Ladies and gentlemen, good day, and welcome to the Godrej Consumer Products Limited Q3 FY 2023 earnings conference call, hosted by Axis Capital Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star and then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Gaurav Jogani of Axis Capital. Thank you, and over to you, sir.
Thank you, Inba. Hello, everyone. On behalf of Axis Capital, it's our pleasure to welcome you all to GCPL's Q3 FY23 earnings conference call. From the management we have with us today, Ms. Nisaba Godrej, Mr. Sudhir Sitapati, and Mr. Sameer Shah. I would now like to hand over the call to Mr. Tapan Joshi from the investor relations team. Thank you. Over to you.
Thank you, Gaurav. Good evening, everyone, and thanks for joining us today. Like Gaurav mentioned, we have with us Nisaba Godrej, who's the Executive Chairperson, Sudhir Sitapati, MD and CEO, and Sameer Shah, the CFO. We'll start with Sudhir sharing his thoughts on our performance, and then we can open up for the Q&A. Over to you, Sudhir.
Thanks. Thanks, Tapan. Good evening, everyone. I hope you and your families are doing well. Thank you so much for joining us on the call today. I'll quickly start with an update of our quarterly performance. We delivered an all-around performance which was in line with our expectations for the quarter. Our consolidated sales grew close to double digits and 15% in constant currency terms with a sharp sequential uplift in underlying volume growth. Our overall quality of profit has been quite healthy with a meaningful recovery in profitability. Gross margin saw sharp sequential improvements of 330 basis points and expanded 50 basis points year-on-year. We have continued to invest behind our brands and increased working media investments by 28% year-on-year. Overall, our EBITDA grew by 10% and PAT without exceptional items and one-offs grew by 13%.
Working capital continues to re-reduce, driven by simplification initiatives thus releasing cash. For the first nine months of FY 2023, our cash from operations has increased by INR 300 crores. Despite macro headwinds, our India business has performed well. We delivered robust double-digit sales growth of 11% with sharp sequential improvements in underlying volume growth of 3% versus decline seen in the previous quarters. We drove significant improvement in profitability with gross margin expansion of 590 basis points quarter-on-quarter and 250 basis points year-on-year. We were able to drive this gross margin expansion due to better sales mix, agility in pricing decisions, and cooling off of input cost pressures. Our EBITDA grew by a healthy 20% year-on-year, and margins expanded 210 basis points year-on-year.
This strong growth in EBITDA in India was delivered along with a 28% year-on-year increase in working media investments. From a category perspective, we delivered broad-based double-digit growth in both home care and personal care. GOM continues to consistently deliver double-digit sales growth, and this was the 11th consecutive quarter of double-digit sales growth. On the profitability front, we were a tad below our own expectations. While EBITDA margins declined 160 basis points year-on-year, our EBITDA plus working media margins declined 40 basis points year-on-year. Our ATR investments in GOM grew by 64%. As a consequence of these, our EBITDA growth was marginally positive at +1%. Severe depreciation in currencies has meant that our forex and interest costs were up. Our Indonesia business is witnessing gradual recovery. Sales declined by 3%.
Good news is that ex Saniter growth was positive at 2%. We saw healthy gross margin expansion, upfront higher marketing investments and scale deleverage resulted in EBITDA decline. We expect to see positive growth in Indonesia in the coming quarters. Overall, I think we have seen sharp uplift in our volume-led growth performance and also on the quality of profits. This alongside green shoots in various parts of our business augurs well for the coming quarters. Our strategy is threefold: To drive category development of our core portfolio, simplify our business, and to put people and planet alongside profit. On the category development front, I'm pleased to announce two disruptive innovations that we hope will democratize the household insecticide category. First is the Goodknight Mini Liquid Vaporizer, targeted at consumers who want affordable yet powerful all-night solutions.
The product simplifies the chip design of the liquid vaporizer and uses much less plastic. We are able to sell the mini combo at INR 50 versus the regular INR 95, and the refill at INR 35 versus the regular INR 76. Our second launch is the Mini HIT Spray, also priced at INR 50. Using inspiration from no-gas sprays in allied categories, this product is not only accessible, but on a per MG basis of active, one-fifth the price of a regular spray and in striking distance of illegal incense sticks. To the best of our knowledge, both these are the first of their kind in the world. On the simplification front, two initiatives are worth calling out. We have had a company-wide initiative to reduce our inventory and receivables.
This has yielded rich results with our AR plus inventory coming down from 97 days at the beginning of the year to 79 days on December 31st. In particular, we have made great progress in Africa. In Kenya, for example, our inventory plus AR has fallen from 78 days in FY 2022 and 36 days in nine months ended December 2022. In Indonesia, about 25% of our value was coming through branch operation. Company salesmen were selling in 60,000 stores from whom we were collecting cash and having credit. We have moved this in the last three months in an exceptionally swift operation to a distributor model with very little disruption to sales.
Finally, on the people and planet front, our attrition rate after a few quarters of turbulence has come back to pre-COVID results, and some of our best employees who had left the company are coming back. The mini LV we've already spoken about is a great example of sustainability, where the plastic per MG of Active is down 25%. We are overall reasonably confident of our business performance in the next few quarters, especially if the macro eco-environment in India turns around and our HI innovations revive the category. Thank you very much.
May we open the line for questions now?
Yes.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may enter star one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star two. Participants are requested to use handsets while asking a question. Anyone who has a question may enter star one. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Abneesh Roy from Nuvama Institutional Equities. Please go ahead.
Thanks, congrats on a good set of numbers. My first question is on the disruptive innovation in HI. Three sub-parts to that. In this category, we have seen very quickly copycats also emerge. If in terms of patent or design or ease to copy, if you could elaborate in this scenario, how do you see copycats emerging? Second is, you discussed the huge difference in pricing versus your mainline product, but I also see the competition offering very high discounts consistently. If I take that into account, will it make sense for the customer to shift? Third is, how does this compare to the mainline product? Why will the customer not shift fully to this? What are the differences for the customer?
Thanks, Abneesh. Let me answer the question. See, our job in household insecticide is to develop the categories of sprays and liquid vaporizers, so we're focused on that. There are like every other category, you know, there are some things that are not that easy to copy. I don't know actually what will happen, but we are really focused on whether people will move from burning formats, which is coils and incense sticks, to these. We have very high share in the sprays. HIT has got upwards of 80 share, and we have got very high share even in liquid vaporizers. We will certainly get a higher than fair share, and our game really is an upgradation game. There are some differences.
I mean, for example, that HIT formulation that we are using in the small HIT is certainly not the same as we are using in the large one. In fact, we have more concentrated better one. It's a different formulation because it's a no-gas spray, which kind of answers, I think, your second question, which is that the LV is the same LV. It's the same liquid. In the HIT or the, or the spray, it is a concentrated spray which is far more efficacious or the cost per ML is MG is far lower, and so it's great. I think in terms of pricing, look, these really bring access to the category. They also may be cheaper on a price per MG, but that's not the intention of these products.
