See robust rural growth, 10 launches this year: Godrej Cons

Going ahead, the company is planning 10 new launches this year versus just five launches last fiscal, said Gambhir.

Meanwhile, Godrej Consumer is also confident of maintaining its advertisement spends at 11-12 percent of total sales in FY16.

Below is verbatim transcript of the discussion:

Q: Revenue has not been growing for most companies for most products. You all have reported 10 percent growth in your domestic revenues. Do you think you can maintain this pace of growth? We hear a fairly deep rural distress with unseasonal rains and now probably deficient rains staring. Is 10 percent maintainable?

Godrej: Yes I think so, very much so. Even rural demand is growing quite well for us even in the January-March quarter when there were unseasonal rains; our rural growth was higher than our urban growth. So whilst there is some distress in the rural areas, consumption still of essential items like ours is continuing reasonably well.

If monsoons are not too bad then I expect even a greater growth in the months to come. If you have seen Skymet, the private agency has predicted a normal monsoon than what the Meteorological Department predicted.

Q: You said your rural growth was faster than your urban growth. How much of your revenues come from rural areas and when you say fast, how much faster was it?

Gambhir: About 30 percent of our revenues come from rural India. Our rural growth last quarter was 17 percent, urban growth was 9 percent and so rural grew at 800 bps higher than urban growth.

Q: I want to ask you about your international business because 50 percent of your consolidated revenues come from the international operations and Africa has played a big part in that. How has the Africa business shaped up this time and on the back of 20 percent growth that you have seen this quarter, what could you expect to see in the quarters to come. Would you expect any slowdown given that there has been currency depreciation over there; the markets are not doing very well especially in some of these African nations?

Godrej: We do not expect a major slowdown although there are problems. The biggest problem of course is that some of them are oil producing countries and oil prices are low, so Nigeria, Angola where we have operations, are oil producing countries.

The other problem is their currencies are depreciating. Therefore, when you translate it into rupee growth is much low, almost all the international currencies are depreciating to the Indian rupee which after the US dollar is perhaps the strongest major currency in the world.

We expect the African growth to continue because consumerism is rising, we feel our products which are directed to the bottom of the pyramid help our business there grow quite well. So we are optimistic about the African growth even in this financial year.

Q: When you say optimistic, what kind of a growth would you outline for FY16? Would it continue to be in 20-25 percent range for Africa?

Gambhir: We are looking towards more constant currency growth and what was interesting in this year was this perhaps was one of our best years as far as international business performance was concerned. However, the one part we cannot control is the effect of currency translation.

On constant currency basis Indonesia and Africa both have been doing very well and Indonesia grew at 21 percent this year, Africa at 23 percent this year. Our hope on constant currency basis would be to maintain if not better this performance level.

Q: I want to come to margins. There has been an improvement in margins. I would assume this is because of rock bottom commodity prices. Do you see that advantage continuing?Gambhir: Absolutely yes. This quarter we saw our highest gross margins in over three years and even in India, our EBITDA margins were the highest ever. Along with improving gross margins we have ensured that a certain amount of benefit flows into the bottomline while investing for the future. The gross margin improvement has been a result of a more benign raw material pricing environment. At the same time, we launched a lot of cost reduction initiatives that are yielding fruit and we are also premiumising our portfolio; it allows us to extract more net sales value. We do not expect margin benefits to flow this year as well and we will try to ensure that our profit growth remains ahead of sales growth.

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Q: You would start reducing your unbranded business and get into more branded and more branded-premium products?Gambhir: Most of the unbranded businesses are exports; exports of Indian brands to markets such as Angola, Yemen and Fiji. Due to some of geopolitical crisis and currencies, these unfortunately took a near term hit but the portfolio in India is largely branded and that continues to do very well with us - growing ahead of the market and gaining share in all of our categories. We will also accelerate our pace of launches and are planning up to ten year launches this year as opposed to five launches last year. That should give us additional growth as well. Q: Coming to the point you made about the slowdown we are seeing in some of the African markets like Nigeria. You recently acquired another brand in Africa called Frika and that makes to five local brands in the past many years. Would you consider slowing down in terms of further acquisitions in the Africa region? Out of the brands that you have bought so far, which ones are performing the best?Godrej: Most of our brands are performing quite well and we would look at further acquisitions in Africa if they are strategically important. We won’t just acquire for acquisition sake but if they fit into our portfolio well and if we feel we can add value in terms of future earnings per share. We will continue to look for strategic acquisitions in Africa. We have manufacturing operations in several sub Saharan and African countries and marketing operations in almost every sub-Saharan and African countries.

Q: Most of your brands and stocks are performing well. They are great wealth generators, then why are you still invested in Geometric. Will you sell out?Godrej: I wouldn’t like to comment on that because I am not on the Geometric board. Personally, of course it’s a group company but we look at Geometric from a strategic point of view.Q: What about ad spends? You expect to continue to pile up on gross profits and gross profit margins? Would ad spend be at Rs 230 crore quarterly run rates?Gambhir: We will try and manage our ad spends to somewhere between 11 to 12 percent of sales. Last year, we ended at about 11.5 percent of sales. We will try and keep that number. The number will fluctuate a little quarter over quarter depending on new launches, but at this stage we feel fairly comfortable to keep it within that range. Godrej: In Q4 results, our advertising expenditure went up by almost 60 percent over the expenditure in the same quarter of the previous year. We have been investing a lot of our additional margin generation for the future.