GODREJCPNSENovember 15, 2022

Godrej Consumer Products Limited

9,655words

92turns

12analyst exchanges

5executives

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Management on call

Nisaba Godrej

EXECUTIVE CHAIRPERSON, GODREJ CONSUMER PRODUCTS LIMITED

Sudhir Sitapati

MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER, GODREJ CONSUMER PRODUCTS LIMITED

Sameer Shah

CHIEF FINANCIAL OFFICER, GODREJ CONSUMER PRODUCTS LIMITED

Krishnan Sambamoorthy

MOTILAL OSWAL

Nisaba Godrej

Executive Chairperson; Mr. Sudhir Sitapati – MD & CEO; and Mr. Sameer Shah –

Key numbers — 40 extracted

have been behind our expectations though the quality of profits have been good. Our sales grew by 7%, three year CAGR of 9%. Volumes declined at 5%, three year CAGR of (+1%). And gross margins after

pectations though the quality of profits have been good. Our sales grew by 7%, three year CAGR of 9%. Volumes declined at 5%, three year CAGR of (+1%). And gross margins after four quarters of decli

ality of profits have been good. Our sales grew by 7%, three year CAGR of 9%. Volumes declined at 5%, three year CAGR of (+1%). And gross margins after four quarters of decline, grew by 3%. Howeve

n good. Our sales grew by 7%, three year CAGR of 9%. Volumes declined at 5%, three year CAGR of (+1%). And gross margins after four quarters of decline, grew by 3%. However, led largely by a nearl

clined at 5%, three year CAGR of (+1%). And gross margins after four quarters of decline, grew by 3%. However, led largely by a nearly 50% increase in advertising spends to drive market developmen

50%

And gross margins after four quarters of decline, grew by 3%. However, led largely by a nearly 50% increase in advertising spends to drive market development, our EBITDA declined by 15%. Our PAT d

15%

y a nearly 50% increase in advertising spends to drive market development, our EBITDA declined by 15%. Our PAT declined by 25% led largely by VAT Amnesty Scheme settlement and some currency volatilit

25%

n advertising spends to drive market development, our EBITDA declined by 15%. Our PAT declined by 25% led largely by VAT Amnesty Scheme settlement and some currency volatility. Despite this, our oper

ubled driven by simplification initiatives largely on working capital. In India our sales grew at 8%, gross margins grew at 7% and above the line grew at 52% leading to an EBITDA decline of 5%. In Q

52%

rking capital. In India our sales grew at 8%, gross margins grew at 7% and above the line grew at 52% leading to an EBITDA decline of 5%. In Q2 FY'23 our three-year CAGR in India was 1% versus 4% in

at 52% leading to an EBITDA decline of 5%. In Q2 FY'23 our three-year CAGR in India was 1% versus 4% in Q1, this reduction was entirely led by a drop in our Household Insecticide business, which bas

77%

ODUCTS GUAM had a good operating quarter with 15% growth. Gross margins grew at 8%. ATL grew by 77% and as a consequence EBITDA declined by 12%. However, severe depreciation in currency have meant

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Guidance — 20 items

Sudhir Sitapati

opening

“Our sales grew by 7%, three year CAGR of 9%.”

Sudhir Sitapati

opening

“Volumes declined at 5%, three year CAGR of (+1%).”

Sudhir Sitapati

opening

“In Q2 FY'23 our three-year CAGR in India was 1% versus 4% in Q1, this reduction was entirely led by a drop in our Household Insecticide business, which basis positive sales growth in this quarter seems probably like a seasonal impact.”

Sudhir Sitapati

opening

“Finally on people and planet alongside profits, in order to effectively compete in the hypercompetitive talent market, we launched Project Neo targeted at managers with one to three years work experience who perhaps wanted to change functions or industry.”

Sameer Shah

“And the third is, in Indonesia, we still continue with consumption of high cost inventory, it is difficult to quantify the impact, but our gross margins sequentially were better, but still on a year-over-year were lower, we expect that to ease out in the coming quarters, because generally the inflation is cooling off.”

Percy Panthaki

“And on Africa, again, we have in the past also mentioned that we aim to increase margins here, but they still remain in single digit.”

Percy Panthaki

“So, while the medium-term target is quite clear, can you give us some sort of route map to that, in terms of how and at what pace, we would see the increase in margins happening in Africa?”

Sameer Shah

“I think going ahead the target which we have set out as ambition, which we have pointed out earlier, in terms of reaching to high teens margin is very much intact, so no changes on that front.”

