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Muted domestic volumes, low IB margins impact profitability
Godrej Consumer Products Ltd’s (GCPL) Q3FY19 numbers were disappointing and below our estimates. Consolidated net revenue increased by 3.5% YoY, largely impacted by poor volume offtake in domestic business (+1% YoY). EBITDA grew by 3.8%, while EBITDA margins improved marginally by 6 bps to 22.4%. Overseas business witnessed a sharp contraction in margins. Further, lower other income and higher depreciation and interest cost impacted the PAT, which de-grew by 2.9% YoY. Notwithstanding the near term challenges, we remain positive on GCPL’s long term growth prospects, given stable demand environment and company’s constant efforts towards brand building and product innovation. We maintain a Buy on the stock with target price of Rs 883.
Q3FY19 Result Update:
* Consolidated net revenue increased by 3.5%% YoY to Rs 2,721.9cr, driven by 6% growth in domestic business. Domestic volume growth was muted at 1% YoY. Household insecticides [HI] (impacted by unfavourable season in South and increased competition in incense sticks) and Hair Colour (impacted by unfavourable base) reported flat growth, while growth in Soaps stood marginal by 2%, though the segment continued to gain market share. Others and unbranded / export segment reported healthy growth of 26% and 11% YoY respectively. International business reported 10% YoY growth in constant currency (adjusted for Europe business divestment), driven by Indonesia (+7%) and LATAM & SAARC (+41%).
* Consolidated EBITDA grew by 3.8% YoY to Rs 608.7cr, while EBITDA margins improved marginally by 6bps to 22.4%. Domestic business witnessed margin expansion of 140bps YoY, aided by cost saving initiatives. However, a sharp margin contraction of 300bps YoY in overseas business (due to currency depreciation and higher crude oil prices) impacted the overall margins. Indonesia & Africa witnessed margin contraction of 160bps & 80bps YoY respectively. Adjusted PAT declined by 2.9% YoY at Rs 419cr, impacted by lower other income and higher depreciation and interest cost.
* Other key highlights:
i) Within the domestic HI business, the company launched natural neem incense stick in AP and Telengana. Going forward, the management expects the business to revive, led by new launches and sustained brand building efforts; ii) In Hair Colour, Godrej expert rich crème continued to deliver robust growth and gain market share.
Outlook & Valuation:
GCPL’s financial performance over the last two quarters has been subdued. However, we do expect the volume offtake in domestic business to improve across segments in the coming quarters, led by stable demand environment and company’s efforts towards brand building and product innovation. Further, with new launches and effective marketing initiatives, the revenue growth trajectory could improve in overseas business, though margin revival could take time. We estimate GCPL’s Revenue and PAT to grow by 10.8% & 12.9% CAGR respectively over FY18-21E. Further, margin trajectory is estimated to improve in FY20E & FY21E, led by cost efficiencies in domestic business and gradual revival in overseas business profits. We have downgraded our Revenue, EBITDA and PAT estimates for FY19E & FY20E by 3-8% to factor in weak Q3. Further, we have incorporated projections for FY21E. Based on this, we maintain a Buy on the stock with target price of Rs 883.
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