The intention of the products is that to, you know, there is no product entering the liquid vaporizer segment at INR 35, and there is no spray in the household insecticide market at INR 50. It is the accessibility which opens doors for millions of households that is more interesting. One of the things, you know, on hand, you know, we feel more confident in a market like India that the upside of upgradation is far greater than the kind of little bit of downgradation that we may or may not see. In general, these upsides are much higher than we've seen it in several categories ourselves. For us, we'll be really happy if more people use this. We feel reasonably bullish on both of these innovations.
Thank you. We'll take our next question from the line of Avi Mehta from Macquarie. Please go ahead.
Hi. Hi, Sudhir. Thanks a lot. Clearly an interesting and exciting innovation. I was just wanting to build on the last point that you said that you believe that the downgradation impact, if at all, of an existing user would be much lesser from what you see. Is that downgradation only in terms of adoption, or do you see any margin hit as well from a gross perspective that can occur because of this?
See, you know, on totality, these are all categories which are highly accretive to GCPL's overall margin portfolio. What we have seen both in categories outside GCPL, but most recently even in our haircare entry, which has done very well for us in the quarter, is that overall gross profits grow for a category and overall margins grow for the company as a consequence of these innovations. It is probably not appropriate to look at. Firstly, downgradation is a lot less than we think it is and far less than upgradation. Overall it is the category GP grows faster than what it's grown in the past. Because these are generally high margin brands, and generally even the lower price SKUs have higher margins than our average ACPR margins, it's generally good for margins.
Hear you. The expert haircare is a good example. I get what you are kind of thinking.
Yeah. Yeah.
The second bit was on Indonesia. I mean, just wanted to, you know, better understand the margin normalization trajectory. I hear that you said that positive growth is what would happen in the coming quarters. Could you give us a sense on when do we see margins normalizing to probably that 24%-26%, or is it a different range that we should build in as we go forward?
Hey, Avi, this is Sameer here. I think we have stated in the past that the immediate task on hand in Indonesia is to see a gradual recovery, which we do believe is around the corner, and we should start seeing, you know, the eventual overall, you know, kind of much improved sales performance driven by a lot of initiatives which we have taken over last two, three quarters. I think the margins uptick will be gradual in nature. I'm not sure in a rush. I mean, the margins will go to those, you know, mid-twenties or even late twenties. Definitely we will see, you know, sustainable margins improvement over the next three, four years in Indonesia. Also with a good quality of profits, right? Gross margins expansion and working media investments and lower controllable costs.
Perfect. Would it be fair to assume a similar trajectory in Africa for the mid-teens that we had initially indicated? Clearly, you know, the focus now is on growth and hence the working capital, working media intensity that has kind of risen. Would love to hear your thoughts on that as well.
Yeah, I think, you know, we had a medium-term plan for Africa, which this quarter, you know, doesn't give us any reason to change our thoughts on that plan.
Yeah. Just to add to that, Avi, I think in Africa, we will see at least in medium-term, meaningful margin expansion, right? We had stated earlier that maybe over the next two years or thereabout, we would want to see Africa margins around, you know, mid-teens. Again, we very much believe we are, you know, in that journey. In Africa, at least over the next couple of years, we will see a meaningful expansion.
Okay. This is despite the, you know, investment that would be needed in the FMCG side.
That's right.
Perfect.
No.
That's all from my side. Thank you very much. That's all.
Thank you. Our next question is from the line of Abneesh Roy from Nuvama Institutional Equities. Please go ahead.
Yeah, thanks. I had a few follow-up questions. First is, of course, you have managed your gross margins very strongly sequentially, so that's a very good performance. Versus the number one soap player, which is very diversified, so I'm not comparing like to like. In their case, of course, detergents have very high inflation. Wanted to understand in soaps versus rest of the players, have you managed to get the commodity bit a bit more right this quarter? You managed the promotions a bit less versus, say, competition? 330 this expansion is very good. In the raw material deflation scenario, always regional players come back. In coming quarters, how much is that of a risk from local and regional soap players?
Yeah. No, I think, Abneesh, on that question, you know, I don't, I don't know versus others, but certainly versus ourselves, we have held ourselves accountable to a few things. I think we've got generally good capability in palm buying across the group. I think in volatile circumstances that often comes to our aid. We have been very disciplined about pricing, and we've been having regular pricing meetings, keeping in mind, you know, replacement margins, keeping in mind RPIs and so on and so forth. I think that we have, I don't know what others have done, but we have played a disciplined game in soaps crisis. After all, soap, oil prices have been falling for the last three, four months. It's...
a lot of this has to do with, you know, who has what price or what stock, how much holding, et cetera, et cetera. While I can't comment on others, I can say that we have... we feel now that this crisis has passed us in soaps, or at least this round seems to be, that we have been done right by consumers. We have basically been prudent in terms of buying, pricing, et cetera. Our market shares continue to be good in soaps, and we're gaining market share.
I would say that the overall soap strategy, which involved very, very heavy margin hits in the preceding few quarters, and on top of that, not cutting investments in the rest of our portfolio, I think, have yielded good results this quarter and should for the next few quarters.
Sure. Thanks. On my previous question on, the disruptive HI, the INR 35 LV versus your mainline LV, for the customer in terms of life of that one SKU, how does it compare in terms of length of the duration of usage and, in terms of efficacy? Will it be different? If it is not different, why will cannibalization not happen?
No, see the firstly, the price, I mean, the number of days and all depends on how people use it, but the price is INR 35 for 25 ml for the small one, and the big one is INR 76 for 45 ml. Not only is the small one a lower unit price, it is also a lower per ml price. Our own learnings in categories is that poorer consumers, you know, are very responsive to slight changes in price per ml. Richer consumers don't downgrade unless the gap is very large. There is a kind of a Goldilocks condition of some kind of discount to products which are aimed at the mass market, beyond which you may have big downgradations.
For every single category, Abneesh, in FMCG, the LUP on a price per ml basis will be cheaper than the modal pack or the monthly buying pack. And categories that have stick to a certain discount, let's say 15%-20% and no more, don't see big degradation, but see big upgradation. In most of these categories, and HI Premium was an exception, you know, the LUPs become, in terms of user base, 75%-80%. In terms of value, 40%-45%. If that happens to us in Premium HI and LV and aerosol, I think we'll certainly have a good run in the coming two years, is our bet. The discount that we have on HI is no different from what other categories, whether it is soaps or toothpaste or shampoo or hair colors more recently have.
It's a kind of formula that seems to work.
Thanks. That's very useful. I'll come back in the queue. Thank you.
Thank you. Our next question is from the line of Latika Chopra from JP Morgan. Please go ahead.
Hi. Thanks for the opportunity. My first question was, you know, what's your... You know, your rural salience for your portfolio is fairly low. But, incrementally, what's your read on rural demand, you know, as you progress through the December quarter and even in the January month?
