No signs of slowdown; growth to continue: Godrej Consumer

Despite a slowdown in various sectors, Vivek Gambhir, CEO - Designate, Godrej Consumer, feels that the company has not seen any sustainable sign of a slow down in the category in which they operate.

According to him, this quarter has seen an increase in ad spends because of significant amount of new launches. The company's growth has been uniformly strongly both in rural and urban areas," he added.

"We saw some improvement sequentially in gross margins in the third quarter. We will see an improvement in the fourth quarter as well," Gambhir said in an interview to CNBC-TV18.

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Below is the edited transcript of his interview to CNBC-TV18.

Q: Ad spends at 10.7 percent of sales, they were usually high in this quarter and that seems to have impacted your margins. Can you guide us as to what level the company is looking to maintain margins on a sustainable basis for this quarter as well as for FY14?

A: Clearly, in this quarter there has been an increase in ad spends because the company had significant amount of new launches, our advertising spend went up size ably to ensure that we adequately invest behind the launches. In the domestic business, spend increase was about 400 basis points and in the international business it was about 250 basis points. The levels are higher compared to normal levels.

There will be some moderation in coming quarters. But, it will be difficult to give an exact estimate because again depending on when the next set of launches happen, one will see occasional spikes of advertising spend but certainly it will not be at this level of activity.

Q: One of your key raw materials palm oil has corrected significantly in the December quarter, given the mass market positioning currently doesn't this benefit your company quite a bit? By how much the current softening will help margin expansion and therefore how much will your profits be benefited?

A: On palm oil front, clearly prices have moderated but these prices have been a lot more volatile than they have been in the past. There is also a bit of a lag effect in terms of the amount of stocks we end up holding, so it does take a quarter or two before the effects starts showing up. We saw some improvement sequentially in gross margins in the third quarter. We will see an improvement in the fourth quarter as well.

Q: Godrej Consumer is exposed to the volatility in the currency movement with its international presence. Does the company have a hedging policy and how much debt is present on the books in dollar terms?

A: We have currency exposure on oil buying and the interest that the company pays on international acquisitions. A lot of those loans are not repayable in the near-term future so there is some exposure we do have in terms of oil buying. But I think so far we have managed to hold this factor in control. In the past, we had benefited from the currency moving in the other direction as well.

This is a part of running our business. We have a forex committee that monitors closely on what our actions should be. So far, while we have hedged our oil purchases we have not hedged our international debt.

Q: December IIP figures indicate a slow down on the consumer durables side which saw a de-growth. Particularly, we have seen this weakness in most of the companies which have reported their earnings as well and many of your peers have indicated a slow down in consumption creeping in to the discretionary side. Has your company started seeing any pressure points which are building up in the consumer staples category?

A: We have not seen any sustainable signs of a slow down in the category that we operate in. Clearly, I think in the food and beverage section there have been concerns about discretionary income dampening and some hints of a slow down. In our categories, we have not seen the slow down and our growth has been uniformly strongly both in rural and urban areas.

For instance, in Q3 our urban markets grew about 18 percent organically in India. Our rural markets grew at about 38 percent, modern trade grew at 37 percent, so across the board at least in our categories driven both by penetration and consumption increases through our premiumisation strategy. So far we have not seen any signs of a slow down. This is something we will obviously watch very carefully but we are optimistic that this growth will continue.