Godrej Consumer- All is well… but valuations rich:: Religare research

As per our recent interaction with the GCPL management, the company continues to see strong growth across its Household Insecticides, Soaps and International businesses. In our view, GCPL could see some gross margin improvement in H2FY13, but higher brand investment coupled with product launches is likely to cap EBITDA margins. We marginally pare our FY13 earnings estimate on account of higher A&P and maintain HOLD given rich valuations at 27.1x/22.8x FY14E/FY15E earnings.

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 Domestic HI going strong, new launches to drive growth in Soaps and Hair Colour: GCPL’s domestic Household Insecticides business continues to grow ahead of the market with Q3 likely to see a further boost due to the spread of dengue and malaria. The company has re-launched its Cinthol range of products which is likely to aid growth and product mix improvement in the Soaps segment. Management is also confident of success in its new range of Hair Colour products (Crème) with growth likely to be in the mid-teens.
 International business on strong footing led by Megasari and Africa: Megasari is likely to report strong growth in H2FY13 as well driven by an increase in distribution and the success of new launches. Management is confident of maintaining margins in the business. GCLP’s Arica business will see the integration of Kenya operations in the current quarter with margins likely to be seasonally better in H2.
 Higher A&P to partly negate short-term gross margin improvement: The company is likely to see a marked improvement in gross margins on account of lower palm oil prices; however, some cost benefits could be partly negated by higher A&P spends.
 Maintain HOLD with Sep’13 TP of Rs 660: We maintain HOLD on GCPL with a September’13 TP of Rs 660. We recommend that investors wait for a better entry point (~Rs 600 levels).