I think like lots of people have been sharing, it is the general demand situation has been tough in poorer income consumers. We have a soaps business which is rural in North India, but it has been a tough demand. You know, I'm hoping we'll see some reshoot soon. I think that is reasonably creditable because of market development, you know, which our focus has been on air care and on hair care, which have really been the recipients of the first round of market development. Market development is a big, you know, macroeconomic proof because you are really playing with a large group of consumers who don't adopt the category. You know, macroeconomics is not the reason they don't adopt the category.
That's one kind of way of beating slowdown blues, which I feel without having. You know, we've done reasonably well on the back of these two categories in this quarter. The, the situation is tough. I don't think I'm in agreement that it is both discretionary demand in urban and rural demand is continues to be soft.
Sure. Second thing was, you know, around the hair color, hair color bit that you talked about. Clearly, you know, improving accessibility has helped you. But could you give us some flavor of, you know, this INR 15 pack? You know, what could be the broad salience in the overall hair color mix for you? Is it high single digit, low double digit? And has that increased? Are you able to tap into more distribution or new distribution outlets, retail outlets because of this price pack? Or you're able to drive better off take from existing reach? What I'm just trying to understand is because you're doing a similar kind of democratization in HI now, it allows you to have a higher reach to newer outlets.
Is that a bigger part or it's more off take from existing outlets? The last bit, I know we are restricted to two questions, but the last bit is just to check on anything incremental or incense sticks. One of your peers did talk about it in their Q3 call. I just wanted to get any, anything to incrementally keep in mind from an incense stick competition. Is it coming back or anything of that sort? Thank you so much.
Thanks, Latika. See, on hair color, I don't think it's proper for me to share the salience of the small pack, et cetera. I think the principle is that many of these low unit packs serve distinct consumer needs. I think it serves distinct consumer needs among existing consumers. For example, not everybody has long hair or wants to color the entire part of their hair, so a lot of people do root touch-up. There's an added dimension of affordability. Certainly small packs across, not just in hair color, but in every single category, small packs open up, you know, the total addressable market opens up with a small pack. I think hair color is one among a long example of categories that have done it. For that precise...
Outlet expansion will happen and has happened, but that's a consequence of more consumers demanding it. That's not the underlying reason. The underlying reason is the TAM opens up significantly when you democratize a pack. I think the HI innovations should do what hair color and many other categories, soaps, in example, in our own portfolio, sachets and so many other parts of the portfolio have done. I think that's probably how we expect the HI innovations to work. That's answer to question number one. On incense sticks, look, illegal incense sticks continue to grow in India. They are illegal and, you know, we're trying all legal means to... Their growth is not as fast as it was a few years ago, but their relative salience post-COVID has gone up a little bit.
Our approach on incense sticks is structural. You see. For example, if you take the small LV or the small air spray, one of the reasons I said is, you know, if you can get into a price per mg, which is the closer and closer you get to incense sticks, you don't have to exactly match incense sticks. The answer to incense sticks may not be another incense stick. The answer to incense sticks may be to make premium formats which have many advantages to incense sticks. For example, they don't burn in the household, they can last longer. Bring it closer and closer in terms of a price per mg of active to incense sticks. That's a more strategic solution to dealing with incense sticks. Whether it works or not, only time will tell.
That's our approach to, while we fight the legal battle on incense sticks, that's our more structured approach to incense sticks.
Thank you so much, Sudhir.
We'll take our next question from the line of Vivek Maheshwari from Jefferies. Please go ahead.
Hi, good evening, everyone. The first question is on home care. You know, there was a shift in season, third-quarter numbers, let's say 10% versus, let's say, the earlier quarter at about 2%. If I take the average of the, you know, of the three quarters, that number comes to about 6%. Where do you think is the reality? Is 10% more of a representative number and, that is what, you know, one can look at going ahead, or it's more closer to 6% because of the season shift?
See, Vivek, these are not, firstly HI numbers. These are home care numbers, and we've spoken about our policy, and now we've stopped revealing HI numbers, so it's not fair for me to reveal HI numbers in some way or the other. I think it's fair to say in HI two things. A, it is fair to say that this is not a category that can be looked at on an in-quarter basis, so you have to average out several quarters because that's the nature of the seasonality here. Your assumption may not be incorrect given the weightage of HI and given what we declare on home care. The assumptions you made may not be vastly incorrect.
I would not hesitate to say that our HI journey in terms of category development and growing the category versus historic rates has still not met the success that we want it to. We hope that these two innovations are a break there. I think that's how I can best answer your question that, yeah, without specifically answering it.
Got it. Got it. Second, you have spoken about Indonesia, but, you know, over the next few quarters, where will be your focus going to be? If I look at, you know, Indonesia for the last four years or so, the business has literally stagnated. How do you think about FY 2024 when you know, when you think about all the measures that you have taken in the last few quarters and, you know, what you are going to do in terms of launches or distribution. How do we think about, let's say, FY 2024?
See, on FY 2024. Forget FY 2024, even now, actually, we're quite bullish on the Indonesian macros. We think the Indonesian macros have turned around. We have our own leading indicators such as our sales growth, let us say in retail, in general trade retail, which is a good measure of consumer offtake because every other channel has, you know, lots of issues. We are quite happy with the growth that we are seeing in GT retail, and GT retail is only a matter of time before that reflects the entire business. We have three sets of issues in Indonesia. You know, number one is the base of Saniter, which has actually come off in this quarter. To be fair, that's no longer a big issue. Number two is we had very high stocks in modern trade.
Number three is that there were a lot of trade. There were a lot of interchannel conflicts in Indonesia that we are trying to lick. We are, you know, taking a little slower in terms of recovery in Indonesia, the problem and, you know, maybe kind of taking it a bit more slow. Now that we're correcting it, we're correcting it to levels which are well ahead of what it was even pre-COVID, you know, where a lot of things went wrong. We're saying, "Let's take this opportunity." I think the fundamental macros in Indonesia are good. I mean, again, it's not proper for me to give exact numbers on what we will grow, but I think we will do well in Indonesia in FY 2024 because I know the kind of cleanup.
I know the various green shoots that are going on there. I don't think there's any issue. We've got two categories where we're market leaders with terrific brands and the Indonesian economy has now started growing. These categories still grow faster than GDP. I'm reasonably bullish on Indonesia in FY 2024.
Got it. Sudhir, I know quarter-to-quarter numbers always, you know, can create distortions, but if I look at, you know, second quarter ex of Saniter, your growth was about 8% in Indonesia.
Yeah.
This quarter it's about 2%. Is there anything specific to call out?
Yes, there is something specific to call out, which is we have taken further corrections in in Q3, both in terms of, for example, reasonably large number of write-offs in our inventory, but also, you know, holding back on heavy promotions and discountings that we were doing in the past. We have decided to go a little easy on those. I think that's, you know, you read it well. I'm reasonably certain. I'm not reasonably certain. I'm sure that that is not to do with offtake because our measure of offtake, which is GT retail, is only sequentially moving up in Indonesia. Our depth of promotions that we were running in the past, we have reduced that in Q3, and that is a journey we're probably going to go on further.
