“BUY” This Large Cap FMCG Stock For A Target Price of Rs. 1,180 Suggests Edelweiss

The brokerage’s take on Godrej Consumer Products Limited (GCPL)

In its research report, the brokerage has reported that "The Godrej Consumer (GCPL) stock has corrected about 17% from its peak. We had earlier highlighted GCPL would have weak Q2FY22 performance in India HI, Indonesia and margins. However, we believe most of these issues are transitory. GCPL will benefit from i) recovery in demand for personal care led by rising mobility; ii) rising dengue cases, which could drive HI business, but watch out for a harsh winter; and iii) strong performance in the Africa business while corrective actions in Indonesia (aided by soft base) should also help."

As per Edelweiss "Four reasons for the recent correction include i) In Q2FY22, Homecare sales delivered muted growth of 5% YoY, due to a soft performance of HI impacted by extreme weather conditions. ii) Dabur entered liquid vaporisers. iii) Indonesia Sales saw a decline of 2% YoY due to company-specific, macro-economic challenges. iv) Inflationary raw materials led to a gross margin dip of 616bp while EBITDA margin dipped 201bp in Q2FY22. Godrej Consumer (GCPL) stock has seen a correction of around 9% from the peak. We had highlighted GCPL would have weak Q2FY22 performance in India HI business, Indonesia businesses and consolidated margins."

The brokerage claims that "GCPL has seen strong performance in the HI segment over the last five quarters. Q2FY22 is an aberration and is not indicative of a trend. HI, one of the most important products for GCPL has been a key interest area for investors over the past three years (GCPL's India HI business recorded a YoY sales dip in three out of ten quarters over Q4FY19-Q1FY22). However, since then, the past five quarters (including Q1FY22) have marked a commendable recovery with positive growth in all quarters-Q1 and Q4 of FY21 and Q1FY22 turned in explosive growth."

The report of the brokerage also states that "In Q1FY22, GCPL turned in double-digit sales growth of ~21% in the India HI business (on a high base of 26%), which is impressive in a quarter of massive disruption due to the second covid wave. GCPL has, throughout the years, come up with good quality products under the Goodknight brand and has been at the forefront of innovation. In spite of being the market leader and 10x the size in HI of Jyothy Labs, GCPL has done well to sustain reasonably high growth. Gross and EBITDA margins dipped 616bps and 201bps respectively in Q2FY22. The quarter saw unprecedented inflation with prices reaching 10-20 year high levels. Every company in the FMCG space has seen margins get impacted and this is not a reflection of the underlying business strength of the company."

Buy Godrej Consumer Products Limited (GCPL) With A Target Price of Rs. 1,180

Edelweiss has claimed in its research report that "GCPL has the right triggers in place to lead the next leg of growth in spite of a disappointing Q2FY22. Growing demand for personal care and the improving penetration and non-mosquito repellent awareness will help the company. Both home and personal care portfolios continue to see strong innovations at disruptive price points. A few recent examples are Jumbo Fast Card, a slew of launches under the Protekt brand, shampoo hair color, powder-based hand wash, henna-based hair color, and natural neem incense sticks. Indonesia is likely to gradually recover, whereas Africa continues to perform well. GCPL's domestic business remains on a good trajectory as management has been taking corrective actions. We retain 'BUY/SO' with a TP of INR1,180."

Disclaimer

The stock has been picked from the brokerage report of Edelweiss Broking Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.