Godrej Consumer’s getting picky about its portfolio

The company is taking the right steps to improve the overseas and India portfolio. It plans to bolster the financial position of the GAUM (Godrej Africa, USA, and Middle East) segment, which formed over 24% of GCPL’s consolidated revenue in the nine months ended December (9MFY24). For this, it is reorganizing its business model in eastern Africa. It recently announced the divestment of its stake in the wholly-owned subsidiary—Godrej East Africa Holdings Ltd, Mauritius along with its step-down subsidiaries. Note that there was negative sales growth and lower profitability in the eastern Africa business. The process is expected to dent revenue to the tune of ₹500 crore per year or about 4% of GCPL’s FY23 consolidated revenue. However, the net profit would increase by ₹50 crore a year. The deal is expected to be completed between March quarter (Q4FY24) and Q1FY25.

Further, GCPL aims to improve profitability in the USA and western Africa businesses. But currency headwinds are a roadblock. In the southern Africa and GAUM export geographies, GCPL plans to sustain the robust performance.

As a result, GCPL aims to clock Ebitda (earnings before interest, tax, depreciation and amortization) margin of over 15% in the next two years in GAUM versus the 9% levels seen historically. However, the restructuring in east Africa and the currency headwinds would mean that the revenue share of this segment would drop to less than 20% in FY25.

Another GCPL international business segment—Indonesia is on the mend. Analysts at Motilal Oswal Financial Services note that the consumer index in Indonesia is showing a steady improvement, reflecting demand recovery. “The Goodknight liquid vaporizer has a high-growth opportunity as its market penetration is only 1-2% in Indonesia versus 25% in India," said Motilal Oswal’s analysts in a report dated 29 February. This shows that there's room for further growth and expansion in margins.

Meanwhile, the India business is on the growth path. In the December quarter, GCPL clocked volume growth of 5%, better than some of the FMCG peers. Further, the household insecticides (HI) business is likely to get a boost from the new launch—Goodknight Agarbatti or incense sticks. With this, the company is entering the ₹1,200 crore incense stick market, which is primarily illegal or unorganized. The product is India’s only government registered active based anti-mosquito legal agarbatti, according to GCPL. The product uses Renofluthrin molecule, which is two times more effective than any other registered molecule. In the medium term, GCPL has exclusive rights for this molecule, which gives it the upper hand thus helping it gain market share. Also, the agarbatti comes at an affordable price point— ₹10 for a pack of 10 sticks.

To be sure, “GCPL’s valuations are slightly on the premium side but the scope of continued good performance and better earnings visibility brightens prospects," said Ajay Thakur, an analyst at Anand Rathi Institutional Equities. He expects the new launches to see healthy traction on the back of strong execution capabilities.

For now, investors are sitting on handsome gains. In the past one year, GCPL’s shares are up by about 40%, beating the Nifty FMCG index’s 21% gain. Softening palm oil price is one factor that has aided investor sentiment and so did the new launch in the HI category. The GCPL stock trades at over 53 times its FY25 estimated earnings, showed Bloomberg data. In comparison, shares of Hindustan Unilever Ltd and Dabur India Ltd trade at about 49 and 44 times, respectively.