Initiate coverage on GCPL with ‘neutral’; TP at Rs 770

While Godrej Consumer (GCPL) has underperformed Nifty by c.26%/11%/ 14% over the past 1/2/3 years, we remain cautious, as we believe two of its three core growth drivers (India household insecticides, Indonesia) are still not out of the woods and can moderate earnings. This can also continue to offset any good progress made in other businesses (recovery in Africa), hence lack of margin of safety cannot be ignored. Our FY21-23F EPS forecasts are 4-5% below consensus. While we like GCPL’s agility; disruptive innovations; medium-term opportunity as an Emerging Markets MNC, and current valuations have moderated, we await catalysts and meaningful pickup in earnings. We initiate coverage at Neutral with a TP of Rs 770 and forecast a FY21-23F EPS CAGR of 12%.

India household insecticides (HI) (c.23% of FY21F sales): Not yet out of the woods While GCPL’s HI business started reviving in 1H21, resurgence of illegal Chinese incense sticks is again casting a shadow on its near-to-medium-term growth trajectory. GCPL is leaving no stone unturned to counter the threat – innovative launches, upgrading consumers to premium formats, increasing rural reach and increasing awareness against illegal incense sticks, but we believe its growth will pick up only gradually.

Indonesia (c.16% of FY21F sales). New headwinds; long-term potential intact GCPL’s sales in Indonesia were less impacted vs peers over the pandemic (due to higher salience in home/ baby care), but elevated competitive intensity has impacted growth in recent periods. As this was triggered by the entry of a new player, if prolonged it may impact not only volumes but also price-led growth and margins. GCPL’s ongoing GTM transformation has witnessed only gradual progress.