (now at about 6 million outlets, direct reach of about 1.3 million outlets). c) Balance sheet performance — a key concern area in the past — has been fairly good in recent years, particularly on the cash conversion cycle front, which declined to 14 days from 47 days in the past three years (on average basis) and to 11 days from 60 days on year-end basis. If not for earnings slowdown of the past three years (PBT growth of 7 per cent CAGR), ROCE improvement (to 17.7 per cent in FY19 from 16.5 per cent in FY16 would have been more impressive.
Valuations of 34.7x FY21, while cheaper than peer average, offers limited upside on considering weaker than best of breed peer earnings visibility and less than peer ROCE levels (at least currently). Maintain Neutral.
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