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Disappointing quarter; revival could take time
Godrej Consumer Products Ltd’s (GCPL) Q4FY19 numbers were disappointing and below our estimates. Consolidated net revenue de-grew by 3% YoY, largely impacted by poor volume offtake in domestic business (+1% YoY). EBITDA declined by 4.3%, while EBITDA margins contracted 31 bps to 23.3%, as overseas business continued to witness margin pressure. We feel the near term growth challenges could continue for GCPL due to consumption slowdown and uncertainty in overseas business. Nonetheless, we remain positive on the company’s long term growth prospects, given its constant efforts towards brand building and product innovation. We maintain a Buy on the stock with revised target price of Rs 829.
Q4FY19 Result Update:
* Consolidated net revenue de-grew by 3% YoY to Rs 2,452.6cr, impacted by poor performance from both domestic and overseas business. Domestic sales growth stood flat (YoY) with muted volume growth of 1% due to slowdown in consumption and delayed summer. Household insecticides [HI] sales declined by 6%, YoY, largely impacted by elevated competition from low price incense sticks. Further, Soaps also disappointed with 1% de-growth, though the segment continued to gain market share. However, growth in Hair Colour was relatively better at 7% (volume led), driven by new product launches and effective marketing initiatives. International business reported 10% YoY growth in constant currency (adjusted for Europe business divestment), driven by Indonesia (+14%) and LATAM & SAARC (+16%).
* EBITDA declined by 4.3% YoY to Rs 571.3cr, while EBITDA margins contracted 31bps to 23.3%. Domestic business witnessed margin expansion of 70bps YoY, aided by cost saving initiatives. However, a sharp margin contraction of 230bps YoY in overseas business (due to currency depreciation in LATAM) impacted overall margins. While Indonesia witnessed 360bps rise in margins, GUAM & LATAM saw margin contraction. Further, reported PAT grew by 51.5% YoY, aided by one time MAT credit / deferred tax reversal of Rs 546cr. Adjusted PAT fell by 6.6% YoY to Rs 395.2cr, impacted by lower other income and higher interest cost.
* Other key highlights:
i) Within the HI segment, the company would continue with the consumer offer on liquid vaporiser and scale up incense sticks to drive growth in the near term; ii) In Hair Colour, Godrej expert rich crème continued to perform well with market share gains. Further, the company recently launched Godrej Expert Easy 5 minute shampoo hair colour in South India.
Outlook & Valuation:
GCPL’s financial performance over the last three quarters has been subdued. While we remain positive on the company’s long term growth prospects, given its constant efforts towards brand building and product innovation, the near term growth challenges for GCPL could continue due to ongoing consumption slowdown and uncertainty in overseas business. We expect demand scenario and the company’s volume offtake in domestic business to improve meaningfully from H2FY20. Further, with new launches and effective marketing initiatives, the revenue growth trajectory could improve gradually in overseas business, though margin revival could take time. We estimate GCPL’s Revenue and PAT to grow by 11.5% & 19.4% CAGR respectively over FY19-21E with meaningful growth likely from H2FY20. Further, after a decline in FY19, we expect margin trajectory to improve over the next two years, led by cost efficiencies in domestic business and anticipated revival in profitability of overseas business. We have downgraded our Revenue, EBITDA and PAT estimates for FY20E & FY21E by 4-7% to factor in weak Q4. Nonetheless, we maintain a Buy on the stock with revised target price of Rs 829.
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