Inflation may hurt food biz, focus on cost cutting: Godrej

Consumption demand slowed down in the September quarter, and cost cutting holds key to maintaining profitability, says Adi Godrej, chairman of Godrej Group.

Also Read: Godrej Inds to do well despite sluggish economy: Adi Godrej

In an interview with CNBC-TV18, Godrej says high inflation has impacted mainly the food segment. He says FMCG companies in general will be able to absorb inflation by improving efficiency.

As for other businesses of the Godrej Group, he sees huge potential in house insecticides and hair colour as these are 'highly underpenetrated'.

He says the group would be equally focused on its local and international businesses, but sees the international business growing faster.

Godrej says he is open to acquisitions in India, provided it offers good value.

Below is the verbatim transcript of Adi Godrej's interview on CNBC-TV18

Q: We have heard enough data as well as noises about how consumption is slowing, what is the sense you are getting in the domestic arena, in Q3 and Q4 do you see any improvement in consumption because of the harvest, because of the rural boom or do you think consumption remains tepid?

A: Yes, I do think that consumption demand will pick up in Q3 and Q4. The monsoon has been very good, agricultural output will be strong. I feel not only will agricultural output be strong but it will have its multiplier effects on both industrial and services growth too. So I do expect consumption demand to pick up. Consumption demand did slow down a little bit in Q2 because of the negative sentiment but I feel the year will end reasonably well in terms of demand for fast moving consumer goods.

Q: I wanted to ask you about the margin performance because this time around it was solid, almost 300 bps year-on-year (Y-o-Y) bump up in margins, you do have certain pressures like higher ad spends, lower margins from the international business etc, do you see that as a hindrance to incremental increase in margins or do you think this 54 percent level can be sustained going ahead?

A: There are many ups and many downs to margin but overall our margins have been improving. One, commodity prices have been reasonable over the recent past. Second, we are putting tremendous emphasis on cost cutting - whether it is cost of purchases, efficiency in sales and marketing, efficiency in manufacture - so we are gaining margins through efficient operations on a regular basis and that has helped us improve margins.

Q: Jyoti Jaipuria: This inflation has been a worry for most people, is that hurting consumer demand?

A: I think the inflation effect on fast moving consumer goods (FMCG) is mainly in the food sector and even in the food sector, certain items of prices have come down in the non-food sector, I don't think inflation has been a major factor during the last six months. During the last couple of years, inflation even in the non-food sector had a major impact. I feel now with the better agricultural season going forward, the inflationary impact in FMCG will be rather low. I think most of the inflationary impact could be absorbed by FMCG companies through efficiency improvements.

Q: My question on demand also was dovetailing what Jyotivardhan Jaipuria referred to as inflation taking away disposable income, the food bill of every household has probably increased two fold if you looked at the rising prices of eggs, milk, vegetables, that entire basket - so you are showing a 20 percent rise in sales Y-o-Y, will you be able to maintain that or will that improve at all or you just stick to the 20 percent growth because of the nature of demand?

A: Godrej Consumer Products is in a good position in that of the three major categories we are in which is household insecticides, hair colour and personal wash. The only one that is fully penetrated and where category growths are low is personal wash. The soap business is not growing very rapidly, the category itself whereas in our other two categories, they are extremely under penetrated, there are large number of non-users and the ability to convert non-users to users is what creates growth.

Especially now, household insecticides business which is our single biggest category, the fear of malaria and dengue has led to higher consumption and higher penetration and we being leaders in the field, we have approximately 45 percent market share in the field, we have been spearheading this increase in penetration. That has led to very strong growth so both our hair colour business and household insecticide business have been growing in the mid-twenties during the last couple of quarters.

Q: Jyoti Jaipuria: If I ask you one strategic question, how do you look at the international business versus the domestic business - is your focus going to be more on international than domestic or it is going to be mixed bag?

A: Our focus will be on both. We are clearly committed to produce the highest possible growth in India. We produce a lot of cash. We work on a negative working capitalist, it is only our surplus funding which we are investing in international acquisitions and that too in the developing world where growth is strong and because our international business is growing inorganically too, our international business over the last 10-12 quarters has been growing faster than our Indian business and in the quarter just ended, our Indian business grew about 17 percent and our total consolidated business grew 23 percent, our international business grew about a little over 30 percent.

Q: Jyoti Jaipuria: Five years later would international be a bigger piece of the business than it is today?

A: It is already a 48 percent in the last quarter. That has been growing, I think it will cross 50 percent soon. So yes, I think our international business is likely to grow faster than our Indian business but of course we are also open to acquisitions in India so if a suitable strategic and accretive acquisition comes along that could make the Indian business grow fast too. So it is very difficult to predict, which will be the faster growing business over a period of time.

Q: Are there any acquisitions planned in 2014 itself?

A: We have an agreement with Pan African group called Darling which has manufacturing operations in 14 sub-Saharan African countries that we will gradually be taking over 51 percent shareholding in the various geographies. We have already taken over in South Africa, Mozambique, Kenya and Nigeria and we are likely to add a couple of new geographies before the end of this financial year. We will be adding more such geographies in the Darling group over the next financial year too.