Godrej Consumer Products Limited
CMP: Rs. 924.25
Recommendation: Buy
Investment Horizon: 3 years
Parul Sharma – Research Analyst
Date – 29.08.2022
Outlook and view
Godrej Consumer Products Limited (GCPL) is a part of the over 125-year-young Godrej Group. Its portfolio and heritage are in democratization, and this is what its strategy is based on- making amazing quality products available at accessible price points.
The geographic reach of GCPL includes some of the world’s largest and fastest-growing emerging economies. However, its top categories in these countries, such as Household Insecticides, Air Care, and Hair Colour, are underdeveloped, leaving space for growth. The firm sees this as a huge opportunity for value creation by applying winning strategies for category development. As category leaders, the strategy is to accelerate innovation-led growth and seek innovative methods to disrupt its categories.
New strategic pillars and philosophy adopted by the New MD & CEO, Mr. Sudhir Sitapati is expected to address the current issues and impact the company positively. The number one priority is to bring the volume growth back. GCPL will also focus on household insecticides and the growth of its Indonesia business, while profitability and governance will be targeted in Africa.
As the company’s renewed strategy takes center stage, it is likely to experience a turnaround in its domestic and international business, as well as an improvement in financials.
Key Positives
Leadership in Core Categories and Geographies: GCPL’s brandsenjoy a market-leading position in Indian and International business in categories like Hair Care, Home Care, Personal Care, and Household Insecticides. Brands like ‘Good Knight’, ‘Godrej Expert’, ‘HIT’, ‘Darling’, ‘Saniter’, etc. have strengthened their position across key markets and geographies with a leading presence in Asia, Africa & Latin America.
Given its market leadership in categories with significant non-linear growth potential, as well as its strong presence in emerging economies that are growing at twice the GDP of the world, the company eyes toward an enduring future to build long-term value.
Power Packed Management: The legacy of GCPL will now be led by Mr.Sudhir Sitapati, New MD & CEO who has rich experience in building sustainable and profitable businesses to steer the growth strategy going forward. Under his leadership at Hindustan Unilever as Executive Director of Food & Refreshment, the category’s sales have grown at a CAGR of ~7.8% during FY16-20. The company has also made two senior appointments of people with significant experience in digital transformation- Rajesh Sethuraman as CEO of ASEAN and Vijay Kannan as the Head of Business Transformation and Digital to bring positive strategic changes in the business.
Medium Term Ambition to Achieve Double-Digit Volume Growth: The company hasvery clear plans for the business to achieve the ambition of double-digit volume growth in the medium term. The strategic pillars for fueling the growth are
1. Extending leadership in core categories and geographies,
2. Accelerating innovation and building purposeful brands,
3. Leveraging digital enhancing go-to-market,
4. Making supply chain best-in-class,
5. Fostering talent and,
6. Building a greener world.
Robust Game Plan: To focus on category development of its existing portfolio, driven by product innovation, relevance building, and access and marketing investments, and funded by a digitally enabled simplification of the company.
Drive Innovation Capabilities: The company is going to fire on the twin engines of blockbuster innovations and category development. A great example of its reconstituted product is powder-to-liquid ‘Magic’ handwash, where the company has reduced plastic, water usage, and transportation costs to create a product that is a quarter the cost of other handwashes in the market.
GCPL’s forte has always been innovation. The firm will continue to build on that, but it is only half the solution. The other half is actually making these new products relevant and accessible, which will be accomplished through more focused category development.
Become truly global: In the fiscal year 2021-22, GCPL led the creation of an empowered global category structure. This new structure will power its global categories in Household Insecticides, Air care, Hair Colour, and Hygiene and will build on product development (innovation and renovation) and brand equity (brand strategy and advertisement). The company has already laid the foundation for achieving this goal, cross-pollinating Magic- powder-to-liquid handwash, from India, Africa, Indonesia, and Latine America, becoming its first-ever global product. Similarly, it forayed into the Household Insecticides category in Africa with the launch of Goodknight Power Shots. Its next big priority is building Goodknight Gold Flash liquid vaporiser into a global product, too.
Financials: The firm has a healthy financial track record. Over the years, it has reduced its dependency on borrowings from Rs 4,001 crore in FY18 to Rs 1,704 crore in FY22. The strong liquidity is visible on the balance sheet with cash and bank balances and liquid investments of Rs 2,224 crore as on March 31, 2022. It has maintained its ROCE in the range of 19-22% over FY19-22. The company’s revenues have increased strongly by double-digit across geographies in FY22 expect the weak performance in Indonesia.
Key Risks:
Competitive Market Conditions and New Entrants to the Market: The firmfaces intense rivalry from new/smaller players in the market, although it holds a leadership position in its core categories and geographies. Competitive market conditions may lead to an aggressive product pricing strategy. However, the three key pillars viz. consumer centricity, new product innovation & development, and training-led skill up-gradation are expected to continue to propel the company ahead of the competition in its strategy of innovation-led value creation.
