Motilal Oswal Suggests Buy This Godrej Group Large Cap Stock For Gains Up To 19%

Motilal Oswal in its recent report gave Godrej Consumer Products Ltd. (GPCL) a buy rating. The brokerage advises buying the stock for a target price of Rs. 1,075 per share.

Godrej Consumer Products is a leading consumer products company of Godrej Group. It is a large-cap FMCG company with a market cap of Rs 92,809.46 crore.

Stock could surge by up to 19% in a year according to the current market price and the brokerage's estimated target price.

Stock Outlook & Returns

The current market price (CMP) of Godrej Consumer Products stood at Rs 907.60 apiece on NSE. The 52 week low of the stock was recorded in March 2022 at Rs 660.05 and the 52 week high was recorded in September 2021 at Rs 1,102.45, respectively.

Over the past 3 months, the stock has given 18.35% positive return. It has given 11.22% negative return over the past 1 year. Whereas, in the past 3 years, it gave a 31.11%, positive return. In the past 5 years, the shares gave 48.12% positive return.

Competitive intensity

Over the past one-year, big players emerged stronger in key geographies. The management's drive to improve product availability and boost distribution has already resulted in early gains. It has increased product availability and distribution. Currently, its coverage has grown by over 2.5x from CY20 levels. The next phase of growth will be driven by the broadening of its portfolio. It is already seeing a massive acceleration in its FMCG portfolio.

Business mix

The US constitutes 20-25% of the overall business, and primarily caters to the Wet Hair category. In GAUM, West Africa (i.e. Nigeria and Ghana) accounts for 30-35% of the business, followed by South Africa (at 25-30%), Kenya, and smaller nations. From a category perspective, 55% is Dry Hair and the rest is FMCG, of which Wet Hair is a major part.

Growth

Over the past 10-12 quarters, both the Dry and Wet Hair category is growing at double-digits in Africa. In Nigeria, GCPL currently has a presence in ~80k stores from ~10k stores at the end of CY20. The aim is to increase direct expansion to cover 120k stores by the middle of CY23. This was achieved by expanding the key distributor model using an ecosystem of sales vans, motorcycles, and salon ambassadors. These sales vans are also used to drive GCPL's sub-distributor model.

Simplification of the business

Given the breadth of GCPL's product portfolio, there is a need to rationalize the number of SKUs to achieve on-ground simplification. Customers need a value proposition in two-to-three SKUs. Except for the US, the other entire clusters will probably have ~2,000 SKUs. In Kenya, GCPL has already halved the number of SKUs. The whole momentum in reducing complexity and increasing productivity is on track, but is differing across markets.

Hair Extension

GCPL is experiencing a lot of changes in this market, with the impact of inflation and its impact on consumer income resulting in challenges. Its focus is on improving the sourcing of raw materials and manufacturing. It is coming up with new styles, which are more value-based than discretionary-based. The management's focus will be more on the core as compared to high fashion.

HI

HI is a USD800m market in Africa. The management said HI is a developed category in South Africa and a tough market to operate in. Nigeria offers a huge opportunity. GCPL has launched differentiated products, with these products seeing good traction. It has started manufacturing products in Nigeria, which provides it an added advantage. Most of its African products are manufactured in Nigeria. Its market share gains appear promising as it has come in a very short time and given its differentiated portfolio (Power Shot). LV is going to be extended to East Africa.

Working capital

Inventory levels are expected to decline across GUAM. The management's focus will be on receivables (especially in certain parts of Africa, where it is currently higher).

Valuation and view

The commentary on GCPL's GAUM business is improving, with the management guiding at a margin expansion of 150bp YoY in FY23, despite an adverse currency exchange rate. Excluding the same, the improvement in margin would have been 600-700bp. Increasing salience of the FMCG business and growing distribution in the GAUM region will provide better sales and earnings visibility over the medium term. Better capital allocation, a moratorium on acquisitions, and an improved performance in the GAUM region was already witnessed before the new CEO took command in Oct'22. As investments by the new CEO are aimed at boosting growth in the high margin, high RoCE domestic business, its medium-term earnings growth outlook remains strong. GCPL remains among our top picks in the Staples space. Valuations, at 37.5x Sep'24E EPS, are attractive, given the potential earnings CAGR of ~16% over FY22-24. We maintain our Buy rating with a TP of INR1,075.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.