GCPL stock appears to factor optimism adequately for now

True, most of this outperformance can be attributed to the change in leadership announced on 11 May—GCPL has appointed Sudhir Sitapati as managing director and chief executive officer for five years effective 18 October.

Even as investors await Sitapati’s new plans and strategies, it’s worth noting that the GCPL stock’s valuations are not exactly cheap now. The shares trade at nearly 50 times estimated earnings for FY23, based on Bloomberg data.

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There are some comforting factors. Analysts from Motilal Oswal Financial Services Ltd said in a report on 30 August, “After nearly a decade of ROCEs in the mid-teens, ROCE is likely to surpass 20% in FY22.” ROCE is return on capital employed. The broker said improvement in ROCE would be led by “a) the recent revival in domestic topline growth, b) an increase in the share of the higher margin, higher ROCE domestic business (57% of consolidated sales in FY21 versus 55% in FY20), c) the moratorium on big-ticket acquisitions, d) the better utilization of capacity, and e) debt reduction”.

It helps that GCPL’s June quarter (Q1FY22) performance was encouraging. Consolidated revenue grew 24% year-on-year (y-o-y), helped by a favourable base as revenue was flattish in Q1FY21. As such, two-year compound annual growth rate at around 11% is not bad at all.

The stock’s sharp appreciation suggests investors are factoring in a good portion of the optimism. On the flip side, this could limit significant upsides in the near future.

Additionally, there could be bumps on the road ahead. As Sachin Bobade, analyst at Dolat Capital Market Pvt. Ltd, said, “There are risks. There are input cost pressures. Moreover, while the household insecticides (HI) category performed well in Q1, when the market fully opens up, it is likely that the company will face tough competition from the unorganized segment.”

In Q1, GCPL’s gross profit margin had contracted by 231 basis points y-o-y owing to input cost pressures. One basis point is one-hundredth of a percentage point. Further, Indonesia’s performance was soft last quarter and investors are likely to keep a close tab on the recovery ahead.

It also remains to be seen if growth moderates in some categories once normalcy returns. According to Bobade, “It would be prudent for investors to be cautious and wait until there is a visible improvement in performance metrics.”