Sameer Shah

“And once we have some of those in place, we will be very happy to share this street in terms of not just the changes in operating model, but also the impact which it will have over a period of time.”

Sudhir Sitapati

“So, moving to softer comparators, and with the seasonality shift, which we hope to see in at least one or two months now, we think that the Household Insecticide volume should go back to normative level.”

Risks & concerns — 15 flagged

And gross margins after four quarters of decline, grew by 3%.

— Sudhir Sitapati

In India our sales grew at 8%, gross margins grew at 7% and above the line grew at 52% leading to an EBITDA decline of 5%.

— Sudhir Sitapati

This was largely driven by an increase in media spend and inflation pressure.

— Sudhir Sitapati

Our challenge in Household Insecticide, Abneesh is not to win share, our primary challenge given the fact that we are market leader is to premiumize this category and grow it faster.

— Sudhir Sitapati

So, your effort to premiumize could become difficult if your key competitors are always on an undercutting mode, which could be because they are not seeing that volume growth.

— Abneesh Roy

The second impact is because of the scale deleverage, on the whole, the business did decline, high single digits close to double digits.

— Sameer Shah

And the third is, in Indonesia, we still continue with consumption of high cost inventory, it is difficult to quantify the impact, but our gross margins sequentially were better, but still on a year-over-year were lower, we expect that to ease out in the coming quarters, because generally the inflation is cooling off.

— Sameer Shah

There are three reasons for the volume decline in the first half and three reasons why we feel that the volumes would be quite good in the second half.

— Sudhir Sitapati

Do you see a similar risk of what we ki panned out in 2nd Quarter, could possibly play out even in the 3rd Quarter, given that Indonesia will probably be something that takes another quarter, because you had shared a similar expectation in going forward, this is something that will pan out, but obviously high cost inventory, the growth in Home Insecticide kind of weighed on this.

— Avi Mehta

So, that, for example is a challenge that remains.

— Sudhir Sitapati

forex management in Africa, is the challenge that remains for us.

— Sudhir Sitapati

Difficult to kind of put a number to it, whether it will go back to you know those +800 bps to +900 bps, which was the case eight, nine quarters back, but they will kind of directionally go up, going ahead.

— Sameer Shah

So, in the context where the demand environment for India as well as globally is a bit volatile and you are obviously supporting some of your new initiatives, is the share of voice significantly higher for you in terms of the spends that you are doing?

— Harit Kapoor

And in an environment where demand is weak, are you still able to get ROIs in line with what you expect, given that the consumer is not as probably responsive as he or she was about a year and a half ago?

— Harit Kapoor

See, we have increased our working media by 70% in the last quarter, despite the gross margin pressure, and you guys know better what FMCG companies and peers are doing.

— Sudhir Sitapati

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Q&A — 12 exchanges

My first question is on Household Insecticides, you mentioned Household Insecticides has been soft in Q2. I understand that in Q2 there were extreme seasonal issues, very high summer and then very high rainfall, both are not conducive. So, when you mentioned the performance was soft, was it also in reference to the industry performance, because you did mention that in H2, you will evaluate if any changes are needed. So, changes would be needed only if competition is doing better, so wanted to understand that bit. Plus, global warming is a reality. In that context you think the mosquito presenc

Sudhir Sitapati

Abneesh, I think I will answer this in two parts. Firstly, Q2 was indeed soft, I suspect for the entire market. Because of the seasonal impact that you spoke about, especially in the East of India, we had delayed monsoons. The monsoon seemed to have spread into October, you know, we have had a late monsoon as well. This is a seasonal category and probably not right to look at this category as one quarter. I would say that between Q2 and Q3 I hope anyway things will even out. And we are broadly holding our shares in Household Insecticide. Our challenge in Household Insecticide, Abneesh is not t

My first question is on Indonesia. On the margin front, you have done around 17% margins here. If you can just parse out the different impacts on the margin, one is the operating deleverage because the sales have declined. Second is the input cost inflation and third is increase in advertising if any.

Sameer Shah

Percy, this is Sameer here. So, I think we have detailed out in the 930 bps drop in Indonesia, I think around 150 bps is driven by upfront working media investment. And as we can see the core business relatively well, I mean in Q2, and we continue with the upfront investment. The second impact is because of the scale deleverage, on the whole, the business did decline, high single digits close to double digits. So, that does have it’s impact on overall operating performance. And the third is, in Indonesia, we still continue with consumption of high cost inventory, it is difficult to quantify th

Just wanted to understand one bit on the volume growth. Now you have clearly called out that the second half we would be looking at a single digit kind of volume growth coming in, from the declines that we are witnessing. Is this based largely on the Home Insecticide recovery that you were alluding in the earlier question, or is there any other segment?

