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The Corner Office: Recovery imminent in domestic business

  • Despite GST 2.0 causing minor disruptions in 3QFY18, Godrej Consumer Products' (GCPL) India business outlook appears to be encouraging, with (i) the significant acceleration in the pace of innovation planned over the next two years and (ii) the shift in trade to the organized from unorganized segment - still early days though -as the key drivers. 
  • GCPL is also confident of the growth prospects in Africa. For this business, it targets USD1b sales and expects EBITDA margin to move from 16% to 19-20% over the next 5-6 years. 
  • In Indonesia, sales recovery and working capital improvement are taking longer relative to expectation as well as the guided timeline. 
  • GCPL's earnings growth has been more consistent than FMCG peers (FY17 reported the eighth consecutive year of double-digit EBITDA and PAT growth). However, given its exposure to various geographies, attendant currency risks and relatively low RoE (mid-20s), we believe the stock does not warrant a higher multiple. Maintain Neutral with a target price of INR1,015 (39x Sep’19E EPS, 5% premium to three-year average).