Analyst Concall
Godrej Consumer won't cut quality to tweak soap formulations
This story was originally published at 23:12 IST on 24 October 2024
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--Godrej Consumer: See a little pressure on soaps sales volume going ahead
--Godrej Consumer: Growth in other pdts to compensate for low soaps volume
--Godrej Consumer: Incense sticks to remain volume driver for couple of yrs
--CONTEXT: Godrej Consumer mgmt's comments in post-earnings analyst call
--Godrej Consumer: See further scope to expand margin in Africa ops
--Godrej Consumer: General trade in urban areas hit by growth in quick-commerce
--Godrej Consumer: Will add more brands in markets in Africa going ahead
--Godrej Consumer: Relative price index for soaps has gone up
--Godrej Consumer: Margins higher in quick-commerce compared to other channels
--Godrej Consumer: Consolidated EBITDA margins to be better in Jan-Mar
--Godrej Consumer: Launching new pdts in Argentina, hope to introduce more
By Aman Aryan
MUMBAI – Godrej Consumer Products Ltd. will not compromise on quality standards and will not tweak the formulations of its soap products just to insulate itself against the increase in palm oil prices, the company's management said in a post-earnings conference call. This remark came a day after Hindustan Unilever Ltd. said it had reduced non-soluble parts in its soaps' formulations to insulate itself from rising raw material prices and to accommodate other ingredients and their benefits.
"A change in quality of the filler may improve peripheral sensorials, but it doesn't change the basic science and chemistry...," the company said and added that customers do notice this change in difficult circumstances. Although the company expects its overall margins and volume growth to remain range-bound for the next few quarters due to inflated palm oil prices, it said it will not revisit its formulations. The company said its soap business' volume has grown both in the primary and the secondary markets in the latest quarter. The company said its market share by volume and value have gone up despite increasing its soap prices relative to the market in the last seven years. As the company expects volume pressure for its soap business, it said its other product categories will compensate for low soap volumes.
The management said it plans to "double and treble" its distribution of incense sticks, which the company considers a volume driver for the next few years, to continue gaining market share. Godrej Consumer said "it's just a hard job of making sure that the products (incense sticks) get placed in an outlet" as Godrej Consumer is the first legal incense stick making company and it has not seen much wholesale demand. The company plans to saturate its direct distribution of the incense sticks over the next six months and wait for the wholesale demand to pick-up.
The company said "the time has come" for it to expand its rural distribution, in which the company has traditionally been under-indexed, as it sees the demand in the rural market to have been growing faster than the urban market. Godrej Consumer has now touched 60,000 villages and about 200,000 outlets, the company said. Although this increase in distribution is costing the company and is not profitable now, Godrej Consumer said it will boost its business going forward. The company said it will "play this game aggressively in rural" as it sees the rural market now growing.
In the urban market, the company sees the general trade channel facing a "double whammy" due to the disruption by e-commerce, especially quick commerce, and slowing of urban consumption. Although quick commerce is not a long-tail business model of Godrej Consumer, the company said it is "generally accretive" to the company and the margins are higher in quick commerce.
The company said it will not cut its investments in advertisements and publicity despite margin headwinds. Despite the margins dropping, the company held the share of advertisement expense of the total expense at over 11% in the latest quarter, Godrej Consumer said. While Oct-Dec will be tough for the company's earnings before interest, tax, depreciation, and amortisation, the company said it expects its consolidated EBITDA and EBITDA margin to improve in Jan-Mar.
Earlier Thursday, the company said its business in Africa, US, and West Asia, fell 21% in rupee terms in the latest quarter, but the EBITDA margin grew 590 basis points to 14.4%. The company said it is "roughly a little short of 15% margin this quarter" and sees some scope of margin expansion in the region as it plans to add more brands going ahead. Godrej Consumer had reported a 145% increase in sales in constant currency terms in Latin America in the latest quarter, and a 660 bps rise in its EBITDA margin. The management said its Argentina business performed well on the back of returning macroeconomic stability in the country. The company said it is organically expanding in Argentina by launching new categories.
Thursday, the company reported a consolidated net profit of INR 4.91 billion for the September quarter on revenue of INR 36.66 billion. Shares of the company ended at INR 1,255.10 on the National Stock Exchange, down almost 3% from the previous close. End
Edited by Ashish Shirke
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