The Godrej Consumer Products (GCPL) stock is a good pick in the FMCG space. Even as low volume growth and price cuts have been eating into the sales and profit of companies such as Hindustan Unilever (HUL), GCPL has clocked good numbers in both the domestic and international operations in recent times.

Lower penetration of the company’s products such as household insecticides and hair colours has given GCPL the edge. A faster than industry growth for the company in markets such as Indonesia has helped too.

In the months to come, GCPL should continue to benefit from innovations in its existing product lines in household care and hair care, as well as recent launches in newer segments such as air fresheners.

The GCPL stock currently trades at 42 times its trailing 12-month earnings. While this is not cheap per se , the valuation is on par with peers such as Dabur and is at a discount to the BSE FMCG index whose trailing price-to-earnings is at 44 times.

Steady domestic growth

GCPL, the maker of ‘Good Knight’ and ‘Hit’ repellent range of products, is the market leader in household insecticides and hair colours in India. Despite the overall sluggishness in consumption, the company, which derives 50-55 per cent of its consolidated revenue from the domestic market, has seen sales growth of 10-17 per cent in these segments in the last four quarters.

Sales growth here has been aided by double-digit volume growth and, unlike soaps, the company did not witness pricing pressures in this space.

In fact, the company took price increase of 6-7 per cent in its Expert Original powder hair colour in the recent September quarter and is also looking at select price increases in the second half. What has helped the company in this period is the low penetration of insecticides and hair colours.

Unlike soaps, which are almost fully penetrated, only 35-45 per cent of the households use insecticides and hair colour products, leaving enough growth opportunities in these segments.

So even as the rural slowdown has hit some FMCG players hard, GCPL benefited from good rural demand for its recent launches such as the Good Knight Fast Card.

Besides launches such as the Good Knight Xpress, Nupur Coconut Henna Crème and BBLUNT range of premium hair care products has helped hold the interest of urban consumers too. These factors are expected to favour the company in the coming months as well. GCPL’s entry into newer and higher margin yielding segments such as air fresheners (aer), Godrej No.1 face wash and handwash (protekt) should help sustain double-digit growth too.

GCPL is also the number one or number two player in air fresheners, insecticides and hair extensions/colour in major international markets such as Indonesia, Kenya, Nigeria, South Africa, Argentina and Chile.

In the recent September quarter, the international business reported 15 per cent sales growth (organic) in constant currency terms, with all geographies recording double-digit growth in sales. While in Indonesia, the company managed to buck the slowdown in the FMCG industry with innovative launches such as compact Hit aerosols, in Africa, the Darling brand of hair extensions, weaves and braids helped growth. The company also reported market share gains in hair colours in Chile and Argentina. Earlier this year, GCPL acquired Frika Hair, a South Africa based hair extensions company.

On the international front, GCPL’s strategy of acquiring premium brands which are among the top three players in their respective markets as also focusing on emerging markets, where the growth potential is higher, continues to hold it in good stead. Adverse currency movements remain a risk factor, which may pull down the consolidated numbers.

Financials

Backed by both domestic and international operations, GCPL’s consolidated sales grew 10 per cent year-on-year in the quarter ended September 2015 to ₹2,242 crore. Net profit moved up by 23 per cent to ₹287 crore over the same period last year. Operating margins expanded to 18 per cent from 16.6 per cent a year ago. Margin expansion has been aided by fall in prices of raw materials such as crude oil (used in insecticides) and palm oil (used in soaps).

Considering the sluggishness in both the Indian and Indonesian markets, the company upped its advertisement and publicity spends to 11.4 per cent of net sales as against 10.3 per cent a year ago.

GCPL hopes to maintain ad spends in the 11-13 per cent range in the coming quarters.

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