Godrej Consumer: a slow moving consumer goods market out there
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Company after company is reporting slowing sales growth. Take Godrej Consumer Products Ltd. In the June quarter, its soap sales volume rose by a figure that was early double-digits, it said, without giving a number. But deflation meant that sales by value rose by only 1%. Even if we assume volume growth at 10% or 11%, that’s a significant cut.
The reason for this is the company gave volume discounts, not only to pass on the benefit of lower material costs, but also protect share and match the aggression shown by market leader Hindustan Unilever Ltd. In household insecticides, its sales was hit by a delayed monsoon (in June), which led to an 11% decline in sales. But this should be a timing issue and sales should improve in the current quarter.
Overall, on a constant currency and organic growth basis, Godrej Consumer’s net sales growth was flat in India and rose by 6% internationally, leading to a 3% overall sales growth. Organic growth is calculated by excluding the sales of acquired/disposed businesses. The acquisition of Strength of Nature in Africa saw the region’s sales rise by 52% and, along with higher growth in Latin America, was the chief reason for higher international sales growth of 18% (constant currency, but including the impact of acquisitions). Main market Indonesia has seen slower growth of 3%.
Overall, Godrej Consumer’s sales rose by 6.8% from a year ago, growing slightly ahead of the 6.7% increase in material costs. While the increase in employee costs and other expenses were restrained to 3.9% and 2.4%, respectively, advertising and publicity costs declined by 4.8%. A higher increase in promotions—more volumes for the same price, for instance—contributed to this. Under the new accounting standards, such promotions have to be deducted from sales.
Total costs rose by only 4.2% as a result and its operating profit margin rose by 2 percentage points from a year ago. That then is the silver lining. As long as margins are stable or improving, companies can play the waiting game. Its profit before tax rose by 17.5% while exceptional items buoyed its net profit, which should be ignored.
If the decline in sales was only due to lower input costs resulting in lower product prices, then it should not matter. Real sales growth will still be high. What is worrying is that companies are saying that demand is weak, especially in rural areas. What has held up investor hopes is that urban demand should revive, and then, there are magic pills such as a good monsoon, the hike in government salaries and the proposed goods and services tax.
Godrej Consumer’s shares fell by 2.7% after its results were declared on Friday. That is nothing considering that its share has been steadily rising since end-January and is up by around 40%. The factors holding down its performance are mostly to be found in the external environment. If they take long to resolve, a long wait lies ahead for investors as well.