Second half to be better; new launches to help: Godrej Cons

Financial performance in second half of this fiscal is likely to be better than the first half, Vivek Gambhir, Managing Director, Godrej Consumer Products, tells CNBC-TV18.Gambhir says the imporved performance will be driven by new product launches. He says rural growth has been hit by high inflation and deficient rains. But the overall impact for Godrej Consumer could be cushioned because of its geographical mix as 70 percent of sales comes from urban markets and only 30 percent from rural markets.Godrej Consumer has launched a new health and wellness platform, which should help growth, says Gambhir.The company has also launched a henna based hair colouring product named Nupur.Below is the verbatim transcript of Vivek Gambhir's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: The first half of the year has been good for the company, it has been a 10 percent revenue growth and now you are sitting at about a base of Rs 4,300 crore of revenues. How much do you think you can build on to this in the second half of the year?A: As you clearly mentioned, the first half of the year has been good for us and what has been particularly comforting is that we are seeing very good volume growth, which augurs well for the future health of the business. Our innovations are working quite well and we are also making a very good progress in our distribution initiatives. Our hope still remains that the second half of the year will be better than the first half of the year.We are getting a series of new and exciting launches and our distribution initiatives are also yielding a lot of fruit but a lot of it will depend on the macroeconomic situation. If the economy improves in the second half of the year that will further drive consumer demand and net-net the second half of the year should be better than the first half. We are seeing gradual uptick in urban demand though we are seeing some near-term challenges as far as rural demand is concerned.Latha: Give us a little more colour about both urban and rural demand. What is first of all the percentage of contribution from both these sectors for you and how bad was rural?A: For us about 70 percent of our business comes from urban and 30 percent comes from rural. So we are more urban skewed than the rest of the industry.For the industry as a whole about 65 percent is urban, 35 percent is rural. So in that sense we are sitting on a low rural base, which gives us a lot more headroom for future growth.Typically in the past, rural business has grown somewhere between 1.5 and 2 times the urban growth. Last quarter rural growth was about 1.2 times the urban growth. Some of it was due to a sharper pick up in urban but rural certainly has been impacted because of higher inflation in rural as well as the deficient monsoon.Sonia: You did mention a while back that you have some new and exciting launches that will spur growth in the second half of the year. Can you line up what they are?A: I think we are looking at launches all across our three categories. What we have done in this quarter is we have launched a very innovative coconut, henna based hair colouring cream under the brand Nupur. We have a new health and wellness platform called Protect. We had done a pilot launch last year, we are now scaling this up across general trade Pan India. We also had launched a premium hair styling brand called B:Blunt with hairstyling products for the Indian consumer at a more premium price point. We are now rolling this out on a Pan National basis.Beyond that we do have some other launches planned in air fresheners, in home insecticides, in soaps and in hair colours. The exact number of launches will depend on the economic environment but we are readying ourselves to have a slew of new products that we can take to our consumers.Latha: In terms of contribution to your topline, I guess household insecticides and soaps would take the lion share. Are you in course of time expecting hair colour to be significantly higher or the entire range of hair products?A: Both insecticides and hair colours will grow faster than soaps because soaps is a much more penetrated category. In terms of profitability also, home insecticides and hair colours are more profitable category. So along with the sales mix getting skewed more towards these categories even the profit contribution will get higher because of these products from these categories.Latha: What does digital mean to you? Is it an asset, is it a pain, what is its contribution plus or minus?A: Digital for us is not about digital marketing but more about marketing in a digital world. So it is a very important part of the marketing mix but what we are doing is we are intimating digital along with the rest of our marketing strategy. So we are not keeping it standalone but thinking about this in a much more omnichannel fashion and we are also allocating a lot of money towards digital media. This year we expect about 10 percent of our advertising budget to be on digital.Sonia: One internal that the market has liked about your numbers is the way your margins have expanded 150 basis points (bps) year-on-year (Y-o-Y). I want to understand how much of this is courtesy lower raw material prices and how much is courtesy improved efficiencies and do you think you could beat this 18 percent level in the second half?A: We have benefited from soft raw material prices. About 2 percent of the improvement that we have seen in our gross margins has been the result of the benefits of lower commodity prices but what is equally important is that almost one-third of this improvement has come from better efficiencies and a better sales mix.As you pointed out, if insecticides and hair colours grows faster in the second half of the year, that will also help improve our gross margins further. So I am hoping that we can build on this.Also in the second half of the year if you compare the cost -- while some of these costs might be bottoming out, the base is still much lower. In that sense the second half of the year should allow us to see improved gross margins as well. The exact quantum we have to wait and watch.Latha: Your raw material costs are down about 8 percent this quarter to Rs 800 crore, can it get better, can it fall even more?A: It is difficult to say. My guess is a little bit difficult for raw material prices to fall below this because we are seeing some bottoming up of these raw material prices. It depends a little bit on what happens to crude because almost 40 percent of our costs are in some ways dependent or linked to crude oil prices, packaging, transportation etc. So we are hoping to continue improving gross margins but maybe difficult to beat the kind of prices we have seen in this quarter.Sonia: Your soaps business has seen a subdued 3 percent growth in revenues, one would have thought that perhaps the higher soaps volume growth but that hasn’t played out, do you think the market has outgrown Cinthol?A: No, Cinthol has been doing very well for us. So we continue to be very optimistic about the kind of progress and plans we have for Cinthol. Our overall volume growth for soaps in this quarter was about 5 percent, which is very good. Historically if you go back and look at the last ten years, for the entire category as a whole, soap volume growth tends to be around 2-3 percent. So versus the industry again, our volume growth has been very strong. There is some price deflation that has been going on in the market, which is why reported volume -- value growth has been little bit on the lower side -- growth still looks to be very strong and it has been driven largely by Cinthol.