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Godrej Consumer: Maintain ‘buy’ with a TP of Rs 1,200

Indonesia is likely to gradually recover in H2FY22, whereas Africa continues to perform well. Retain ‘buy/so’ with a TP of Rs1,200.

A good performance of the household insecticides (HI) portfolio of Godrej Consumer (GCPL) has allayed a key long-standing (three years) investor concern. HI had suffered a sales dip in three out of 10 quarters over Q4FY19–Q1FY22. However, we expect HI in Q2FY22 to disappoint Street in spite of a soft base of just 4%. In this report, we discuss the reasons for the miss and why this might be temporary. We highlight potential disruptions to watch out for HI: likely vaccines against major mosquito-borne diseases like malaria and dengue. Resurgent Africa business and upswings in the hair colour and hygiene segments remain key positives. A new MD at the helm, Mr. Sudhir Sitapati, also enthuses us. Maintain ‘buy’ with a TP of Rs1,200.

HI sales likely to be muted in Q2FY22 in spite of soft base. Over the past five quarters, GCPL has clocked roughly 21–33% Y-o-Y growth in HI sales. August saw very little rainfall, and September recorded very high rainfall, neither is good as mosquitoes don’t thrive in extreme weathers. Key questions investors will/should ask: i) was resurgence due to fear during Covid as consumers wanted to avoid falling ill? and ii) as Covid fades, is the HI segment again going to be a laggard? Likely vaccines for malaria and dengue could disrupt HI industry… We are monitoring vaccine development against two major mosquito-borne diseases: malaria and dengue.

An effective vaccine thereof can dent HI’s long-term growth. The WHO recently endorsed use of the world’s first malaria vaccine. Scientists in India have developed a dengue DNA vaccine candidate. …but long-term outlook still positive. Our long-term outlook for GCPL’s HI segment is positive due to: i) strong focus on bottom of pyramid with high-efficacy products; ii) working on legal side; iii) improving consumer awareness; iv) pushing premiumisation with innovative products; v) developing market for non-mosquito insecticides; vi) Strong outlook for HI in Indonesia and Africa and vii) strong recovery post pandemic led by innovations.

Explore: Outlook and valuation: Sitapati factor; maintain ‘buy’. Mr. Sudhir Sitapati has been appointed GCPL’s MD & CEO for five years with effect from October 18, 2021. We have high hopes from him. Overall, an upswing in the health & hygiene segment (benefiting from customers’ sharpened focus on health) along with recovery in discretionary consumption should bolster revenue growth. The company’s strategy of launching innovative products at disruptive price points is set to bolster growth. A few recent examples are the launch in the liquid vaporiser in the HI segment, a slew of launches under the Protekt brand, shampoo hair colour, powder-based hand wash, henna-based hair colour and natural neem incense sticks. Indonesia is likely to gradually recover in H2FY22, whereas Africa continues to perform well. Retain ‘buy/so’ with a TP of Rs1,200.

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