Friday, October 11, 2024

Godrej Consumer is making the right moves, but the positives are priced-in for now

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Godrej Consumer Products Ltd’s (GCPL) investors are sitting on handsome gains with the stock rising 46% over the past year, steeper than the Nifty FMCG index’s 23% gain. The fast-moving consumer goods company is taking steps in the right direction, including continuous simplification of its business by reducing its stock-keeping units (SKUs, or product lines) and processes.

Godrej Consumer is also focusing on new launches and growth categories. Recently, it entered to the fast-growing pet care business through a subsidiary in alliance with Godrej Agrovet Ltd. Production is planned to start in the second half of 2025-26.

Over the past year, GCPL has ventured into four new categories (deodorants, liquid detergents, bodywash, and pet care), Nomura Global Markets Research noted in a report. “While the contribution from these categories will be marginal to GCPL currently, we expect its sales to grow by about 15-20% and achieve meaningful size over the medium term,” it added.

Overall, Godrej Consumer is hoping its efforts will aid in increasing the total addressable market in the India business, which is one of the company’s goals.

In the previous few quarters, the company has demonstrated good volume growth. In the first quarter of FY25, its domestic branded volume growth at 8% was better than that of its peers. GCPL’s management expects the April-June period to be the last quarter to see negative pricing.

The launch of its RNF-based liquid vaporiser in July can be a growth driver. RNF, or renofluthrin, according to the company, is twice as effective as other mosquito repellents.

A 52-week high

Some headwinds are emerging though. Palm oil inflation can be expected to weigh on GCPL’s India business margin. Godrej Consumer has taken a 3% price increase in soaps so far in FY25 (as against 7-8% warranted) as Hindustan Unilever Ltd, the market leader, has retained prices, said analysts from Kotak Institutional Equities.

Hindustan Unilever’s recent formulation innovation in Lux and Lifebuoy soap has lowered its consumption of palm oil, a key input for making soaps, by about 25%, enabling it to be more competitive. While it is still early days for a big change in market share in soaps, it is a metric worth watching closely.

In an interaction with Kotak analysts, Godrej Consumer’s management pointed out that the India business’ robust underlying volume growth momentum continued, led by improvement in household insecticides and continued strength in soaps, although it was slightly offset by softness in hair colour. Also, the Indonesia and Africa businesses are on track to deliver strong Ebitda growth this year.

Amid this, GCPL’s shares hit a new 52-week high of 1,528.25 apiece on NSE on Monday, while the Nifty FMCG index gained 1,290.15 points, or about 2%, to reach 64,465.85 points. The Hindustan Unilever stock also hit a 52-week high of 2,938.20 per share on Monday.

The GCPL stock trades at around 52 times the company’s FY26 estimated earnings, as per Bloomberg data, and appears to be factoring the brighter picture adequately.



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