Not weak Re, delayed monsoon may impact FMCG: Godrej Cons

Although, the depreciating rupee has been a cause of concern for many sectors, A Mahendran, MD, Godrej Consumer Products said that its impact would be very limited on the company's business. In an interview with CNBC-TV18, he further added that changes in the packaging norm is not expected to dent their profitability.

However, a delayed monsoon can be a worrying factor, informed Mahendran. According to him, the delay could affect rural income to a certain extent and the FMCG sector could be hit due to this. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.  Q: A legal issue, the government's much awaited notification, the legal metrology packaged commodities amendment rules kick in on July 1. How does that change the arithmetic of pricing or profitability for you?
A: As far as this amendment is concerned, we expect no change on profitability because this is already well set as we were informed of the kind of changes about a year back. When you look at all the SKUs which we have, they are fairly there in terms of the amendment. I don’t see any change in our profitability as such. Q: We are seeing a seminal fall in a host of commodities and you would be a buyer in several of the commodities. Is that going to make a difference to your operating margins in this or the next quarter?
A: Not really. There is only one raw material which we rely on from a commodity point of view, which is palm oil. It is used for our toilet soap and personal wash category. But right now the palm oil prices are softening. Looking at the trend we can say, it is going to be very positive towards us. Q: The other side of the rupee story is your international business, net-net how does the rupee depreciation and the fluctuation in other currencies impact you? You also have a policy of keeping your hedges low in terms of your exposure, are you looking to change that in the near term?
A: As far as the rupee depreciation is concerned, yes there could be some sort of an impact with the kind of rate in which the depreciation has happened in the last one year, particularly in the last month.
Our short term hedging policy etc. is well geared to manage our bottom-line, if at all it is hit. We are fairly hedged as far as the anticipatory risk in terms of rupee depreciation is concerned. We are fairly in line with our plan. Q: There has been a talk about slow down. We had the GDP growth come down significantly in the last quarter. Have you seen any kind of a slow down? Your category is in staples and may not have seen much of a slow down, but is there any indication that consumers maybe looking for some discretion?
A: There are two types of slow down. One is the global macro outlook, the gloom and doom type of scenario. If that is leading to any slow down, as far as our sector is concerned, we don't expect that.
But my concern is on the monsoon delay and the delay in monsoon can lead to some sort of slow down across FMCG categories. Also it could have an impact in the rural income. That is the only worry we have. Q: What percentage of your revenues or profits come from export markets and how are those markets doing? You have the finger on the pulse of several markets, the rupee depreciation should be a solid help for you, are you going to see more money over there or is the slowdown going to eat into most of it? Give us an idea of how much percentage of cash comes from there? How much will come as the percentage change?
A: Overall we don't call it as export earnings because most of the countries where we are in like Argentina, Chile, the African countries and Indonesia; we are local country operative. To that extent rupee depreciation doesn't come into play.
When you say export earnings, it refers to sales made on export and it is then that the full amount coming from rupee depreciation or appreciation impacts us. But, in all the concerned countries, where we have operations, we are running it independently. So to that extent, the impact of rupee depreciation is fairly limited. Q: A word on the balance sheet – you had an equity infusion that has gotten down your debt to equity to much comfortable levels. Are you comfortable with the current position and also now that your balance sheet again is seeing a decent position are you looking for inorganic growth?
A: Our debt to equity ratio is in a very comfortable position. We did some valuations about 4-5 months back. With Temasek coming in, we got the debt corrected and our ratio is very healthy right now.
As far as our way forward is concerned, we are looking at some amount of inorganic growth with the Darling acquisition in Africa. It falls in the hair extension category. We are going through phase II acquisition process for Darling. We completed phase I and now we are in phase II. It will happen during this year. Q: Will it be a 30% run rate as far as revenues are concerned, will margins remain at 17% or will they do better?
A: If you are talking about our consolidated top-line growth rate, we are looking at a fairly robust growth rate, similar to ones reported in the last financial year. As far as bottom-line is concerned, it is also well in line with a good performance that we reported last year.