Muted Q3, stock rally limit upside for GCPL

The stock of Godrej Consumer Products Limited (GCPL) fell about 3.7 per cent in trade after its Q3FY24 earnings disappointed brokerages and led to downgrades.

Further, the stock, after a 15 per cent run-up over the past month prior to Monday’s correction, had already factored in the upside from the business front.

Its peer in the consumer space, Marico, too, saw a 4 per cent drop in its stock price.

Marico indicated that consolidated sales would decline by low single digits given pricing corrections in key domestic portfolios and significant currency depreciation in select overseas geographies.

Brokerages were working with a low single-digit increase in sales.

The company said that the FMCG sector displayed similar demand trends on a sequential basis (as in Q2), with urban markets staying steady and rural markets offering little cheer. In addition, constraints on liquidity and profitability in the general trade (GT) channel remained an overhang for the sector, while alternate channels continued to fare well.

The company remains optimistic about a gradual uptick in consumption trends over the course of the next calendar year on the back of improving macro-economic indicators, continued government spending and conducive consumer pricing across categories in response to a benign input cost environment.

Nomura Research expects the company’s India business to report a drop in sales growth for the third consecutive quarter due to significant price cuts in Saffola edible oils, volume decline in Saffola oils due to a high base and no significant pick-up in parachute coconut oil (PCO) and value-added hair oils’ volumes.

The company expects gross margins to expand as key raw material inputs such as copra and edible oil prices remained at lower levels crude derivatives also exhibited some downward bias. Gross margins are expected to expand by 490 basis points Y-o-Y to 49.8 per cent while operating profit margins
could expand 240 basis points Y-o-Y to 20.9 per cent.

A sharp ramp-up in advertising and promotion costs is expected to have offset the gains from the gross margin level.

The company is increasing advertising spending to strengthen the long-term equity of both the core and the new franchisees.

Motilal Oswal Research has a buy rating with a target price of Rs 660.

Godrej Consumer Products’ consolidated sales update indicates a reported volume growth in the high single digits while sales growth would be flattish in rupee terms.

Like-for-like volume growth would be in mid-single digits while sales could see double-digit constant currency growth.

However in rupee terms given the Africa/Latin American currencies and hyperinflation accounting, sales could see a low single-digit decline.

The company highlighted that the operating environment in India was similar to the one in the September quarter.

Mihir P Shah and Umang Parekh of Nomura Research say that GCPL’s 3Q24 business update has negatively surprised, with reported consolidated sales growth expected to be flat Y-o-Y compared to their earlier expectation of 7.7 per cent sales growth.

The brokerage also said that the stock price could see some pressure in the near term after the recent run up in price even as volume growth and
constant currency growth across other businesses remain healthy.

Emkay Research too has downgraded the stock to add from buy as the positives are factored into the stock price.

The brokerage has a price target of Rs 1,325 a share.

On the margin front, Motilal Oswal Research expects gross margins to expand 250 basis points Y-o-Y to 53.7 per cent, while it is expected to see 120 basis points fall on a sequential basis.

Operating profit margins are expected to expand 50 basis points Y-o-Y and 170 basis points on a sequential basis.

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