Godrej Consumer Products outlook upgraded by broking firms

MUMBAI: Godrej Consumer Products (GCPL) has seen an earnings re-rating by leading brokerages Motilal Oswal, Kotak Securities and India Infoline which have cited a fall in palm oil prices, a key raw material, as one of the reasons for the upgrade. The earnings upgrade comes in the wake of an 85% year-to-date rise in the stock, making it more expensive than peers ITC and HUL.

Motilal Oswal, in a report dated October 8, upgraded the company's FY13 and FY14 earnings estimates by 3-8% to factor in the softening raw material costs.

"We are upgrading the earnings estimates to factor in market share gains in home insecticides, softening of PFAD prices, and margin improvements in international business in FY14 due to scale economies post integration," Motilal Oswal said while maintaining a 'Neutral' rating on the company, with a target price of Rs 740.

GCPL's price to earnings multiple is 38 - higher than 36.5 of HUL and 34 of ITC and 36 of ET FMCG index.

Given these stretched valuations, the stock may have limited upside from the current levels. However, the downside is also limited since the company is expected to post good numbers for the quarter ended September, mainly due to a fall in the raw material price. The stock ended at Rs 690.80, down 0.3% on Tuesday.

Palm oil prices have fallen nearly 23% in six months and are expected to correct further owing to rising inventories in Indonesia and Malaysia.

According to Kotak Securities' latest update on the company, the domestic soaps business, considered a drag on growth rates and margins, has shown strong growth over the past few quarters. driven by strategies like launching variants and gaining distribution synergies.