Quarterly updates of companies have started pouring in for September Quarter 2023. Godrej Consumer Products Ltd (GCPL) released its quarterly update on October 5, last week. According to GCPL’s Q2FY24 update, the operating environment was tough amid weak macros and adverse weather conditions. High food prices and monsoon deficit has not only hit rural India but also subdued urban spending. As a result of adhik maas in 2023, the festive season has been delayed by a month. Thus, movement of festive cheer in Q3FY24 will partly be responsible for a subdued volume growth in the September Quarter 2023 for the FMCG sector.
International business, a major differentiator for GCPL
Godrej Consumer Products operates across two main business segments, homecare and personal care. Homecare is segmented into household insecticide and air fresheners. Personal care comprises personal wash and hair colour businesses. The company has recently acquired Raymond Consumer Care which houses Park Avenue and Kamasutra brands. GCPL stock price is up 17% over the past one year. Hindustan Unilever (HUL) is down 4%, Marico and Dabur are up 4% and 3% respectively over the same period. While the product basket varies, all these companies operate in the home care and personal care segments in the Indian FMCG market.
Investors were spooked by Marico’s disappointing quarterly update leading to negative impact on Dabur, HUL and GCPL stock prices. Dabur and Marico stock prices are down 1-2% over the past one week, GCPL and HUL stock prices have recovered and are flat. While Marico’s quarterly update indicated low single digit volume growth in Q2FY24, GCPL was on a better footing. Even though GPCL’s overall consolidated volume growth fell from 10% in Q1FY24 to mid-single digit volume growth in Q2FY24, it is higher than Dabur, Marico and HUL volume growth in preceding June Quarter 2023. Dabur, Marico and HUL are all expected to continue on their low single digit volume growth trajectory.
A major differentiator for GCPL is its international business which contributes nearly 40% of its revenue basket. Geographic diversification helps in balancing seasonal vagaries and demand downturn across various countries and aids a strong broad-based revenue base. For instance, the Indian economy witnessed extended summers and unseasonal rains in Q1FY24. While the Indian market reported 9% YoY revenue growth, Indonesia, Latin America and SAARC reported 20% YoY and 18% YoY revenue growth respectively in Q1FY24. In June Quarter 2023, GCPL’s international business which constitutes Indonesia, Africa, USA, Middle East, Latin America and SAARC contributed 43% of total revenues. While HUL has very low contribution, Marico and Dabur derive roughly 20-25% of their revenues from international markets.
Large capex plan outlined to chase volume growth, automation
Retail inflation has cooled down considerably and stood at 5.03% in September 2023. This is good news for India Inc. In the latest September retail inflation data, rural inflation came in at 5.02% and urban inflation stood at 4.65%. GCPL is the market leader in household insecticides in India and second largest soap company in India. Urban centric with low rural revenue contribution, volumes are expected to recover faster for GCPL than Dabur, HUL and Marico. With retail inflation in check, festive season is expected to add cheer to FMCG volume growth in Q3FY24.
The street is also enthused with GCPL’s capital expenditure (capex) plan of Rs 900 crore over the next 18 to 36 months. The maker of Goodknight, HIT, Cinthol, Protekt and Magic hand wash plans to add 20% capacity to its existing manufacturing facilities. GCPL is currently utilizing 75-80% of its existing capacity. Capacity expansion will be funded both through debt and internal accruals. According to the management, capacity addition is undertaken largely for volume growth, improving automation to increase productivity and increase manufacturing presence in north India.
