Analyst Corner: Godrej Consumers – Upgrade to ‘buy’ with revised TP of Rs 850

Consolidated revenue / EBITDA / PAT grew 27%/ 15% / 42%. India business sales grew 35% (24% in Jan-Feb’21) with 29% domestic volume growth (2-year CAGR of 5%). Soaps grew 41% driven by continued market share gains due to micro marketing initiatives and new launches. Household Insecticides grew just 34% (28% globally) driven by broad based performance in burning as well as premium formats.

International business sales grew 18% with 22% EBITDA growth; EBITDA margin expanded 50bps YoY to 17.2%. Indonesia business grew 4% in CC terms impacted by adverse macroeconomic factors and higher competitive intensity in wet wipes. Indonesia EBITDA margin expanded 230bps to 35.4% driven by cost saving initiatives. On the other hand, robust recovery continued in GAUM (Africa, USA, and Middle East) with revenue growth of 36% (CC terms), EBITDA margin expansion of 710bps YoY to 10.9% driven by scale leverage and cost saving initiatives.

Other highlights: 1) OCF / FCF grew by 23% / 40% YoY to Rs 25bn / Rs 23bn respectively, 2) Working capital days is flat at 11 days, 3) Net Debt decreased by 73% to Rs 0.7bn with Net Debt / Equity ratio reducing from 0.32 to 0.07 in FY21, 3) Management stated that they are better prepared to tackle the second wave of Covid – has ramped up production and have optimal level of inventory across the supply chain, however, localised lockdowns could impact frontline servicing and replenishment of outlets, 4) second wave of covid is a likely tailwind for hygiene (including soaps) category and headwind for discretionary categories, 5) innovation rate was in high-teens in FY21, and 6) E-commerce contributed ~4% of business in FY21.

Valuation and risks: We increase our earnings estimates by ~2%; modelling revenue / EBITDA / PAT CAGR of 10% / 12% / 13% over FY21-23E. Upgrade to BUY (from ADD) with a SoTP-based revised target price of Rs 850 (Rs 800 earlier). At our target price, the stock will trade at 39x P/E multiple Mar-23E. Key downside risk is structural deceleration in India household insecticides and steep input cost pressure.