That may cause a little bit of, you know, speed bumps on the way, but we are sure that that's the right way to run this business without having very differential promotions for different channels or different traders versus the others. That's the correction that we took in Q3, Vivek, which we hadn't taken in Q2. Q2 we simply took some other sets of corrections like stock. This is another set of corrections we are taking on promotions.
Got it. Last question, if I may. You know, one of your comments concerned me a bit, which is around the rural bit. Most of your peers are talking about at least rural bottoming out, with some even saying things have started to pick up. Is that not something which you are seeing on the ground?
I mean, it's hard. I mean, now, you know, this now gets into, you know, January month and February month and things like that. I think it's fair to say two things, Vivek. One is that post-COVID, poor consumers have had pressure on consumption. It may recover. I'm hoping it recovers either this quarter or the next quarter. It's really early for me to see. You know, it's very hard to read these signs with that kind of precision. Two is we did see overall some discretionary pressure in, you know, even in urban in post-Diwali. We feel in the context of these two pressures, We had a reasonably good Q3. How is Q4 going to be? How is the demand situation going to be? I mean, it's hard for me to say specifically whether there are green shoots or not, Vivek.
Probably others are seeing green shoots, maybe there are for us, but I've just not observed that. I mean, I know definitely that lots of people in the market were talking about post-Diwali. When you went to shopkeepers, they would say that, you know, things have not lifted up post-Diwali. I mean, I've not been to market in the last two weeks. Maybe next time I go I'll let you know how it is.
All right, sir. Thank you very much, and wish you all the best.
Thank you. We'll take a next question from the line of Arnab Mitra from Goldman Sachs. Please go ahead.
Yeah, hi, Sudhir. My first question was on this innovation on LV. On aerosol, it's obviously the penetration is so low that any democratization will have a net positive effect. On LV, the price gap on the machine itself seems to be quite large, in terms of the INR 97 versus INR 50. Just wanted to understand, is machine a very large part of the sale of the category, or is it more towards refills, and therefore we can guess a little bit about the potential risk of the downgrade in the machine itself, and which would then lead to the downgrade of the refill on its own?
Arnav, the machine, you know, the principle of the machine is to seed it in, so it is not a large contributor to value or value creation because the principle of the machine is seeding in and not to make money on the combi pack, which is the first pack that we want to go into the household. Really the game, both in terms of sales salience, but more than sales salience in terms of profit salience, is very much in the liquid part of the business. In other words, it doesn't matter too much if someone moves from a 95 rupee machine. I mean, even if there's downgradation, as I told you, I don't think there will be because our 95 rupee machine has superior features. It's got its, in a twin mode, and it's better for higher income consumers.
It's better when you have relatively low mosquito infestation. When you have higher mosquito infestation, the mini machine is a better machine because it remains at a higher level through the night. This one switches on and switches off. It's a more sophisticated chip. It's a better machine for high income. The machine, by the way, is not just, it's not quite the same as the LV, where it's just a, you know, the same LV at a lower price. It's a different machine with different functionality. I don't think movement one way or the other there is going to hit our profit pool significantly.
Got it. Understood. My second question was on the gross margin side. Between India as well as Indonesia, Africa, has most of the benefit of the commodity reduction already been netted in the Q2, or there is more upside on the commodity side, in all the 3 geographies, if you could separately talk about them?
Yeah, Arnab, this is Sameer Shah here. India has definitely seen, I mean, sequential as well as year-over-year margins expansion. I think Indonesia and Africa will see going ahead, you know, kind of margin expansion both sequentially as well as on a YoY basis. In markets like Africa, there is still this currency inflation, which is, you know, sort of, impacting the margins. In Indonesia also there's a little bit of commodity, you know, inflation, which is still, you know, kind of prevalent. The way the trends are as well as expectation is that, you know, there should be, you know, kind of commodity prices cool off, and that should result in margin expansion. I would say India is ahead of curve, but Indonesia and Africa will see it maybe in this quarter as well as, you know, in the quarters going ahead.
Got it. My last question was on Africa. We've seen, as you said, 11 quarters of good growth, but there is obviously a lot of price-led growth here and mixing with the currency changes and all that. How do you judge the, you know, the volume traction in the business? What would be a good growth for that kind of an environment, if you were to look at a three-year stack in that business now?
Yeah, no, I think, Sameer, look, the way I look at the Africa business is slightly different, Arnav. You know, the key metrics for us are volume growth in FMCG and overall growth in FMCG in Africa. That's a really important long-term driver of value creation. Overall, EBITDA growth in Africa. On front number one, which is volume growth in FMCG, it has been exceptional. And the dry hair business is a little bit more complex because there are some businesses where we, you know, we feel we need to, you know, probably extract more value, et cetera, et cetera. That's probably the right way to look at the Africa business. In terms of EBITDA, I think we've had a rough round of cards.
You know, the cards that have been dealt to us in the last 24 months have been pretty tough in terms of Forex, which peaked out in the last quarter, in terms of shipping costs, in terms of fiber costs, which is related to petrol costs. All these costs seem to be cooling off as we speak, so I'm hoping that. Many fundamental improvements have happened. What has happened in Africa EBITDA is that gross margin dilution is masking a lot of fundamental work in BTL reduction, overhead reduction, et cetera. I'm hoping that when the water recedes, the benefits of these costs will come into the Africa business. That's our hope, which we hope in the next few quarters will play out. I don't know, Sameer-
Yeah. Just to add to that, Arnab, I think, even as a data point, I mean, in last quarter, I think the overall volumes growth only in Africa, which is ex-U.S., were close to mid-single digits, and the overall constant currency growths were upwards of 20%. I think the other big focus also in Africa is more on profitability, right? There will be, you know, pricing-led growth. There will be, you know, upfront investments in FMCG categories, as Sudhir was sharing earlier. There also will be a very clear, you know, focus in terms of driving profitability.
It's better to get that balance right in terms of what's the minimum scale leverage alongside investments in FMCG, but you know, kind of cost reductions or margin improvement in dry hair to reach to the overall ambition of that mid-teens, you know, EBITDA margins over the next few years.
No, Arnab, I think just to conclude the Africa point is, I think there are two really good things that may happen come our way. One is that FMCG salience is going up. I don't know if Sameer wants to share the volume growth in FMCG or... It's good. I mean, even if we don't share the exact numbers. If our overall is mid-single digits, FMCG is far ahead of overall volume.
Close to double digits, yeah.
It's a double digit kind of... That's really good. The second one is the structural cost of our business has come down in Africa. If the gross margins, we can get it back to close to normative levels, we should have a pretty good EBITDA growth going forward.
Got it. Thanks for that. That's it from my side. All the best.
Thank you. We'll take our next question from the line of Harit Kapoor from Investec. Please go ahead.
My first question is on the rollout of the HI innovation. Could you just give a sense of, you know, what the rollout plans are, which markets and, you know, how much time you wanna take to go national on this?
No, I mean, we have learned. Obviously we don't share rollout plan before we roll them out, but broadly speaking, we are rolling out as we speak, and the intention is to go national. It is not an intention to be a single state launch anything. As we speak, we are rolling this out across the country. There is a season in household insecticides that starts in mid-February in large parts of the country, so we're hoping to be able to catch that.
