Godrej Consumer Products: A good long-term bet

The stock of Godrej Consumer Products (GCPL) has lost about 20 per cent in the last year due to the general consumption slowdown in the domestic economy as well as muted performance in some segments such as household insecticides.

Headwinds in some of its overseas businesses, too, took a toll on the stock.

However, the company is on a better wicket now. In the June and September 2019 quarters, GCPL was able to clock 5-7 per cent volume growth in its India business.

While price cuts have helped volumes in some segments such as soaps, product launches have sustained the interest in other segments. The international business, too, is looking up, with Indonesia — among GCPL’s biggest markets — bouncing back convincingly.

The recovery makes it a good time for long-term investors to enter the GCPL stock. This apart, a presence in under-penetrated segments as well as a portfolio leaning towards premium products is a positive for the company.

At the current price, it trades at about 31 times its trailing 12-month consolidated earnings. This is at a good discount to peers such as Hindustan Unilever, Britannia Industries, Dabur and Marico which trade at 35- 64 times.

Focus on volumes

GCPL derives about 55 per cent of its total revenue from the domestic market.

After clocking an overall domestic volume growth of 14 per cent in the quarter ended June 2018, GCPL saw volume growth decline to 5 per cent in the three months ended September 2018 and further to 1 per cent each in the third and fourth quarters of 2018-19.

But the company has pulled up its socks this fiscal. It has achieved better volumes through price cuts, offers and product launches.

For instance, price cuts, offers and introduction of regional variants in soaps have helped GCPL clock mid to higher- than-mid single-digit volumes growth in this segment in the June and September 2019 quarters.

Importantly, the household insecticides (HI) segment, which had been off colour in the last few quarters, bounced back in the September 2019 quarter, showing similar volume growth as soaps. Launches such as Good Knight Gold Flash in South India, HIT Anti Mosquito Racket in e-commerce channels, HIT Rat Glue Pad in select markets, and price cuts in liquid vaporisers did their bit to boost offtakes.

GCPL also benefited from a plateauing in the sales of spurious mosquito incense sticks which was eating into coil sales of organised players such as GCPL and Jyothy Labs.

To take on this competition, the company has introduced Naturals Neem incense sticks in about eight States now. Besides, a focus on premium products such as personal repellents and fabric roll-ons as well as a robust product pipeline for the coming quarters is expected to hold this segment in good stead.

GCPL is using innovations and relaunches to beat the slowdown in categories with lower penetration, such as hair colours. To upgrade powder hair-colour users to value-added products, it is relaunching Expert Crème hair colour and also scaling up the availability of Expert shampoo hair colour across the country.

Godrej Anoop, an ayurvedic anti-hairfall oil, has also been initially launched on e-commerce platforms as an experiment.

Thanks to these initiatives, volume growth bounced back to 5 per cent and 7 per cent, respectively, in the first and second quarters, though sales growth remained somewhat flat at 1 per cent in both these periods.

Given the ongoing slowdown as well as the prevailing benign raw material costs, GCPL expects to continue focussing on boosting volumes in the next 2-3 quarters.

Considering that it operates predominantly in under- penetrated categories, is urban-focussed and also concentrates on value-added products, achieving price growth once volumes stabilise may not be a difficult task.

International business

Africa and Indonesia are two of the biggest overseas markets for the company. GCPL had been facing headwinds in Indonesia for a long time, especially in the HI business.

However, the company has recovered in the past few quarters, seeing a consistent growth in sales.

In the quarter ended September 2019, Indonesia sales grew 13 per cent in constant currency terms, with growth being evenly spread across HI, air fresheners and baby wipes.

The company’s focus on improving distribution footprint, a sharper marketing and promotion strategy and product innovations have helped the recovery in Indonesia.

Though West Africa reported a slowdown in sales in the latest July-September quarter, South Africa, the rest of Africa and West Asia performed well on the back of new product developments.

The company has been making efforts towards expanding its wet hair-care products in Africa, which fetch higher margins.

To bring down costs and have greater flexibility in product pricing, it has started local manufacturing in Africa for the wet hair-care segment. It is also relaunching the Darling brand in the dry hair category.

Financials

For the quarter ended September 2019, the firm’s consolidated net sales (in constant currency terms) moved up 3 per cent over the September 2019 quarter to ₹2,604 crore; adjusted net profits (without exceptional and one-off items) grew 11 per cent to ₹384 crore.

Despite price cuts, the company’s India business managed to show a 40-basis point expansion in operating margin to 26.9 per cent, thanks to cost-control efforts.

Its international business, too, witnessed a 320-basis point margin expansion to 15.3 per cent.