Inflationary Pressure on Input Costs: The company remains vulnerable to raw material price fluctuations. A spike in key raw materials, particularly led by commodities like palm oil and crude oil increases the costs for the company. It also places a significant dent in demand and volume growth in some categories with a drag on EBITDA margins. GCPL’s ability for cost optimization programs and timely price increases will be the key monitorable in the future.
Currency Risks & Macroeconomic Factors: International business, having a strong presence in emerging markets, contributes to 44% of the company’s sales in FY22. Such high exposure also places GCPL for exchange rate volatility, political instability, and devaluation of local currency along with the impact of economic environments on consumer behavior.
Valuations:
Better capital allocation, refreshed strategies, green shoots in business across geographies, introduction of new products, leadership in diversified product offerings, decline in commodity prices, and major cost control measures are expected to be fruitful for the company in the future. We value the company at a P/E of 39.09x FY25E which seems inexpensive.
About the company:
Over the last decade, GCPL has transformed into an emerging markets FMCG leader. Today, the group enjoys the patronage of 1.15 billion consumers globally, across different businesses. It also has a presence in 90+ countries. In line with its 3 by 3 approach to international expansion, the firm is building its presence in three emerging markets, namely Asia, Africa, and Latin America, across three categories (home care, personal care, and hair care). The company ranks among the largest household insecticide and hair care players in emerging markets.
Financial snapshot:
| Figures (Rs in Cr) | FY18 | FY19 | FY20 | FY21 | FY22 |
| Total revenue from operations | 9,937 | 10,314 | 9,911 | 11,029 | 12,277 |
| Other income | 108 | 109 | 112 | 67 | 90 |
| Total income | 10,045 | 10,423 | 10,023 | 11,096 | 12,366 |
| Total expenses, including depreciation and finance costs | 8,186 | 8,591 | 8,182 | 8,971 | 10,201 |
| Profit/loss before tax | 2,039 | 2,085 | 1,760 | 2,080 | 2,155 |
| Tax expense | 405 | -256 | 264 | 360 | 372 |
| Profit/Loss after Tax | 1,634 | 2,342 | 1,497 | 1,721 | 1,783 |
Key metrics:
| Particulars (%) | FY18 | FY19 | FY20 | FY21 | FY22 |
| Debtors Turnover Ratio | 8.68 | 8.05 | 8.02 | 10.12 | 11.48 |
| Inventory Turnover Ratio | 6.60 | 6.52 | 6.03 | 6.40 | 6.33 |
| Interest Coverage Ratio | 13.25 | 9.91 | 8.75 | 16.22 | 19.11 |
| Current Ratio | 1.24 | 1.20 | 1.06 | 1.08 | 1.43 |
| Debt Equity Ratio | 0.41 | 0.34 | 0.32 | 0.19 | 0.14 |
| Operating Profit Margin (%) | 20.13 | 19.27 | 20.17 | 22.34 | 20.47 |
| Net Profit Margin (%) | 16.56 | 22.91 | 15.23 | 15.74 | 14.65 |
| Return On Net Worth (%) | 26.11 | 32.22 | 18.95 | 18.23 | 15.43 |
Story in charts:
Revenue from operations grew by a CAGR of 5.98% over FY19-22; Likely benefits of the refresh strategy are expected to pay off in the future
Revenue by product categories over FY19-22
| Segmental Revenue (In Rs.) | FY19 | FY20 | FY21 | FY22 | CAGR FY19-22 |
| Home Care | 4,167 | 4,250 | 4,729 | 4,958 | 5.96% |
| % of revenue | 41% | 43% | 43% | 41% | |
| % of growth | 6% | 0% | -6% | ||
| Hair Care | 3,268 | 3,147 | 3,415 | 4,049 | 6.40% |
| % of revenue | 32% | 32% | 31% | 33% | |
| % of growth | -4% | 8% | 19% | ||
| Personal Care | 2,786 | 2,429 | 2,793 | 3,167 | 4.37% |
| % of revenue | 27% | 25% | 26% | 26% | |
| % of growth | -13% | 15% | 13% | ||
| Total | 10,221 | 9,827 | 10,936 | 12,174 | 6% |
| % growth | 4% | -11% | -11% |
Geography-wise revenue performance over FY19-22; Indonesia’s growth is crucial
Trend in EBITDA Margins; Raw Material prices shoot up in FY22, particularly Palm Oil
Trend in ROCE
| Particulars | Details |
| Market Cap | Rs 92,977 crores |
| 52 week high low | Rs 1,138 |
| CMP | Rs 909 |
| PE | 54 |
Shareholding pattern as of June 31, 2022:
| Particulars | Holding (%) |
| Public | 6.70% |
| Promoters | 63.22% |
| DIIs | 6.05% |
| FIIs | 24.03% |
Price performance V/S NIFTY50:
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