KRChoksey Research has issued an "Accumulate" rating for Godrej Consumer Products Limited (GCPL) with a target price of Rs. 1,264, implying a potential upside of 12.3% from its current market price of Rs. 1,126. This recommendation is based on the company's steady revenue growth, robust international performance, and strategic product innovations despite domestic headwinds. GCPL’s performance in Q3FY25 reflects challenges in the Indian market but signals opportunities for long-term gains through diversification and operational efficiency.

Q3FY25 Performance Highlights

Revenue Growth: GCPL reported a 3.0% year-on-year (YoY) increase in consolidated revenue to Rs. 37,684 million, aligning with KRChoksey’s estimates. Sequentially, revenue rose by 2.8%. The growth was primarily driven by the Indonesia business (up 8.9% YoY) and a strong performance in Latin America and the SAARC region, partially offset by a decline in the Africa business.

EBITDA and Margins: EBITDA declined by 16.4% YoY to Rs. 7,559 million, with margins contracting to 20.1%, down from 24.7% a year earlier. This was due to:

Rising palm oil prices, which inflated raw material costs.
Increased advertising expenses (approximately 10% of revenue).
Urban consumption slowdown, particularly in household insecticides.
Net Profit: Adjusted net profit declined by 22.7% YoY to Rs. 5,041 million, reflecting the cascading effect of margin pressures.

Dividend Declaration: The company declared an interim dividend of Rs. 5 per share, reinforcing its commitment to shareholder returns.

Segmental Performance

1. India Business:

The domestic segment, accounting for 60% of GCPL's revenue, grew 4.0% YoY in value terms but reported flat volume growth due to urban consumption slowdown.
The Household Insecticides category faced challenges due to delayed winters and cyclone impacts in South India. However, new product launches like Goodknight Agarbatti and upgraded liquid vaporizers are expected to drive future growth.
Soaps Segment witnessed mid-to-high single-digit volume declines due to steep palm oil inflation. Price hikes and grammage reductions are expected to normalize margins in Q4FY25.
2. Indonesia: Indonesia contributed 13.5% of total revenue, with an 8.0% YoY growth in constant currency terms and a 60-basis point EBITDA margin expansion to 21.5%. Growth drivers included:

Strong performance in shampoo-based hair colors and electric household insecticides.
Doubling of Stella Pocket air freshener volumes.
3. Africa, USA, and Middle East (GAUM): This segment, representing 20.5% of revenue, reported muted growth of 1.0% YoY due to currency volatility and portfolio simplifications. However, EBITDA margin improved by 340 basis points to 14.8%, indicating operational efficiency.

4. Latin America and Others: The Latin America and SAARC region saw a 165% YoY revenue growth in INR terms (28% in constant currency). The growth was driven by currency appreciation and successful product launches, though management expects normalization in the medium term.

Key Challenges and Strategic Measures

1. Margin Pressures: Gross margins contracted by 175 basis points YoY to 54.1%, primarily due to rising palm oil costs. EBITDA margins are expected to recover by H1FY26, supported by:

Further pricing actions, especially in soaps.
Stabilization of raw material prices.
2. Urban Slowdown: GCPL faces significant challenges in urban general trade and modern trade channels. However, rural markets are performing well, bolstered by the company’s van program.

3. Competitive Landscape: The entry of new players in categories like liquid detergents and body washes has intensified competition. GCPL is countering this with aggressive marketing and product innovation.

4. Currency Volatility: The African business continues to grapple with the devaluation of currencies like the Naira, which has impacted growth.

Growth Outlook

Revenue Projections: KRChoksey forecasts GCPL’s revenue to grow at a 7.3% compound annual growth rate (CAGR) between FY24 and FY27, reaching Rs. 174,293 million by FY27.

Profitability Improvements:

EBITDA is projected to grow at a 7.9% CAGR, with margins recovering to 22.1% by FY27.
Adjusted PAT is expected to increase at a 10% CAGR, driven by higher operating efficiencies and normalized input costs.
Innovations and New Product Launches: GCPL’s focus on new product categories like liquid detergents, air fresheners, and sexual wellness will likely drive incremental growth. The relaunch of Goodknight Liquid Vaporizer and new RNF formulations in coils are expected to deliver medium-term gains.

E-commerce and Quick Commerce: These channels are growing at a robust 30-40% YoY, contributing significantly to GCPL’s overall performance.

Target Price and Investment Recommendation

KRChoksey has revised its target price for GCPL to Rs. 1,264, based on a P/E multiple of 48x FY27 EPS of Rs. 26.6. Despite short-term headwinds, the brokerage maintains an Accumulate rating, citing the company’s:

Resilient international performance.
Strategic pricing actions to counter cost pressures.
Focus on high-growth categories like personal care and home products.

Technical Levels for GCPL

Key Levels for Investors:

Support Levels: Rs. 1,100 and Rs. 1,050
Resistance Levels: Rs. 1,180 and Rs. 1,264
Actionable Insight: Investors may consider accumulating GCPL around Rs. 1,100-1,120, with a medium-term target of Rs. 1,264. A break above Rs. 1,180 could signal further upside potential.