BackGodrej Consumer Products: falling commodities vs currency volatility
Its domestic business has comforted investorssales have grown by 13% in volume terms, with its main businesses of soaps, household insecticides and hair colour all contributing
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The slump in equities spared few stocks and Godrej Consumer Products Ltd was no exception. Its share has declined 9.4% since early August. On Thursday, when the broad market recovered, the stock did jump intraday, but closed with a mere 0.8% increase. The BSE FMCG index did better with a 1.9% gain.
One impact of the worries that have gripped global markets is a decline in commodity prices. As a consumer goods firm, that’s a boon for Godrej Consumer Products. Take crude palm oil, whose price as of 30 June was down about 9.6% from the start of 2015. Between 1 July and now, it has fallen by 27%. Intermediates of palm oil are a key input for the company’s domestic soaps business.
Already, it has gained from falling palm oil prices and has used those gains to reinvest in growth through discounts and advertising. That is showing results, with domestic soap sales growing 13% in volume terms in the June quarter. The current decline will see the company’s costs fall further, though with a lag. Other inputs, too, have declined and the fall in crude oil is also beneficial for packaging and transportation costs.
But another impact of the global volatility is the effect on currencies. The rupee has depreciated, which translates to higher costs in rupee terms. That could negate some of the benefits of lower input prices.
Currency volatility is a bugbear for another reason. Godrej Consumer Products has operations in several emerging markets. Asia, Africa and Latin America are some of the regions it is present in. Not only does this cause havoc in terms of translation-related effects while consolidating results, but the company’s input costs increase because purchases are priced in dollars in some markets. That can pose a challenge.
While currency effects can distort financials, the real figure to watch for is organic constant currency growth. This will disclose if the macroeconomic challenges facing emerging markets have affected real consumption demand. In the June quarter, Godrej Consumer Products’ international business grew by 13%, which is decent. If that slows down, that could become a reason for worry.
Its domestic business has comforted investors—sales have grown by 13% in volume terms, with its main businesses of soaps, household insecticides and hair colour all contributing. This level of growth and low commodity prices, barring a sharper decline in the rupee, should benefit the company. Investors would then be willing to overlook the volatility in its international operations.
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