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Potential Triggers For Godrej Consumer’s Stock

These are the factors that would trigger an upside in the consumer goods maker’s stock, according to brokerages.

A man examines an insect repellent  manufactured by Godrej Consumer Products at a store. (Source: Godrej Consumer Products)
A man examines an insect repellent manufactured by Godrej Consumer Products at a store. (Source: Godrej Consumer Products)

Godrej Consumer Products Ltd. is expected to get a boost from its household insecticide business as the Covid-19 disruption may see a substantial decline in the number of unorganised players, helping it gain market share in the segment.

Shares of the consumer goods maker have risen by more than 25% since the pandemic struck, lagging the 53% gain in the benchmark Nifty50 index. The stock has even underperformed peers. Emami is up 126%, Tata Consumer Products Ltd. gained 88% and Jubilant Foods jumped by around 75%.

But according to brokerages, there are potential triggers for Godrej Consumer’s business:

Household Insecticides

The segment, according to Philip Capital, offers twin triggers—in the form of upgrades by consumers from burning format to electric, and as more people transition from burning illegal incense sticks as a repellent.

Phillip Capital said it has based its assessment on dealer checks with incense stick manufacturers, which compete with Godrej Consumer’s mosquito repellent, Good Knight.

Vishal Gutka, vice president of research (consumer and retail sector) at the brokerage, said manufacturing cost of incense sticks has risen following the more than twofold increase in import duty on bamboo sticks to 25%.

Business has declined by up to 40% in the segment over the past six months because of supply-chain disruptions, among other reasons. This, the brokerage said, would result in market share gains for organised players—and Godrej Consumer would be at the forefront.

Relevant Portfolio

Godrej Consumer has a portfolio suited to the current environment, with health, hygiene and value-for-money contributing to almost 80% of revenue, according to Axis Capital. Nearly 40% of its revenue comes from its overseas markets, which would aid its recovery after the pandemic, the brokerage said.

New Launches

Godrej Consumer launched as many as 45 new products and variants of existing products in India and international markets in the quarter ended June. This may have aided its recovery in India and is likely to boost growth in the ensuing quarters.

The company plans to continue with its innovation and increase its advertising spend, which may impact its margin but aid revenue and market share growth.

Double-Digit Growth

The company expects to deliver double-digit sales growth year-on-year in the quarter ended September, led by its hygiene and household insecticides segments. It expects business growth in India and Indonesia to remain in low double digits and single digits on a constant-currency basis, respectively.

The last time its revenue grew in double digits was nearly eight quarters ago, in the three months through September 2018.

Edelweiss Financial Services said in a Sept. 8 note that the company’s domestic business has started to recover following corrective actions. The brokerage, which has a ‘Buy’ rating on Godrej Consumer’s stock, said its growth in overseas markets and margin expansion will be key going ahead.

The stock trades at nearly 43 times its estimated earnings for FY22, in line with its long-term average.

“Although the double-digit top line performance in Q2 FY21 is encouraging, it’s on a soft base of 1.1% sales decline in Q2 FY20,” Motilal Oswal said. “Given the uncertain outlook and inferior return on capital employed v/s peers, the valuations appear fair.”

Risks

According to JP Morgan, the downside risks to Godrej Consumer stock include:

  • A further slowdown in revenue growth across India, Indonesia and any overseas markets
  • Increased competition in the domestic personal care segment, leading to lower pricing/higher brand spend
  • Execution risks for overseas operations
  • Margin pressure in overseas business
  • Any dilution from potential acquisitions
  • Currency risks

Antique Stock Broking, too, expects a flat to marginal fall in the company's gross margin as prices of key raw material, palm fatty acids, are rising (9% year-on-year increase).