The second question is on the urban.
Sorry to interrupt. Mr. Kapoor, if you can just, use your handset and speak. Your audio is not clearly audible, sir.
Give me a second, please. Sorry. Yeah, is this better?
Yeah.
Yeah. Second question was on the urban discretionary, you know, impact you called out on. In terms of the categories, you know, where are you seeing this? Is it more on the air fresheners, you know, side or is it on the premium hair color side?
No, I think we are not seeing it. I mean, That's what I said earlier, is we're hearing this, Generally, you know, when we speak to retailers and consumers, we see this. I think the, the beauty when you get market development right is it trumps macroeconomics. Simply because the space to grow. Let's take air care, right? In principle, it's a discretionary category, but the penetration is so small that if you get your relevance and access and everything right, regardless of stress, it, it does really well. I, I think that is the What we're reasonably happy with Q3 is, while we hear a lot and we see it, and we see it for example in soaps and all in our premium parts of our portfolio, we can see this kind of slight drag in urban.
Both these categories have beaten, at different ends of the spectrum, I mean, hair color at one end and end at the other end. For different reasons, we feel that they've beaten the Q3 kind of slowdown.
My last question was on, you know, the cost structure simplifications. You know, while I understand it's an ongoing process, but if you look at FY 2024, you know, is there a target geography that, you know, some of these initiatives will be higher in, you know, versus others?
Yeah, Harit, this is an ongoing process, right? I mean, strategically we had shared that we would want, you know, the overall controllable cost, which is basket of supply chain, variable manufacturing costs, the fixed storage, the non-working, you know, part of the ATL spends, as well as, yeah, I mean, you know, those costs. Basically, that basket will continue to go down. I mean, you can see it, I mean, not just last quarter, but last, you know, nine months. Even in FY 2024, we do see there are meaningful, you know, kind of opportunities in terms of bringing it down. No targets as such, but yeah, I mean, it's going to be very integral in terms of creating that pool which goes either for investments or goes towards, you know, bottom line.
Got it. Thank you. Thanks.
Thank you. Our next question is from the line of Akshay Thakkar from Fidelity. Please go ahead.
Yeah. Hi, guys. Congratulations on a good set of numbers. Two questions, one slightly long term and one slightly near term. On long term, you know, the new products that you have developed, you know, three years out, if you were to call them success, how large do you think they can be? I'm just trying to handicap what's the, sorry, size of the prize over here. The second, more on sort of FY 2024, you know, I'm just looking at the personal care category where, you know, pricing could come off, you would see a decline, et cetera, over there now. You know, generally from your experience, what kind of acceleration do you see in volume? I'm just trying to again handicap that.
You know, you've obviously come off two, three years of very strong growth in that business. Next year, should we be thinking of that business as single-digit growth with good profitability growth? Do you think the volume accelerates enough to offset whatever pricing headwind you might have and that business could still see double-digit growth? Yeah, those two questions from my side. Thank you, guys.
Yeah. Again, thanks. You know, again, it's probably not appropriate for me to give a number, but I think, look, the, the principle here is that many categories operate at these democratic price points, right? For example, hair color went from INR 90- INR 30, and pretty much the entire market moved. Now, I mean, 85% of the market in India is INR 35 or, you know, the old INR 30 or less.
In cream.
In cream. you know, that's a good case study of the kind of things that happen. If you take, you know, shampoos, detergents, there's a, you know, large range that operates at this low unit price. anywhere in that range, even the bottom of the range, you know, would make frankly us quite happy because that will large part of that comes incrementally to us, and there is no particular reason that shouldn't happen. we do think this is a value driver, as has happened in so many categories, HI should be no exception to this, right? that's the range that we are kind of looking at. your second question on FY 2024, I think in May we'll do an analyst meet with all of you and sort of share, you know, how our thinking for FY 2024 is.
You know, while we've not had a great year this year in terms of volume growth, I, you know, like I said last year, and that has not changed frankly, is that this is a business that must aim for double-digit volume growth. You know, that is the I feel the destiny of this business. You know, we did have a first six months, which was negative volume growth, despite, you know, despite, because of the hyperinflation that we had. We've had some volume growth, especially in our core market of India, and we hope that this volume growth improves. What we are interested in is how do we take what is essentially a 4-5% volume growth business closer and closer to double-digit. I feel that, you know, next year will be a good step-up in that journey.
Thank you, guys. All the best.
Thank you. We'll take the next question. That's from the line of Kunal Vora from BNP Paribas. Please go ahead.
Yeah. Thanks for the opportunity. My first question was on soaps. Where are you in terms of pricing in soaps? Do you see a need to take price cuts? By when would the entire benefit of the raw material cost decline, which you see, and start reflecting in the margins? Yeah, I mean, that's assuming the raw material cost stabilizes here. That's my question number one.
Oh, I mean, look, in terms of pricing, we have some principles on pricing, you know, which again, I don't want to specifically share. It's not correct for me to specifically share the principles of pricing. I think the time of heavy volatility in soaps for the time being seems over. There will always be some slight correction here and there. You know, if oil goes up, oil goes down, you know, passing it on. Sometimes we pass it on. Through various ways we pass it on. We are now in some sense in oil prices in peacetime. As far as, you know, the margins go, I mean, on soaps, maybe Sunil is in a better position to answer.
Yeah. I think, Kunal, it's going to be very dynamic, right, in terms of pricing as well as margins. I mean, we have seen, I mean, with commodity pull-off, benefits also getting passed on to end consumers, but there is margin uptick, as you can see from gross margin expansion also. I think we'll first need to, you know, kind of have our, you know, kind of estimates in terms of what price, I mean, palm oil will, you know, stabilize. It has been very choppy. I mean, choppy in way it went up as well as choppy in the way it's coming down. Let's see. Point is that we will remain extremely competitive in terms of pricing, and in terms of our, you know, strategy, and that is seen in our results.
I mean, over the last three years, four years, I think we continue to gain 80, 90 basis of market share. We are pretty happy with the strategic choices which we have taken in this category, and are equally hopeful that we'll continue to, you know, gain market share as well as expand margins if commodity environment remains as what it is at this point in time.
Thanks. I was just trying to understand, like assuming the raw material costs remain stable now, is bulk of the benefit of margins already captured or is there?
There might be some carry forward.
Yeah, I think there will be some incremental, you know, kind of margin benefit which will, you know, sort of kick in. As I said, I mean, the intent is also to, you know, eventually use some of this, you know, as pool for investments for growth. Yeah, directionally we will see a little bit of gross margin expansion.
Sure. Sure. Second is on the HI LUP innovation. How long did it take to come up with this product? Is this a new product which was conceptualized after you joined or was something which was work in progress? If you can provide any initial response, any test marketing, any distributor feedback which you received on this?