Sudhir Sitapati

There are three reasons for the volume decline in the first half and three reasons why we feel that the volumes would be quite good in the second half. The first reason is the whole Indonesia, sort of, for lack of a better word Saniter, reduction of inventory, etc. which should come back in second half. The second reason is that there was hyperinflation in Soap. And what happens when there is hyperinflation in Soap and we didn’t pass on anywhere close to the inflation, but that kind of inflation usually does not lead to marginal drops in consumption, but pretty large drops in pipelines. So, no

My first question is Sudhir a big picture question. So, there is a feeling amongst investors that the business is taking a lot longer to turn around compared to what everybody expected, and you took over almost about 12 months back or so. What is your sense now that you have completed 12 months? Is it tougher than what you thought? Or do you think market expectations were running high at that point of time?

Sudhir Sitapati

No, the short answer is no, it's not tougher than I thought it was. I think we have been dealt with one card, which has been a big joker in the pack, which is the Ukraine crisis and the oil impact on account of the Ukraine crisis. I did think that Indonesia and Africa when I came in required a little bit of cleaning up and I think that's happening. So, the broad point is we have had a bit of a, stroke of bad luck, I guess in terms of Household Insecticides in September month and August month. So, I continue to be on many fundamentals, I am very happy with the state of the business, because you

My first question was an ad spend, so this increase that you have seen, is it setting like a new normal of ad spend that this business can now have from here on or is it a few quarters phase where you would be investing heavily to kickstart the growth, and then you will be coming somewhere in between where you were and where you are now. And also, if you could just explain the difference between working media and ad spends, how you kind of calculate the two different metrics?

Sudhir Sitapati

So, I think, Arnab, exact numbers will be hard to get, because there is always toggling, we are investing when we will get return on media invested, we may cut back, we may go ahead, etc. But broadly, it's fair to say that as a company over the next four or five years, we should see increases in advertising spend, even from where we are. I mean, obviously calibrated, and obviously looking at what it's giving us in terms of growth. But this is certainly not something we are going to do for a few quarters, it's certainly more philosophical, in terms of what our portfolio deserves, and what we sh

Yes, I think it is better for me to talk about the innovations that we didn't launch and the products that we supported, and also give you a few examples of innovations that we did launch on fewer. So, for example, let's talk about Air Care right, which is a pretty large category, not top of mind for a lot of analysts, etc. But that category has seen explosive growth. And that has come by investing in one SKU, which is Aer Matic. Now, Aer Matic was an SKU that was present in India, and selling reasonably well and growing reasonably well. But in Indonesia, it is a far larger SKU. So, when we se

Sudhir Sitapati

Firstly, wthat's not the way we look at the metric, we just look at lowest cost to reach consumers, and whatever media is the lowest cost to reach consumers that it is. I think, when we do the numbers, and we look at it, and we benchmark it across FMCG competition, we are roughly around about where competition is, in terms of total digital to TV or conventional spends.

My first question was on A&P spends again. So, in the context where the demand environment for India as well as globally is a bit volatile and you are obviously supporting some of your new initiatives, is the share of voice significantly higher for you in terms of the spends that you are doing? And in an environment where demand is weak, are you still able to get ROIs in line with what you expect, given that the consumer is not as probably responsive as he or she was about a year and a half ago?

Sudhir Sitapati

See, we have increased our working media by 70% in the last quarter, despite the gross margin pressure, and you guys know better what FMCG companies and peers are doing. That's a pretty large investment in the context of the gross margin. I think see the media investment firstly is iterative if one invests, one finds out what's happening, then one takes a call again, but ultimately, media is an investment for the long term it is for developing and building categories. For example, on Air Care we have increased our media by like 5x or 6x. It's building for the future. So, the demand environment

While a lot of questions and responses about Household Insecticides was already done, just wanted to push the envelope on one particular aspect on the mosquito repellant side. Now a lot of discussion on whether this being a market problem or a sales problem or an R&D problem etc. and thanks for the responses, but one question is, is that a sales problem or a distribution problem yet to solve? So, the reason I am asking is because you have been reiterating this for a while that premiumization is one of the important agenda for us as a company, particularly in the context of Hone Insectivides, a

Sudhir Sitapati

No, there is in a sense that these premium categories are not present in as many stores as we want them to. But that's not because we are not going to those stores. We are going to those store in Soaps and many other categories. Where it's not going to the store is because of whatever reason, relevance of price, etc. it's not relevant to smaller stores. So, one of the things that will have to happen is the distribution, but I don't think that's the underlying reason for lack of premiumization on Household Insecticide is not, unlike, let's say Air Care so a lot of the growth that we have got on

My first question Sudhir was to you, you mentioned in the opening remarks that the performance report was below your expectations. Is it more to do with India business or across businesses and across geographies?

