A gradual, but uneven recovery is underway, as consumer sentiment has improved, says Vivek Gambhir, Managing Director, Godrej Consumer Products. In an interview to CNBC-TV18, Gambhir says there is a gradual uptick in the urban market, but the rural market remains sluggish.He is hopeful of a better performance in the second half of the year driven by around 10 launches across all product categories."Net net, FY16 should be better than the last fiscal," Gambhir says.Gambhir says advertisement and promotional spends right now account for 15-20 percent of revenues and he is comfortable with that number. However, the company could spend more as it has the comfort of lower input costs to cushion margins.He says the the recovery in Northern India is quite strong, while South has done better after a weak run last year. However, the Eastern market, which is predominantly rural, is still under stress, he says. Below is the transcript of Vivek Gambhir’s interview with Sonia Shenoy.
Q: You had a chat with analyst in the last one week and we have been reading a lot of notes which suggest that you are betting big on a gradual urban recovery. However we have not seen any recovery play out just yet. In terms of a timeline how long do you think it could take for both the rural and the urban markets to see a sustainable say maybe a double digit recovery?
A: As you outlined this has been somewhat of a two steps forward, one step backward kind of a story. We are still seeing a gradual and an uneven recovery. There were some pockets of strong performance, some pockets of sluggishness. There has been a gradual pick up in urban and that is the good news. While we have done very well in rural, I think there is still some sluggishness in rural, but what is comforting is that things are headed in a right direction. We still remain optimistic that things should improve in second half of the year. Net-net fiscal year 2015-2016 should be much better than the last fiscal year.
Sonia: Can you just throw some more colour on this gradual pick up in urban? In which segments are you seeing a pickup, in which geographies are you noticing some rebound and going ahead where do you see the growth triggers coming from?
A: What is think is driving this growth uptick, first of all is an improvement in consumer sentiment and if you look at the Reserve Bank of India (RBI) future expectation index, the Nielsen confidence Index both of them are at a all time high versus the last four years. Second of all inflation has been well under control and typically that is a bit of a leading indicator. Once inflation is under control for about three-six months, it typically leads to improvement in disposable income.
The outlook for job creation also has been quite positive and then finally a lot of companies are readying their arsenal to launch new products in the second half of the year ahead of the festival season. However, given the benign commodity environment, there are enough cushions to deliver strong profit growth along with intensifying promotions and being able to launch new products.
In terms of geographies we are seeing a better growth in the North of India. The south was an area of concerned last year but that has been picking up quite nicely, but the eastern part of India which has the highest salience of rural that is continuing to face some stresses.
Q: In the quarter gone by your volume growth in the domestic business was around 13 percent odd and that was led by new product launches that you had in the household insecticide segment. Going ahead say in the next three to six months what are the new products that we can look forward to from the Godrej Consumer stable?
A: For this year we are getting about ten launches ready, the exact number of launches will depend a little bit on the overall macro environment but we are looking at launches across all of our major categories-in insecticides, in hair colours, in skin cleansing, along with that we are also looking at some launches in air fresheners and the health and wellness space as well. Therefore, across the board we are looking at a series of new launches but the exact number will depend a little bit on the overall macro environment.
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Q: So that would also mean higher amount of ad spends because in the quarter gone by your ad spends were not much, they were at about 12 percent of revenues which is what you have seen on an average but given that you have ten new launches going ahead, ad spends as a percentage of revenues will go up you think?
A: Ad spends as a revenue will go up but typically we keep ad spends between the range of 11 and 13 percent and we look at overall marketing investment, that is a function of both ad spends and promotional expenses, those typically tend to between 18 and 20 percent. So that is the range we feel comfortable with and because of the supportive gross margin situation, we believe that we can increase our ad spends and still deliver profit growth ahead of sales growth.
Q: Given that we are seeing a bit of a pickup in the urban demand as you stated yourself, what kind of growth do you think you can eke out by the end of the year? I am talking about volume growth, you think this 12-13 percent domestic volume growth is a sustainable number or do you think that rural slowdown could drag it down through the course of the next couple of quarters?
A: Our intent is to be able to try and keep this growth rate at this level and for us also unlike the rest of our peers, our rural growth has actually been quite strong and even in the first quarter our rural growth was about 16 percent. This has largely been due to the innovations we have launched along with some very good distribution initiatives we have launched. So, we do expect strong pick up in urban but we also expect rural growth to be quite resilient for us.
Q: Tell us a little bit more about the international business because as you would have known yourself, in the last couple of weeks and months, there has been a significant slowdown in many pockets in Asia and you get a lot of your revenues from different Asian markets. Are you facing any heat over there and overall what kind of volume growth can you expect to see in the international business?
A: Our international business also grew at double digits in the first quarter. Our Africa business has been doing very well and we are seeing good growth from South Africa, Eastern Africa and Western Africa, so that seems to be on a very strong wicket. We are looking at some challenges in Indonesia driven by the macro environment, our Indonesian business also grew in the mid-teens in the last quarter and that was far ahead of the industry growth which overall has been somewhat flattish, so in terms of going forward, we are feeling very good about Africa but certainly waiting and watching to see how the Indonesian situation pans out. We would still outperform the industry but if the overall fast-moving consumer goods (FMCG) growth slows down, that could pose some challenges on Indonesian front.
Q: Have your earnings already reflected the benefits of lower commodity prices or is there more to go because your margin expansion has been solid in the quarter gone by and you are sitting at almost 15 percent margins now. Can we see more on the upside because of lower commodity prices?
A: Yes, I believe so. The commodity price benefit has pretty much been baked into the profit and loss (P&L) but there are two other sources of margin expansion, one is a makeshift particularly as higher margin categories like insecticides and hair colours grow faster than soaps, that makeshift will help us. Second of all as we premiumise our portfolio and launch new innovations, those tend to be higher margin and then third of all we have launched a series of cost reduction initiatives, one is called Project P. The benefits of Project PI should roll in over the quarters ahead also. So, we do expect to see a further margin expansion though the commodity price benefits have been more or less baked in.
Q: Tell us a little bit about fund raising. Recently you did get a shareholder nod to raise up to Rs 300 crore from the non-convertible debentures (NCDs) route but any more fund raising plans that you would have say in the next 6 to 12 months?
A: No immediate plans as well. However, that fund raising option was more to provide us the flexibility in case there is a future need for fund raising but at this stage there are no immediate plans.
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