I mean, I can't provide the test marketing results. Suffice it to say that we don't launch products without rigorous testing and, you know, See, I think there is a, both these, you know, you know, wasn't built in a day. If you take, for example, the HIT formulation, which is the no gas formulation, it has done very well for us in Nigeria, which was originally based on an India idea. It has been in the pipeline for some time, but we have now made it fit for purpose. In Nigeria it wasn't launched as an LUP. It was launched as a general formulation and it's done really well. One of the drivers of FMCG growth in Nigeria. This is a good example.
The HIT one has been around in our system for a long time. It went from an idea which was test marketed in India, didn't do so well, to Nigeria, did really well, has come back to India. You know, because we defined the problem, which we did last year, saying we need to, you know, market develop premium household insecticides. One of the tools for market development is access. How do we make sprays accessible? Here we have a solution in Nigeria. Can we get that to purpose? That's the story of this innovation. The liquid vaporizer innovation, which is the machine innovation, is actually simplifying the chip in our large machine and using a lot less plastic. That we've been working on for maybe around about the time, maybe a year or so. You know that...
Again, you know, we've had various machines. A lot of these have had innovations in the, in the tool chain. I think what has changed, to be fair, is the sharpness of problem definition, that we have to get something at INR 35 or INR 50 for the market. You know, it's taken us some time, but there's been a whole body of work for many years that helped us in solving a problem that we defined.
There's a lot of clarity on market development.
Yeah.
Product following that.
I do think both these, by the way, are pretty smart innovations. We are quite proud of them because, you know, to bring no gas into HI is a second time in the world. The first time in the world we only did it. To build a small machine of this price is also probably the first time in the world. We're quite pleased with the speed with which we did it, and I hope the sharpness with which you defined the problem that this will solve.
That's very helpful. Just like one bookkeeping question, which is if you can provide the CapEx number for FY 2023, what should we look out for? Tax guidance for FY 2024?
Well, I think the CapEx for FY 2024 would be, you know, in line with largely FY 2023. Maybe, I mean, there could be an odd INR 15 odd million, you know, higher spends more towards digitization automation, which in turn should result in lower controllable costs and a little bit towards supply chain initiatives, which we have in place.
I think the larger principle, without getting into the numbers, is we have One of the reasons for reducing our working capital and focusing on cash is to focus on technology and digital investments, which in turn further reduce our costs, which can give us some fuel for growth. That's the general model that we are trying to follow. Certainly one part of it in terms of working capital reduction is a tick. In terms of setting up capability for digitization is also probably a tick. That now needs to deliver so that costs come down further.
Understood. That's very helpful. Just on tax guidance, if you can talk about that. Tax rate for FY 2024.
I think in terms of tax, to begin with, next year what will happen is we will actually move out of a lot of tax-exempted manufacturing location in India. The overall reported tax rates will go up. We have to please remember that this is a non-cash tax, you know, expenses. Last, I think five or six years back, we took a significant INR 600 crore of MAT credit in the P&L. Some part of it, I mean, will be, you know, basically, from that INR 600 crore credit. The cash tax remains at 17.5%, 18% thereabout. The reported tax rates will go up and then maybe year down the line we will converge to 25% tax rate in India, which would be the reported as well as the cash tax.
Okay. FY 2025 you get to 25% tax rate.
Correct. Correct. Next year increases only, I mean, a non-cash tax rate increase. The cash tax remains more of the same as what we have.
Understood. Thanks. That's it from my side.
Thank you. Our next question is from the line of Sheel Rathi from Morgan Stanley. Please go ahead.
Thank you. Thank you for the opportunity. I have three questions. The first one was on the innovation. I think it's a very interesting innovation. Just one question there is, what I understood is that this product is more effective than the existing product we have. Is the idea here is to replace the existing product over time? How are we going to be positioning this product? Yes, the idea is to do category development, but, it seems to be like that this is a replacement to the existing product. I just wanted a clarification.
No, no, it is not a replacement. Let me clarify. The answer is a little bit more nuanced than that. In the case of the electric liquid vaporizer, it is exactly the same liquid. The delivery system is different. The delivery system in urban and higher income households has an automatic switch which goes up in the beginning and releases a lot of active in the beginning and then releases a little less active for the next 3 hours and then again updoses active. That is based on the insight largely that in urban households the need for, you know, a lot of people the rooms are, you know, they keep their windows closed. They need a quick burst as they sleep, and then they don't need that kind of active.
This has been designed keeping in mind rural and low-income households, where windows are often open. Mosquito problem is through the night, so this is, remains up through the night. The delivery systems are different. There are two different needs of consumers, and we don't think that there is going to be, I mean, there will be basically two different segments, but the liquid is exactly the same. It is just a smaller... This is 25 ml, the bigger one is 45 ml. In the case of the spray, it is a fundamentally different structure, which is that this is a no gas spray, which is very similar in other categories you guys would have seen in the deodorants category, et cetera.
This has the advantage of being able to concentrate more active and therefore a great value when you spray. Obviously it doesn't have the kind of ease of spray that an aerosol has because that will spray all over the room. Again, this is more suitable for smaller rooms where there is not much, you know, you don't want massive dispersion, but you want a concentrated amount to come out in a small space. In the case of the aerosol spray, it is a different product designed differently for a different consumer. I think what is reasonably smart about both these products is that they are designed for a use case which is slightly different from what the bigger ones have been designed for, which is typically higher income urban households.
This is more for smaller rooms, poorer consumers, rural consumers, et cetera. That it's not a replacement.
Thank you. Just a follow-up then. What would be our market share in some range in rural and urban India? What is it, you know, penetration.
See, we don't give out market shares of our products. I think suffice it to say that the spray category is very, very under-penetrated in India. The liquid vaporizer category is reasonably well penetrated in urban India, but very poorly penetrated in rural India.
Understood. The second question would be was that it felt like that you sound more upbeat on Africa performance, especially led by FMCG growth. My first question now would be that, what is the share of FMCG versus non-FMCG now, and what is driving this more than double-digit growth? Is it that, we are gaining market share? Is it that the starting point is low, or we are expanding our distribution in a different manner versus what we were doing earlier?
FMCG is now roughly a third of our Africa business and growing much faster than the rest of our business. That's roughly the salience of FMCG. FMCG has done really well, I would say predominantly because of the route to market work that the nation team have done in Nigeria first and now Kenya increasingly, where both our wet hair products that we acquired with the Africa with the Sonn U.S. acquisition, which is in both relaxers and in hair treatments. The physical distribution of it and now increasingly media have gone up. Now in Nigeria, we're quite happy with the progress on household insecticide. These have been the drivers of FMCG. We are certainly hoping that... I mean, you know, our long-term strategy in Africa was to build a big profitable FMCG.
That makes us really bullish because the bigger FMCG gets, the more stable it is, the more, you know, likely to be a more value-creating business Africa is for us.
Thank you.
Was there another question? I perhaps missed that. Was there another sub-question?
No, just the distribution strategy. I think you covered it briefly.
