Godrej Consumer Q1 results knocked down by GST and Indonesia
Indonesia is proving to be a problem for Godrej Consumer Products Ltd. Once one of its best performing overseas businesses, FY17 saw growth slow as the country’s economy is going through a difficult phase, affecting consumer spending. The March quarter saw flat growth but this quarter took a turn for the worse, as rivals stepped up competition in Godrej Consumer’s flagship insecticides business in Indonesia.
This was also the quarter when sales growth slowed due to the imminent transition to a goods and services tax (GST). That made things worse. Godrej Consumer’s sales grew by a mere 2.8% in the June quarter from a year ago. Some of this was due to a temporary increase in its excise cost, which should normalize in subsequent periods.
Surprisingly, raw material costs grew ahead of sales growth (blamed on an increase in palm oil costs), contributing to a decline in gross profit. The company management decided to spend more on advertising and promotions and it believes this would ensure growth improves over the medium term. While that is to be seen, the immediate effect is an 8.7% decline in Ebitda (Earnings before interest, tax, depreciation and amortization) and a 2 percentage point decline in profitability. Net profit too declined by 8.5%.
The India business is recovering post-GST and should see both sales and profitability improve from the September quarter onwards. A key point to watch is if sales grow ahead of material costs or not, and also whether the step-up in advertising was worth it. Indonesia will pull down growth for at least one more quarter. Godrej Consumer has had to offer promotions to remain competitive but wants to use innovation rather than price to protect its market. How that works remains to be seen. Among other main regions, Africa and Latin America are expected to do better.
Godrej Consumer’s shares fell by 2.8% after its disappointing results. Investors won’t mind the wait for the India business to recover from GST’s effects. But the international business was adding to growth, with acquisitions adding heft. That has waned a bit in recent quarters and the June quarter was worse. If the international business continues to underperform in FY18, it poses a risk to valuations.