Add Godrej Consumer Products, target price Rs 700: ICICI Securities

ICICI Securities has given an add rating to Godrej Consumer Products Ltd (GCPL) with a target price of Rs 700. The share price moved up by 1.01 per cent from its previous close of Rs 661.70. The stock’s last traded price is Rs 668.40.

For the brokerage, GCPL remains an outperformer within staples. It sees potential turnaround in India Household Insecticides (22 per cent of revenue, 45 per cent of SoTP valuation) driven by (1) regaining lost ground from illicit incense sticks (challenges in sourcing, weakness in wholesale), (2) acceleration in category growth (greater usage given consumer focus on health), (3) continued weakness in competition and (4) new product launches.

The brokerage also expects margin benefits from mix improvement (India Household Insecticides is margin accretive) and deflationary input prices. Africa business has a high exposure to consumer discretionary categories and outcomes could be binary. That said, Household Insecticides in Africa, though a long-gestation, could benefit from a management change.

Investment Rationale

The brokerage expects overall market expansion from higher usage by consumers being wary of contracting mosquito borne diseases (malaria, dengue). Competitive intensity could also remain low given Reckitt Benckiser (second largest player in India Household Insecticides with Mortein brand) rolling back the split of its businesses in 2019. The brokerage expects a host of new product launches by GCPL in Household Insecticides to gain market share.

The brokerage has increased its earnings estimates by 8-9 per cent; modelling revenue / EBITDA / PAT CAGR of 6 per cent / 10 per cent / 8 per cent over FY20-22E. It maintains add raing with a SoTP-based revised target price of Rs 700 (Rs 600 earlier). At our target price, the stock will trade at 39 times P/E multiple March-22E.

Key downside risk is sustained weakness in Africa.

Source: ICICI Securities

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 2132.69 crore, down -22.59 per cent from last quarter sales of Rs 2755.08 crore and down -12.22 per cent from last year's same quarter sales of Rs 2429.68 crore. The company reported net profit after tax of Rs 230.11 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 63.24 per cent stake in the company as of March 31, 2020, while FIIs held 26.34 per cent, DIIs 3.1 per cent and public and others 7.32 per cent.