The distribution retailing strategy is. You know, the hair extension business is a different channel to FMCG. While we, in the initial years of the hair extension acquisition strategy, had presence in Africa, it didn't necessarily mean we had presence in retail. The hair extension business is very much a wholesale salon kind of business, and this is much more a modern trade GT kind of business. I think the Africa team has done a really good job in the last three years of building the roads for retail distribution.
Understood. Now, my final question is on F 2023 guidance. Do we still maintain the low single-digit volume growth and double-digit revenue growth guidance? Because, you know, you sounded less upbeat on rural demand in this quarter and urban also. It's a little mixed bag.
Hey, Sheela, this is Sameer here. I think it's too early to, you know, kind of share a guidance in F 2024. As Sudhir said, we will be having, you know, annual analyst meet where I'm sure we'll be sharing more lights in terms of what are our building blocks and drivers. Surely, I mean, we do expect, I mean, much better, you know, overall business performances compared to what we have seen at least in first half of the year. Part because of, you know, better macros expected at least in F 2024, and part also because a lot of our category development initiatives either working or expected to, you know, kind of, you know, work over a period of time. No guidance.
I think the other thing is strategically we had shared that we would want to be, you know, kind of as a war cry, close to a double-digit, you know, volume growth over a period of, you know, 3- 4 years as well as see, you know, 100-150 basis points of EBITDA margin expansion. I think we are very much on track, at least to begin with, on, you know, volume growth in that journey. Next year, directionally again, we will see a much improved volume performances compared to what we have seen in FY 2023. Margins also for sure we will see margin expansion, but the quantum is something too difficult to call out at this point in time.
Absolutely. Sure, Sameer. On F 2023, how should we think of the number?
F 2023 is almost over now, it's only Q4 that's left. I think, you know, I mean, Q3 was reasonably good, I think Q4 will be.
I think you're asking for a quarter four guidance, Sheela, more than anything else. Which again, directionally I can share it's going to be better as compared to at least what we have seen in the first half of the year, hopefully also quarter three.
All right. Thank you. Thank you very much.
Thank you. Our next question is from the line of Alok Shah from Ambit Capital. Please go ahead.
Yeah. Hi, thanks for the opportunity and good to see new launches in HI. Firstly, a clarificatory one, and sorry if you already answered, did you mention anything on the technological changes in this mini LV pack? Essentially the heat time would be lesser, resulting into difference in efficacy? Would the current Active or the Goodknight Flash refills fit into it or that would not be possible?
Yeah. I mean, to answer to both questions is, I mean, I answered this once before, but I'll say it again, which is the spray is definitely different, and it's definitely got a strong product moat around it. The machine design in the liquid vaporizer is certainly, you know, designed for purpose. I don't know how competitive what moats you have there, but it's certainly designed for purpose and some clever designing on plastics and on the chip required. What was your second question? I'm sorry.
The second was, whether the current Active or the Goodknight Flash.
Yeah. Yeah. Yeah.
Goodknight Flash.
These are all replaceable. All GK machines will fit into all GK Actives. Consumers can use the smaller LV on their existing Gold Flash, their larger Actives on the small machine. Our family fits everything.
Okay. So that's completely there. Got it. The second was on the strategy to communicate the HIT proposition to the consumer, and I'm referring to the INR 50 price point one. Will that be more about, you know, educating the consumers about the lower price point? Or, because it is more gas, so you know, you cannot spray through the room, and hence it is about addressing problems in smaller areas. How do you plan to communicate this?
About about this produ ct to the consumers for the Goodknight.
We don't usually speak about what we communicate till we put it on air. We're going to put it on air quite soon, so you'll see then. It's not, again, not proper, even if it's only a few weeks away, to say what we're going to do before we actually do it.
Okay. Sure, sure.
It will be a few weeks away.
Sure, sure. Look forward to seeing that. My last question, Sudhir, was in one of the previous calls you had mentioned about, you know, global category teams and, you know, leading to global distribution. You know, this seems to be, you know, one of the start point to that end. Can we expect this product to be now cross-pollinated also?
Of course, you know, in one of the previous replies you did mention about this product being in one of the African market. Can we see both these products now getting, you know, soon launched in Guam and Indonesia also? How do we think on that one?
I mean, look, you know, one of the products that has done well for us this year is this product called aer matic, which basically a big brand for us in Indonesia, and we brought it to India. It's been there for a few years, but this year we really focused on it and it's grown fast. One of the advantages of having a global category team with global categories is if something works in one country, we'll move it fast to another country to work.
To be fair, it has to prove itself in one place before it moves elsewhere. Got it. Got it. Typically the result of the cannibalization happening, not happening takes about 6 months to 12 months. Maybe if at all any cross-pollination happens, it could be maybe, you know, at least 8 to 12 months away, would that be right? I mean, I don't want to give exact times and all, but yeah, these things, it's better to be patient and prudent, to learn your way through in the home market and then to take it however long it takes. I mean, I don't know specifically how much time it'll take, but there's no
I don't think there's a tearing hurry, because also, you know, the size of our India business is so large and this is such an India-specific issue that if we can lick it here, you know, it's worth a lot more than in this particular case, in any case, than potentially exports. Yeah, I mean, I don't think we'll be in a tearing hurry till we learn our way in India. Got it. Got it. Thank you very much. That's all. Wish you good luck.
Thank you. Our next question is from the line of Prolin Nandu from GMO . Please go ahead.
Yeah. Hi, team. Thank you for taking my question. Sudhir, my question to you is on HI. You have been quite upfront in mentioning that you are still not there in terms of the HI development. Now you have launched new products which will take care of democratization issue and premiumization is taking its own time and happening. I want to talk about this whole advertising campaign that you started six months back, because we mentioned a lot about working media and marketing spends. When I look at that advertising, it's more focusing on a sound sleep at night rather than focusing on mosquitoes. How do you measure the ROI on that?
I mean, have you been able to change the behavior pattern of the usage, or for the, for the targeted customer by that advertising? If you can just share something on that.
Yeah, I mean, look, we generally put a lot of advertising, increase our advertising on some brands. It's clearly paid off in one. In, you know, HI, the jury is still out on the advertising front. That's also because different categories have different, you know, pain points or points of inflection, and I suspect on HI, the bigger issue is accessibility. Something like sleep will take some time to build. It is not easy. You know, our reading of the situation was Good knight was built on sleep. It was Good knight goes. Over a period of time we moved away from it. Over a period of time, people perhaps felt that with newborn babies there's a bit of a safety concern, et cetera, et cetera.
This kind of thing takes multi-year investments to grow. It's not easy We still remain convinced as we do more and more consumer work, that there are two fundamental positions in household insecticides. One is, you know, the fear of disease and to kill mosquitoes, and then the desire to sleep, which is then a combination of safety and efficacy, are kind of two different positions. We have two different brands. Nothing in the strategy has told us that that is incorrect. It is not fair to expect a repositioning like that to give you explosive growth. What I've noticed in the past is when you do repositioning like this, and then you have a mix element change like bringing a mini LV, it usually responds really well.
I would say that one of the ways in which we will test our repositioning, whether it's worked or not, is how successful the small LV is.
