Jefferies expects this FMCG stock to rise 25% despite Q3 margin pressure

Even as the shares of a Mumbai headquartered fast moving consumer goods company (FMCG) have risen 18% in a year’s time, the stock has erased more than 13% of investors’ wealth in the past six months. However, Jefferies continues to maintain its ‘buy’ rating on the stock and sees further upside despite the company expecting flattish growth in the September to December 2024 quarter.

Godrej Consumer Products’ shares have the potential to go up another 25% from the closing price of December 6, Jefferies believes as it has set the target price at ₹1,550.

The brokerage however has acknowledged that inflation and weather impact may weigh in on the company’s third quarter earnings.

The brokerage note comes, as in a first, Godrej Consumer has released a pre-quarter update well before the quarter is set to end. Jefferies is of the view that the release is likely to add to investor concerns on a slowing down trend.

According to the company’s statement, both soaps and home insecticides are likely to see volume decline in the quarter set to end on December 31, 2024.

It added that despite the domestic revenue growth, earnings before interest, taxes, depreciation, and amortisation (EBITDA) is likely to decline on the back of margin pressure.

The firm said a challenging demand environment and external pressures are affecting its key business segments. “The surge in palm oil and derivatives prices to the extent of a (year-on-year) increase of 20-30% has impacted the soaps category, which represents one third of our standalone business revenue,” the firm said.

Also Read: In Q2, Godrej Consumer net profit and revenue beat forecast

The company also increased prices, shaved off a few grams from each bar of soap and scaled its trade schemes to mitigate cost pressures. This has affected inventories in its wholesale and household channels. The firm expects volume growth to return to normal once prices stabilise in the coming months.

Godrej Consumer highlighted that pressure on EBITDA margins is due to inflationary trends and normalisation from last year’s exceptional 29.7% Q3 margins, bolstered by favourable commodity prices. This quarter, margins are expected to temporarily dip below the normative range of 24-27%. “GCPL, however, remains committed to strategic investments, including media spending and rural distribution, to drive long-term growth,” it said.

Hence, Jefferies too noted that the management sees these as transitory issues.