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Godrej Consumer Q2 Review: Shares Drop As Most Brokerages Cut Target Price

Here's what brokerages have to say about Godrej Consumer’s Q2 FY22 results:

<div class="paragraphs"><p>A man examines an insect repellent  manufactured by Godrej Consumer Products at a store. (Source: Godrej Consumer Products)</p></div>
A man examines an insect repellent manufactured by Godrej Consumer Products at a store. (Source: Godrej Consumer Products)

Shares of Godrej Consumer Products Ltd. dropped the most in seven months as most brokerages cut target price for the Cinthol soap maker, citing pressure on margin due to rising price of palm oil—a key ingredient for home care and personal care items.

The company saw its profit and revenue rise sequentially in the quarter ended September. But year-on-year, it reported an operating loss in India. Operating margin contracted 330 basis points, while gross margin fell 830 basis points due to a lag between increase in input cost and product price hikes.

Godrej Consumer, however, has indicated about price hikes in the domestic soap portfolio, effective December, to protect margins.

Besides, analysts await fresh growth strategies from the company’s new Chief Executive Officer Sudhir Sitapati.

Shares of Godrej Consumer shed 4.17% as of 11:16 a.m. on Friday. Of the 37 analysts tracking the company, 24 maintained a ’buy’, 11 suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 19.5%.

Here's what brokerages have to say about Godrej Consumer’s Q2 FY22 results:

Emkay

  • Maintains ‘hold’, cuts target price to Rs 920 from Rs 1,030 apiece.

  • Expects margin pressure to sustain and earnings growth momentum to remain weak in the near term. It has trimmed its FY22-24 earnings per share by 3%.

  • The new CEO is expected to share the growth strategy in the next quarter. GCPL needs to address slow growth in the international business and add more growth vectors.

  • Forecasts double-digit top line growth and 16% earnings per share compound annual growth rate over FY22-24E.

Edelweiss

  • Maintains a ’buy’ but lowers target price to Rs 1,180 from Rs 1,200.

  • Palm oil inflation of 50-55% year-on-year is a worry.

  • The company’s strategy of launching innovative products at disruptive price points is set to bolster growth amid tough macroeconomic conditions.

  • A slowdown in rural demand due to lower government spending or a monsoon failure could impact Godrej Consumer’s revenues significantly.

  • The company’s ability to gain market share in its soap segment could be adversely affected by the aggression of Hindustan Unilever Ltd., ITC Ltd., Wipro Ltd., etc.

Systematix Institutional Equities

  • Maintains ‘hold’, cuts target price to Rs 960 from Rs 980 apiece.

  • Cuts earnings per share estimates for FY22-23 by 2.5-3.7%.

  • Key upside risk is a faster-than-expected correction in raw material prices.

  • Demand slowdown remains a key downside risk.

  • Disclosure of business strategy to drive growth by the new CEO will be the next key trigger for the stock.

  • While Godrej Consumer has all the elements to deliver sustainable long-term shareholder value, the current valuations seem rich at 44.7x FY23E earnings per share.

Dolat Capital

  • Downgrades stock to ‘reduce’ with a target price of Rs 995 apiece.

  • Maintains its FY22/23E earnings per share estimates to Rs 18.4/19.9 and introduced FY14E earnings per share at Rs 22.1.

  • A mere single-digit sales growth in household insecticides category, which was impacted due to excessive rains in August-September 2021; and 2% decline in Indonesia was a disappointment.

  • Reopening of markets would give an opportunity to incense sticks category to re-enter.

Morgan Stanley

  • Maintains ‘underweight’ with a target price of Rs 829 apiece, a potential downside of 15%.

  • Key risks to upside include increase in market share in soaps and hair colours, as well as faster-than-expected turnaround in the Africa business.

  • Key risks to downside include concerns on continued rising penetration of illegal incense sticks in the domestic home insecticides business and Godrej's inability to arrest market share losses. Low international business return ratios and higher volatility as well as rise in input cost pressure could also be a worry.

  • Over the next few years, we expect Godrej Consumer to focus on volume growth and market share gains in existing categories in India, while also looking to expand the total addressable market, distribution, and innovation-led growth in Indonesia and Africa.

Nomura

  • Maintains ‘buy’ with a price target of Rs 1,230 apiece.

  • With new management on board already identifying areas of improvement, the brokerage expects a meaningful step-up in overall growth profile.

  • Steps being taken to mitigate margin pressure (pricing, cost control initiatives) are expected to lead to sequentially better margins.

  • The three core growth pillars of the company (India home insecticides and hygiene portfolio, Africa, the U.S. and the Middle East, Indonesia) are gearing up for strong performance over the medium term.