Godrej Consumer Products (3QFY15) : Margin surprise. Maintain SELL ::HDFC Sec, report

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Margin surprise GCPL’s revenue grew by 12.8% YoY to ~Rs 22.4bn (inline). Key positives were (1) Aided by a lower base, HI witnessed a revival with 16% YoY revenue growth (2QFY15 : 2%) (2) Despite the high base (3QFY14 : 37%), Hair colour grew 10% YoY (3) consolidated EBITDA margins expanded 205bps YoY to 17.8% driven by lower COGS (-49bps), ad spends (-173bps) and other expenses (-24bps). Key negatives were (1) Soaps revenue growth decelerated to 11% YoY (vs 12% in 2QFY15) (2) hurt by currency translation, international business reported sales growth of 12% YoY (20% in constant currency term). We remain cautious on account of a difficult demand environment and increased competitive intensity. Though softening in palm oil prices will further benefit gross margins in the coming quarters, we expect higher ad spends to restrict a significant uptick in EBITDA margin. Also, at 30x FY17E EPS, the stock does not factor any execution/currency risk across diverse continents. Retain SELL with a TP of Rs 1,010 (28x FY17E). Domestic business : sharp revival in HI  Domestic revenues grew a resilient 12% YoY to Rs 11.7bn with 19.5% margin (up 107bps YoY). India volume grew more than 8%. Soaps witnessed 11% sales growth (low single digit volume growth). Despite the high base (3QFY14 : 37%), Hair colour revenue grew a creditable 10% YoY. HI business bounced back with a 16% YoY growth (2QFY15 : 2%). Softening in palm oil prices will further benefit gross margins in the coming quarters. Also, we are enthused by its entry into the face wash category and premium hair care space (via BBLunt). International biz : margin boost  International sales grew by 12% YoY (20% organic constant currency growth) impacted by currency translation. GCPL witnessed strong constant currency growth in Indonesia (+19%), LatAM (+25%) and Africa (+36%). However, Europe reported 13% constant currency decline.  Organic EBITDA margins at 15.2% expanded 262bps YoY, led by Indonesia (+330bps), LatAm (+270bps) and Europe (+230bps).

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