Godrej Consumer Product's third-quarter fiscal 2016 earnings increased by 23% and ahead of our estimates for 2016; however, top-line growth of 9% was below estimates. Based on these results, we are modifying our five-year average revenue growth forecast down to 16% from 18%, and earnings growth forecast to 20% from 22% previously. This has a change of less than 5% to our discounted cash flow model; therefore, we retain our INR 1225 per share intrinsic valuation. At current prices, we believe this narrow-moat stock is fairly valued.
For 2016, we move our EBIT margin assumption up to 16.9%, from 15.6% previously assumed, as the company continues to enjoy the benefits of lower commodity costs (gross margins have moved up by 440 basis points for the consolidated company during the quarter). Similar to its other branded competitors in the consumer products space, GCPL has been able to keep a large chunk of commodity gains without having to pass them on to consumers in the form of lower prices-- reflecting the strength of GCPL’s economic moat.
In terms of geographies, GCPL’s international business (47% of total sales) increased by 9% in constant-currency terms, similar to its India business. However, our margin-expansion hypothesis plays out in its Indonesia and Latin America geographies, which together account for 27% of total sales. Within its India business as well, its largest category of home insecticides (which contributed 50% to India sales) expanded by 15%, as Godrej’s HIT and Good Knight brands continue to be market leaders. Its soaps and hair-colour categories expanded more slowly, however, respectively growing by 2% and declining by 1%.
Overall, we remain optimistic about the future prospects of the firm, as it should continue to generate returns on invested capital several notches above its cost of capital for the next decade.
