The MSCI (Morgan Stanley Capital International) global indices are being reconstituted and the latest entrant to the index is Godrej Consumer Products. Effective from 31 May, Godrej Consumer Products along with Bank of Baroda and Cairn India will be a part of the indices.
Soon after the announcement, Godrej's stocks touched new highs and in an interview with CNBC-TV18, Adi Godrej, Chairman, Godrej Industries said that he expects strong growth in Godrej Consumer Products in the next fiscal. "The company is doing exceptionally well in the domestic front and the international business continues to grow in line with expectations," explained Godrej.
Speaking about the real estate arm of Godrej Industries, Godrej Properties, he said that it will continue with new launches in FY13. The company has signed two redevelopment projects in Mumbai and believes that the real estate margins will contract in FY13. Godrej also recommends a strong momentum in the reform process and says that India needs better governance to revive growth.
Godrej is also of the view that the government needs to address issues related to subsidy and Foreign Direct Investment (FDI) in retail. He also expects the Goods & Service Tax (GST) to be in place by the end of FY13.
Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
Q: We will get down to Godrej Consumer Products. Your view with regards to the domestic business because that one was up around 21% last quarter and in Q4. What is the growth trajectory that you expect for FY13 then?
A: We expect a very strong growth in FY13. Sales in April and May have been very good domestically. Growth rates have accelerated and consumer confidence seems strong and I expect the FMCG sector will do well in this financial year. Godrej Consumer Products should be doing exceptionally well in the domestic front.
Q: Your stock has seen new highs in the past week and that’s also because of the MSCI (Morgan Stanley Capital International) including your stock in its index. But there seems to have been some bit of good news coming in also from the Palm oil prices. There has been a huge crash in the Malaysian Palm Oil prices. Should we expect that your margins could see a quantum leap or a substantial improvement in this quarter itself?
A: First of all palm oil prices have not come down that much and secondly, we don't use palm oil. We use the by-products of palm oil like palm fatty acid distillate (PFAD) and palm stearine. Their costs have been stable for the last few months so, there is not a big cost reduction. We expect some cost reductions and if there are cost reductions, it can help improve margins in soaps.
Q: Can you give us some outlook with regards to the international business and how that is doing with regards to Godrej Consumer?
A: Most of the geographies in which we have businesses, Africa, Indonesia, South America, the economies are doing well. Our growth rates are good. We expect good growth this year in our international business also.
Except for Europe, most economies are doing reasonably well. Even yesterday the information from Japan was positive. The United States feedback is positive. Europe is the difficult place.
Q: You would expect the run rate of around 20% to continue in terms of revenues as well your margins, I think it’s about 18-19%?
A: I wouldn't like to give any guidance but we are growing very well. Last year, we grew very well in our international business. Of course, we have some acquisition related increase in international business also. That will continue in 2012-13 but, we expect growth to be very strong in 2012-13.
Q: What is the situation in the Mumbai real estate space? We get contradictory reports that with a change in municipal headship there have been an increase in prices as business has improved. Yet there are some research reports which say that for the year ended FY12, home prices actually fell by about 10%. What is the situation in the ground, what is the experience for instance at Vikhroli where you have personal experience. Are prices and volumes showing any tendency to rise?
A: In Vikhroli our sales have been very good. Our new residential projects in Vikhroli have done extremely well and prices over the last couple of months have risen. We have effected two price increases and we expect strong demand as we introduce new phases and I expect prices will continue to rise.
Q: Can you just give us a sense of what the launches would be in FY13 for Godrej Properties and which would be the geographies that you would be targeting, considering which ones you think are the most lucrative at this point?
A: I think we have signed eight new projects last year. We will be launching them. We have signed two new projects in this financial year. We have a presence in about 12 cities across the country and in all the four zones of the country.
We will continue to have new launches in 2012-13. We have signed two redevelopment projects in Mumbai, which we will also be taking forward in the near future.
Q: For the latest quarter, Godrej One was the big contributor for your own numbers. Otherwise, there seemed to have been evidence of pressure on the margins, probably because of labor costs. What's the situation in terms of Godrej Properties margins itself? Will you see this pressure continuing?
A: I think all real estate margins have been affected because cost increases have been quite considerable. We do feel there will be pressure on margins in the real estate sector in 12-13.
Q: How much do you think volumes may grow? Will they grow in the first place in FY13? The economic mood is still somber. We are getting increasing reports of people marking down their GDP forecast, even their corporate earnings forecast. In such a situation what will be the likely sell of units compared to FY12?
A: In FY12, our sales in Godrej Properties grew very considerably. I forget the exact number, it was upwards of 50%. In the year 2012-13 also, we expect our sales to grow tremendously. It's a function of the number of new projects we have launched all over, including the new projects in Vikhroli. Sales growth will be very strong.
Q: Can you just give us an update on what exactly is happening with the BKC deal and the property?
A: It's a joint venture with Jet to develop a commercial building which roughly will be a project of about Rs 3500 crore. Its going on.
Q: We were given to understand that GIC is not investing in the project?
A: We have had negotiations with many people. We don't talk about who invests and who doesn't invest. When there is a private equity deal finalized, we announce. We discuss private equity investments with several parties from time to time in several projects.
Q: But the understanding was that GIC was reluctant to invest because of over supply in that part of Mumbai or at least in the Mumbai market. Was that the reason why is it difficult to find private equity?
A: I can't speak on behalf of an individual private equity player.
Q: But there is a private equity interest you think in that project?
A: Yes, the private equity interest in all projects, it's a question of being able to strike a deal.
Q: Are you getting a sense that the government is moving ahead on several issues, the manner in which the budget got passed and the repercussion for the economy in terms of fiscal deficit have not been very positive, the macros in terms of inflation are not looking good, current account deficit is not looking good. Are you getting a sense that the government is coming to grips at all or is there still a sense of drift as far as corporate India is concerned?
A: What we need in the country is to get the reform process going. We need the governance to improve and we clearly need to focus on reviving growth. I expect that post the parliamentary session may be, we will see some action from the government on some of these fronts.
I think they have burnt their fingers in the past when some of the reforms were announced while parliament was in session. They will perhaps take the steps required. There are several steps required including executive action. They need to reduce subsidies in various products. They need to allow FDI in certain sectors.
I expect that once the parliamentary session is over we may hear some announcements. I do hope that the reform process is taken forward because if the reform process is not taken forward, then growth will be affected. We need a strong momentum in the reform process and of course the most important reform to get the economy going is the goods and services tax. I do hope there will be action on that front too.
Q: There are conversations on that between the centre and the states. They seem to have been stepped up a little in the last few weeks. What is your own sense and your conversation with the political leadership? What kind of a deadline are you expecting in terms of the GST?
A: I am hoping that before the end of this financial year it is put in place.
Q: Any sense at all about whether appetite for capital investment is improving. The kind of numbers we are getting, especially from capital goods industry bigwigs is not at all encouraging. You have your ear to the ground. Are you getting a sense at all or does it look like it might not happen, perhaps in all of 2012?
A: I think more needs to be done under the reform umbrella, to encourage more investment and better growth. Clearly, I think where we are today is not satisfactory. We need to improve the forward movement of the reform process and I do hope the government will take action over the next couple of months.