Sudhir Sitapati

Sheela we have a forecast which we, you know, at the beginning of every quarter, we keep having a running forecast. So, when I say it's below my expectations, only been below my expectation on one particular sell which is India Household Insecticide, both in terms of top-line and bottomline, That has been the only sell that has not been what we forecast at the beginning of the quarter. So, yes, I mean, the rest of the sells, I mean, even Indonesia, which is not a great result is something we foresaw a few months ago. And my second question was, Just wanted to get some understanding, here is th

I have two questions. Number one, Sudhir can you outline for us how you think Soaps will pan out now that you are doing price cuts, it was 25% kind of growth, what we have been seeing in recent quarters in this business, it can drop to how low as you start to cut prices? And how much will margin expansion offset that, that impact? And related to this, how much danger is there from the unorganized guys coming back and spoiling the party in the wake of the more benign input cost environment? So, the second question is a different area. I wanted to understand a little bit about the movement in ot

Sudhir Sitapati

Okay, so let me answer the question on Soaps, it’s easy for you to do the math. I mean, Soaps is a category that grows a little bit more than the population growth of the country is, what the volume growth of Soaps typically. So, the population of the country grows at 2% to 2.5% it's a 95% penetrated category, or 98% penetrated. The category grows at 3% to 3.5%. We roughly have been gaining some amount of share for the last decade odd, we have been gaining 50 to 60 bps of share a year, that's been our share trajectory. So, you can now calculate in this entire inflation period of about four or

My first question was on directionally we have seen that all your India categories other than Household Insecticides has done well. I mean there would be some time to soak in the overall sales growth. But there have been those underline strategies across the board has worked. And what has not worked is in Home Insecticides where accessible packs innovations will lead the way. But when we say we are seeing some amount of optimism. Is there some optimism in Household Insecticides because our channel check say there has been some amount of recovery for the category as a whole. So, my first questi

Sudhir Sitapati

No, I think look, as I said already, structurally our Q2 performance ex-Household Insecticides in India has actually been very good. In Home Insecticides, there are two components to it, one is that there is a seasonal impact, which I think is having looked at now October and November, I think was a seasonal impact. But there is also an impact in Home Insecticideswhich we have to do better, which is to premiumize the category. So, we have got to break up, even if the season was good, let me say that the Home Insecticides growth would not have been where we wanted to go. So, that broad story co

Thanks everyone for joining. If you have any further questions do reach out to the IR team. Thank you.

Management

Speaking time

Sudhir Sitapati

Moderator

Sameer Shah

Abneesh Roy

Percy Panthaki

Vivek Maheshwari

Harit Kapoor

Manoj Menon

Richard Liu

Avi Mehta

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Opening remarks

Pratik Dantara

Good evening, everyone, and welcome to the call. On the call with me from GCPL is Ms. Nisaba Godrej - Executive Chairperson; Mr. Sudhir Sitapati – MD & CEO; and Mr. Sameer Shah – CFO. We will now have Sudhir share his thoughts on our performance, and then we can open up for Q&A.

Sudhir Sitapati

Good evening, everyone. I hope you and your families are doing well. Thanks so much for joining us on the call today. I wanted to first start with an organization change upfront. Pratik who has been leading Investor Relations and M&A has decided to move on. Tapan who has earlier lead Investor Relations and many of you would have interacted with him, would head Investor Relations alongside Global FP&A. I wish both Pratik and Tapan all the best. I will now start with an update of our quarterly performance. Our results have been behind our expectations though the quality of profits have been good. Our sales grew by 7%, three year CAGR of 9%. Volumes declined at 5%, three year CAGR of (+1%). And gross margins after four quarters of decline, grew by 3%. However, led largely by a nearly 50% increase in advertising spends to drive market development, our EBITDA declined by 15%. Our PAT declined by 25% led largely by VAT Amnesty Scheme settlement and some currency volatility. Despite this, our

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