Godrej Consumer Products Ltd’s (GCPL) third quarter of FY25 was gloomy, and it did not come as a surprise. The company had already informed in a pre-quarter update in early December that Q3 revenue and profitability would be weak as its India business was facing challenges in soaps and household insecticides. These segments contribute significantly to the overall mix.
On a high base, GCPL’s Q3 consolidated Ebitda margin contracted as much as 291 basis points year-on-year to 20%. As the chart alongside shows, this is the first drop in the measure in many quarters. Gross margin contracted 175 bps to 54%. That, along with high other expenses and staff costs weighed on Ebitda margin. Thus, Ebitda fell by 10% to ₹756 crore at a time when total operating revenue rose by almost 3%.
Like other companies, GCPL too emphasized on slowing urban demand in India. Its domestic underlying volume growth was flat in Q3 with standalone revenue growth at 2.6%. The household insecticides segment was adversely impacted owing to the relatively poor season.
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Further, GCPL took price hikes in soaps to offset steep inflation in input costs such as PFAD (palm fatty acid distillate). The management pointed out in its Q3 call that while palm oil prices have dropped about 20% from its peak, the price of its derivative PFAD has only dropped about 7-8% from its highs.
On the bright side, GCPL said Goodknight Agarbatti has seen strong outperformance, gaining significant market share in the incense sticks category. Further, air fresheners continue to perform well, clocking double-digit volume growth.
GCPL’s international business fared comparatively better. Indonesia volume growth was 6% year-on-year, although constant currency value growth was a tad higher at 8%. The Africa, USA & Middle East business saw 1% organic constant currency growth but organic sales in rupee terms were down 8%. Ebitda margin of the region has been above 14% for four quarters in a row now. The company showed signs of improvement in its journey to expand its total international business margin. For the first nine months of FY25, international business Ebitda margin expanded to 16% versus 13% in FY24.
Investors are, however, cautious. Since its pre-quarter update was out on 6 December after market hours, GCPL’s shares are down 9% and are currently trading at just about 7% above their 52-week lows of ₹1,055.05 apiece seen on 30 December. “The management is hopeful of a business recoup in FY26, and where we see need for enhanced execution,” said a report by Emkay Global Financial Services, adding, “Upholding market share in soap and accelerating growth in household insecticides would be key.”
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To be sure, margin pressures can linger in the near-term. While palm oil prices have softened, it remains to be seen if the trend persists. “Any duty cut related to palm oil (if it materializes) in the upcoming Union Budget would provide some margin support,” said the Emkay report dated 24 January. Demand concerns are likely to cap near-term volume growth, although performance is expected to improve sequentially in Q4FY25.
Nomura Global Markets Research forecasts 17.5% earnings per share CAGR over FY25-27 and expect sales and margin to improve gradually. CAGR is compound annual growth rate.
GCPL’s shares trade at nearly 47 times estimated FY26 earnings, showed Bloomberg data. While investors seem to be factoring in a good share of the negatives, steep upsides are not a given in the near-term even as sharp downsides may be capped.
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