GCPL shares: Jefferies raises demand concerns, still sees 37% upside

Godrej Consumer Products Ltd (GCPL) shares have received a target price of Rs 1,550 from Jefferies, suggesting a 37 per cent potential upside over Tuesday's trading price. Jefferies, however, raised concerns over the industry-wide demand weakness and sees a muted Q3 for GCPL following its pre-quarter update. On Tuesday, the stock rose 0.51 per cent to Rs 1,133.60 level on BSE, a day after falling 9 per cent in the previous session.

Jefferies in a note dated December 9 said GCPL's home hygiene segment and soaps are expected to see volume decline in Q3, and that despite revenue growth at MSD, Ebitda for GCPL may decline due to margin pressure. The FMCG firm's pre-quarter update released on Monday could add to investor concerns on the industry as a whole, which has been facing a slowdown, it said.

Jefferies sees flat volumes in Q3 with drop in India margins. It, however, noted that the rest of the India portfolio including hair, air and liquid detergents have been growing strongly and are expected to deliver underlying volume growth.

"Combining everything together, GCPL's India business should report near flat UVG and around MSD revenue growth in Q3. Impact of cost inflation would weigh on Ebitda margins which could decline below 24 per cent in the quarter, lower than the management guidance range," Jefferies said.

The foreign brokerage said the Ebitda may decline due to unsustainably high margin base of last year.

Jefferies said soaps, which is a third of GCPL's India business, has seen 20-30 per cent YoY rise in key inputs recently. This has prompted the company to take up product prices, including through grammage reduction along with a cut in trade schemes. This hurt volumes in Q3, partially due to reduction in inventory levels across wholesale and household pantry.

GCPL also faced weak weather conditions due to winter in North and Cyclone in South, impacting HI segment that makes up for a third of India business. The next couple of quarters would be important to see the ramp-up in recently launched segment, it said.

"Indonesia business is likely to report MSD volume and HSD revenue growth. In Guam, organi volumes should declined due to continued portfolio and channel simplication, with Q3 likely to be the last quarter to see this impact as per the management," Jefferies said.

It said margins, however should continue to trend up, in line with recent trends, helping segmental Ebitda.

Jefferies said the release from GCPL will likely raise concerns on the industry as a whole, given mixed signals on demand pick-up. The GPCL management has attributed the pain points to specific issues in both categories, some of which would also impact peers, it said.

In addition, recent analyst meets of Hindustan Unilever and Colgate-Palmolive have not provided confidence on a recovery, at least as yet. Cost pressures in specific inputs like palm and tea also add to concerns on margin in some specific cases.