Godrej Consumer slumps 7% on downgrades after weak Q1

Weak first quarter earnings by Godrej Consumer Products triggered a spate of analyst rating downgrades and sent the share price crashing as much as 7 per cent on Tuesday.

Analysts expect further weakness in the stock as rich valuations could prompt investors to look at rivals such as Hindustan Unilever (HUL) and Britannia.

Godrej Consumer shares closed 6.81 per cent lower on Tuesday at Rs 964.25 extending its 2 per cent fall of Monday after disappointing first quarter results.

Analysts said destocking in the run-up to the goods and services tax and higher competition coupled with lower trading days in Indonesia were the key reasons for underperformance in the quarter.

Brokerage firms CLSA, Credit Suisse and Deutsche Bank downgraded ratings on the stock. “People were building in strong growth prospects for both Indonesian and African markets but Indonesia did not deliver.Further de-rating is likely in FMCG companies with a high international concentration due to currency fluctuation and unstable macro-economic conditions,” said Himanshu Nayyar, consumer analyst at Systematix Shares & Stocks.

Godrej Consumer’s international business accounts for over 40 per cent of its overall business. “Even though shares of Britannia and Hindustan Unilever aren’t cheap, we prefer them over Godrej. Their Indian focus means far fewer risks to growth.“

The continued competition in the Indonesian household insecticide (HI) segment will weigh on margins in the second and third quarters, said brokerage firms.“The issues have been in the HI business like adverse seasonali ty and sporadic surges in competitive intensity . However, what makes us concerned now is that the decline in sales is happening on a low base as well,“ said Credit Suisse in a note.

Some analysts like Abneesh Roy, senior vice president at Edelweiss Securities, aren’t too perturbed by the company’s performance .

“GCPL’s Indonesia business has struggled in the last many quarters. So this isn’t a new development.In one sense we expect the India business growth to make up for the stress in the Indonesian market going ahead.”

The company’s year-on-year profit after tax (PAT) has fallen for the first time in six years while EBITDA has fallen for the first time in nine years. It reported an 8.7 per cent decline in net profit at Rs 225 crore against an expected Rs 264 crore. Revenue growth of 2.9 per cent at Rs 2,177 crore was, however, in line with estimates.

The price-to-earnings ratio of Godrej Consumer is 25 per cent higher than the three-year average and 30 per cent higher than the five-year average, a report by Kotak Securities said. It currently trades at 48 times its 2018 estimated earnings.

The company’s India margins would have been higher had it spent lesser on advertisements, said analysts. Its primary sales growth in India at 6 per cent year-onyear is expected to be one of the highest amongst peers despite GST destocking.

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