GCPL stock at higher level; All eyes on Africa trade margin recovery

One reason for optimism has been softening prices of inputs such as palm oil and crude oil. Against this backdrop, GCPL is expected to post double digit EBITDA growth for the March quarter (Q4FY23). Ebitda is earnings before interest, taxes, depreciation and amortization.

Going forward, continued improvement in Indonesia business and improving margin performance in Godrej Africa, US and Middle East (GAUM) segment could further boost investor sentiment. As such, a major concern for investors of GCPL is the muted margin performance in its GAUM segment.

While this vertical accounted for 26% of the consolidated revenue in the nine months ended December (9MFY23), the Ebit share was only around 6%. Ebit is earnings before interest and tax.

Under the leadership of Mr. Dharnesh Gordhan, who was appointed as the CEO of GCPL GAUM in April 2020, the division has seen meaningful improvement in revenue growth, said analysts at Kotak Institutional Equities in a report on April 11. GAUM’s revenue grew by around 8% in FY21, 22% in FY22 and 14% in 9MFY23.

However, this has not reflected in margin improvement due to factors such as crude inflation and adverse currency movements. Analysts at Kotak estimate that had it not been for these headwinds, GAUM’s Ebit margin would have been around 9-10%. For perspective, in 9MFY23, the Ebit margin stood at 4%.

What’s more, the vertical is expected to see a relatively sluggish Q4 due to the elections and demonetization in Nigeria. GCPL in its quarterly update said the GAUM segment is likely to deliver higher than mid-single-digit sales growth in constant currency terms. This compares to double-digit growth in the previous 11 quarters.

“Apart from short-term macro-headwinds (elections and demonetisation in Nigeria), we believe the GAUM business has the potential to drive GCPL’s earnings growth over the next few years,” the Kotak report said.

Meanwhile, GCPL’s consolidated volume is expected to grow mid-single-digit in the fourth quarter. The momentum in the company’s India business, which accounts for the largest share of revenue and Ebit, is strong. GCPL expects to register double digit volume and value growth in the fourth quarter. In the half year ended September, volumes fell year-over-year, while the measure was up 3% in the third quarter. Also, the Indonesian business is slowly recovering, which is a plus.

To be sure, investors are likely to see recovery momentum in the Indonesia and GAUM businesses. Commenting on the company’s outlook, analysts at Nuwama Research said, “GCPL’s strategy to launch innovative products at disruptive price points is poised to drive growth amid tough macroeconomic conditions.

Going forward, we expect GCPL to continue to enjoy market leadership in air fresheners. In addition, in light of increased marketing initiatives, we expect share growth in personal washing and hygiene (double-digit year-over-year growth in the third quarter) and hair care (year-over-year growth in the third quarter for teens). Let’s hope so.”