Godrej Consumer: using lower costs to drive sales growth

The Indian consumer products market saw slower annual growth in the fourth quarter, than in the third quarter. Urban growth is steadier though not enough to call it a recovery but rural growth is under stress. That was Godrej Consumer Products Ltd’s (GCPL’s) assessment of the market. When can things turn around? The second half of FY17 should see things looking better, contingent on a good monsoon spreading cheer in rural India.

The one unqualified bright spot in FY16 has been falling input prices. The past quarter saw GCPL change track and use the savings in palm oil-related inputs to launch volume discounts in soaps. Advertising and publicity expenses declined in the March quarter by 6.7% over a year ago as a result of this shift. And the company’s soaps volume growth improved from the mid-single digits in the December quarter to low double-digits. But the discounts meant value growth in the soaps segment declined by 6% compared with a 2% growth in the preceding quarter.

GCPL’s household insecticides business saw good growth at 10% and its hair colour business grew by 7%. Overall, its India business sales volumes grew by 9%, including promotional offers, 6% excluding offers, and by 7% in value terms, over a year ago.

The company’s international business did well, with organic (excluding the impact of acquisitions) constant currency sales growth of 18%. While margins in its international business improved over a year ago, they declined on a sequential basis.

At the consolidated level, GCPL’s sales increased by 8.8% over a year ago, but its material cost rose by a lower 5.1%. Operating profit increased by only 13.8%, however, as employee costs and other expenses rose at a higher rate than sales did.

The company’s operating profit margin rose by 90 basis points over a year ago and showed a small increase sequentially. Its net profit growth came in at 11.8% but improved to 16.8% after adjusting for minority interests. A basis point is 0.01%.

A benign input cost environment and GCPL’s focus on driving volume growth to protect its market share are positives. But the strain on the pricing front is showing on sales and profit growth. These near-term concerns will be resolved either when the forecasts of a good monsoon are proved to be right or if input costs increase, giving organized firms an edge in the market. An additional concern is higher working capital, which the company said will be brought down in FY17.

The GCPL stock was flat on Tuesday, but has gained 14.6% since end-February and trades at 41 times its FY16 earnings per share. The management has earned these valuations through its strategy of driving growth through acquisitions, new product launches and delivering earnings growth.

Right now, the industry environment is causing some stress. Investors appear to be hoping this phase will soon pass. An improvement in market conditions in FY17 is necessary to justify these valuations.