Godrej Consumer posts weak Q1 results, outlook for the stock remains ‘cautious’

Godrej Consumer’s reported a weak set of numbers for Q1 FY18, partially clouded by GST transition, highlight headwinds of competition reflected in flattish volumes. International operations provided a mixed picture in terms of growth and so at the current elevated valuations, we prefer to remain cautious.

Pricing-led Growth

Godrej Consumer’s (GCPL) Q1 2018 consolidated net sales were Rs 2,172 crore (2.8% YoY) benefitting from the improved pricing and favourable product mix, but partially offset by subdued volume growth. Organic sales at constant currency (excluding Strength of Nature inorganic sales of Rs 44 crore) grew by 6%. Margin pressure was visible in most of the segments and geographies. Consolidated EBITDA margin shrank by more than 200 bps to 15.9% impacted partially by higher advertising cost.

godrej cons nos

India Business — Hair Colour Result was Positive

godrej india hair colour biz

Godrej peers gfx

The organic growth of India business was 6%, coming mainly from the pricing effect. Branded volume growth was flattish, reminding us of similar trajectory posted by HUL. Amongst segments, hair colours (14% of India business) witnessed double-digit volume growth (Godrej Expert Rich Crème). Scaling up of BBlunt also aided the same. The performance of Household Insecticides (33% of sales) segment was below expectations primarily due to destocking in the month of June. Soaps (40% of sales) unit witnessed volume decline in high single digit but was relatively less impacted by GST.

India Business Dragged by Indonesian Operations

godrej Indonesia ops

GCPL’s operations in Indonesia (15% of consolidated net sales) continued to face headwinds from the elevated competitive intensity. Sales in Indonesian operations were down by 4% (constant currency basis), partially impacted by higher sales promotion spend. Management sounded cautious on the near-term future for the business but was hopeful that recent initiatives would help in getting better clarity on margins in the next quarter.

Elsewhere, particularly in Africa, sales growth (16% growth CC) was better, aided by hair extensions business.

GST Transition Impact to Wane by End of August

As per management, GST transition impact was high for segments like household insecticides and hair colours. In the case of Soaps, the impact was relatively low. The company mentioned improved offtake for the household insecticides unit in the current quarter. Regarding trade channels, particularly wholesale, the company expects normalcy by the end of August. CSD (Canteen Store Department) purchase is stalled as was noted by other FMCG players.

Patanjali Impact on Soap Category

While in the earlier quarters, GCPL had mentioned about a possible adverse impact of Patanjali in soaps category, this time they sounded unaffected. However, the fact that there was a volume de-growth in the quarter and even in the month of April and May there were no volume improvement points to rising competition in the low-cost category of soaps. Currently, the impact of Patanjali in terms of change in market share is difficult to gauge as the market research firms don’t take Patanjali’s own store sales into account.

Focus on Wet Hair Segment in Africa

Amongst the positive takeaways was the company’s increased focus on wet hair segment. The company is, therefore, focusing on consolidating the business of Strength of Nature (SON) and started local manufacturing of wet hair products in East Africa.

Overall, the quarterly numbers were below expectations on both top line growth and margin front. Godrej Consumer’s efforts to consolidate hair segment — both in India and Africa — is encouraging. Traction in soaps segment is something to be closely watched amid competition from unlisted players. However, a possible trend towards premiumisation can help. The other key factor to watch out for the company is the earnings visibility in Indonesia operations.

While we like Godrej Consumer’s geographically-diversified and de-risked business model, and the growth drivers from other emerging markets, at current valuation (48x 2018 earnings), it prices in most of the near-term positives and leaves little room for upside.



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