Currency headwinds to spoil Godrej Consumer Products’ Dec quarter show
Godrej Consumer Products Ltd’s (GCPL) shares hit a new 52-week high of ₹1,230 apiece on Friday, before its pre-quarter update for the three months ended December (Q3FY24) was released. The update suggests Q3 is likely to be a forgettable one, at least on the revenue front.
GCPL’s reported consolidated revenue is expected to be roughly similar year-on-year at about ₹3,600 crore. This is against expectations of growth, thus, unsurprisingly, dragging GCPL’s shares down by nearly 4% on Monday.
Sure, overall volume growth is expected to be healthy and grow in high single digit. Plus, Nuvama Research does not see negative pricing growth in Q3 as the price cuts taken by GCPL previously are now in the base. As such, what spoils the show is the currency devaluation in GCPL’s Africa and Latin American (LatAm) businesses.
For perspective, GCPL’s GAUM (Godrej Africa, USA, and Middle East) business is expected to clock double-digit constant currency sales growth in Q3. But thanks to the devaluation of Naira, the currency of Nigeria, the segment’s reported revenue would drop in the high single digit. GAUM formed almost 24% of GCPL’s revenue in the first half of FY24.
Similarly, the sharp devaluation of Argentinian Peso would weigh heavily on the LatAm business revenue despite the segment clocking growth in volume.
Moreover, it does not help that in the India business, GCPL did not see any significant improvement in operating conditions in Q3 versus Q2. But it is encouraging that the acquired FMCG business of Raymond Consumer Care Ltd, which consists of key brands – Park Avenue and KamaSutra are performing well.
The bright spot is that there is respite on the margin front. GCPL expects to see a year-on-year expansion in Ebitda margin despite flat sales growth. Ebitda is earnings before interest, tax, depreciation and amortization.
In Q3FY23, GCPL’s Ebitda margin stood at about 20%. A favourable input cost is one factor that has aided the sentiment of investors in GCPL. For instance, the price of palm oil, a key raw material, is down by 9% in the last one year.
Investors are not complaining. GCPL’s shares have gained 21% in the past three months. The stock trades at 49 times their FY25 estimated earnings, according to Bloomberg data. Valuations are not exactly cheap and the sharp recent rally may cap large upsides in the near future.
Analysts from Nomura Financial Advisory and Securities (India) see some pressure on the stock in the near-term due to the impact of currency devaluation on LatAm and Africa businesses, especially after the recent run-up in the stock price.
