Margin gains ahead for Godrej Consumer Products on strong sales

The quarterly update indicates strong sales momentum across geographies

Godrej Consumer Products posted better-than-expected December quarter numbers.

In a pre-quarter sales update, the company said that it expects to deliver a consolidated sales growth in mid-teens in constant currency terms and around double-digit growth in rupee terms with flattish volumes.

The performance is better on a sequential basis given the mid-to-high single-digit sales growth and the mid-single digit volume decline in the previous quarters.

While the company was cautious on the macro environment in India, citing poor rural consumption and a muted demand post the festive season, it was able to beat the slowdown blues.

It delivered double-digit sales growth on the back of a low-single-digit volume growth.

Though sales in the Indonesian market declined to low-single digits, it was in the green zone, excluding the hygiene portfolio.

Investment in core categories and scaling down of hygiene business are positives; the geography could see an improved growth print in the current (March) quarter.

Gains in Godrej Africa, US and Middle East continue to be strong, with double-digit growth in constant currency terms.

Commenting on the results, Mihir P Shah and Anshuman Singh of Nomura Research highlight that the Q3 show was led by India volume coming back to year-on-year (YoY) growth (low-single-digit) after three quarters of decline.

The Indonesia business has witnessed almost full recovery with only a low-single-digit decline YoY in constant currency terms.

The brokerage has a buy rating on the stock with a target price of Rs 1,050 a share. It expects the company to post an earnings growth of 14 per cent annually over FY22-25.

In its Q3 preview, Nuvama Research pointed out that the company has seen a recovery in the household insecticides business (due to delayed monsoons). It also saw a strong growth in hair colour and air fresheners. This led to a 10 per cent consolidated revenue growth despite poor rural consumption.

In addition to meaningful recovery in key markets of India, Indonesia as well as Godrej Africa, US and Middle East, margins, too, could see an improvement.

This is on the back of falling palm oil prices that has come off from its peak. This, coupled with higher volumes, will translate into higher gross margins.

How much of this will be reflected at the operating profit level may depend on the quantum of advertising and promotion spends to boost growth.

Most brokerages expect that the initiatives taken under the new chief executive officer (CEO) would bear fruit.

Motilal Oswal Research said, “Since the new CEO is focusing on boosting growth in the high-margin, high return on capital employed domestic business, the company’s medium-term earnings growth outlook is strong.”  

Further, it points out that valuation at 34 times its December 2024 earnings per share is attractive. This is because of the 16 per cent annual earnings growth over FY22-25. The brokerage has a buy rating with a target price of Rs 1,035.

Given the target price, gains from the current levels are upwards of 13 per cent. Investors can consider the stock on dips.