Oh, great. Very clear on that. I think the interesting part on this HI in terms of this innovation and new product, and you mentioned that, you know, in terms of you want to get as close to Incense Stick in terms of pricing on a per MG or per unit kind of a level. I just want to pick your brain that does the customer think on those lines, you know, when he buys any product in terms of pricing or does he look at an overall, you know, what is his out of pocket kind of an expenses rather than looking at a per unit thing? I mean, has it worked in any other category in your experience? You know, if you can just comment on that?
See, no consumer articulates per MG and all that. Unit price and access, both are important. Access price is important on an individual basis. Consumers respond to it. On an individual basis, consumers don't respond to price per MG. What we've seen in take-off in many categories is that there is, on an aggregate basis, when you're talking about millions and millions of people, price per MG is a simple way to understand underlying value. Consumers have different ways of understanding underlying value, so they'll say it lasts longer, lasts less, et cetera, it works more. They will hardly. Nobody will articulate price per MG. Price per MG just forms a good analytical framework.
In many categories, we have taken scene that when the price of format A, you know, falls to less than 1.5x of format B, then a lot of upgradation happens from format B to format A. It's more an analytical tool than a consumer language, but it is a powerful analytical tool, right? It works on aggregates.
Sure. One last question on Indonesia would be, you know, again, this 2% growth, extra sanitizer, last quarter it was 8%. Are we done in terms of whatever one-time correction that we were supposed to do, and now Q4 onwards, there wouldn't be any correction that would be required, and obviously, the base will also be a lot more favorable to us. Is that a fair comment to make?
No, I don't... I mean, I don't know if it's done because I, as I said earlier on, there are three separate issues in Indonesia. Issue number one was Saniter base, which is more or less done. Issue number two is downstocking, which is more or less done. Issue number three was very high differential promotions between channels, which is unfortunately not, you know, fully done yet. It, it is fair to say that Q4 will be better than Q3. You know, I mean, that is something we are determined to... Now that we're taking two corrections in Indonesia, we'll take the third one also, and I'm not sure that the third one is fully done yet.
Thanks, Sudhir. That's it from my side. Thank you, and all the best.
Thank you. Before we take the next question, we would like to request participants to please limit your questions to two per party. Time permitting, you may come back in the queue for a follow-up question. We'll take the next question from the line of Jaykumar Doshi from Kotak Securities. Please go ahead.
Yeah. Hi, thanks for the opportunity. Sudhir, a couple of quarters back, you had articulated your views on palm oil prices, and it has played out pretty much on time. How do you see the outlook, you know, going into next financial year, and what does it mean? What's the headroom for gross margin from current levels? Essentially, you are operating at 59%, 60% gross margin. Do you see that, you know, full recovery or will it settle at somewhere midpoint between where we are today and...
Sameer wants to answer it. Look, on soaps there are a couple of things here, right? The macro situation on palm oil prices, I mean, it's a bit of a black swan event. It's not likely to repeat in the near future again. In general peacetime, you know, it is difficult to make margins off palm oil prices and soaps and so on and so forth. There is a nominative margin which you can return to in soaps. I think the broader point on gross margins is an important one, which is our approach, you know, is a consumer first approach. Along with increased media, we are also democratizing all these SKUs. We are more relaxed about...
We're not fussed about getting back to historic margins because we also see a lot of cost savings that are possible for us to be able to fund innovations like the small HI. I mean, on soaps we probably will, but on small HI or on hair color, we may have a weighted average gross margin which may be different from what it was in the past. I think it's suffice it to say that we will push more and more in controllable costs or cost to serve within us to try and mitigate whatever. The idea is to pass more value to consumer, either through the product or through advertising. That journey we should be on, so we may or may not go back to where we were.
Yeah. I think a couple of things to add to this, Jay. One is it's very difficult to hazard a guess in terms of what will be the level of palm oil prices, you know, next year, because it has been extremely choppy over last, you know, two years. Let's see how that, you know, shapes up. Directionally, I mean, even passing on this benefit to, you know, consumers, whether it be palm oil through this democratization strategy, my senses are gross margin still will expand in FY 2024 at overall global level on base of FY 2023.
Understood. One more question, if I may? Could you just give us an update on, you know, your earlier innovations, one is powder to liquid body wash, is tracking and perhaps some color on, you know, powder to liquid hand wash, which was launched back? Just want to understand what is the extent of penetration that those innovations are-?
Powder to liquid hand wash is doing extremely well, and a large part of that market is now moving. There are several players in that category now are moving to that. I think on powder to liquid body wash, it's taking time. These kind of innovations take time. Powder to liquid hand wash itself took good 18 months before it caught on. I think this one is taking a little bit of time, the body wash.
Understood. Thank you so much.
Thank you. We'll take our next question from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.
Hi. good evening. Thanks for the opportunity. Just one question for Sudhir and one for Sameer. I'll start with Sameer. I'm referring slide 12, we have seen that the India ad spend has gone up almost INR 188 crore we have spent. To my best understanding, I think Q3 is normally a winter season, people back less or even not HI season. Where this money qualitatively was spent, was it more front-ended towards the support of new product and the launches, or was it spread across?
Hey, Shirish. No, I think it's pretty broad-based. I mean, we continue to back the HI repositioning, especially in Goodknight. There was also meaningful investments in aer category, and the results are seen in terms of overall home care category, you know, growth, being quite, you know, meaningful one. Of course, there were, you know, investments in larger personal wash as well as, you know, hair care, you know, kind of space. I would say it's pretty broad-based. Yeah, I think the percentage to sales, you know, keeps on moving up on a YoY basis, what we can see even in quarter three compared to the base quarter in India.
One follow-up for me here. If we benchmark this and now entering into the season, so will the ad spend remain elevated level or will be there is some margin improvement, where the ad spend will come down?
Yeah, I think we've stated this in the past. Again, there is no, you know, kind of ban because every category, I mean, has its own, you know, kind of specific, you know, kind of spends, you know, threshold. Of course, for us it's not just quantity of spends, it's also quality of spends. We have mentioned in the past that, you know, for HPC, typically, I mean the categories in which we are in or alive, maybe the threshold is anywhere between 10%-12%. We are not too far off either. I mean, last quarter we were at like 9.5%-10%.
There seems to be some opportunity in terms of scaling up the working media investments incrementally, but I think that will more than, you know, get funded from, you know, either controllable cost savings or even gross margins expansion.
Okay. My last question for Sudhir. On 28th on December 2021, we had the first interaction with you, I did ask this question: What are the things you would like to change? Maybe after 1 year, if I can ask, what are the hits and misses? Maybe, if you can say that, what are the things which is there? This is more on the people, processes and culture, if you can speak about.
I mean, let me think a little bit about both the question and also. I think the definitely the HIT have been as a company that the clarity of strategy that we had enunciated in December 2021 hasn't really changed now a year and two months later. We have only been executing it. This, for example, even this household insecticide, the LUPs were an idea. We didn't obviously share it then, but we had at that time that because we knew that we had to make the category more accessible. It's taken us a year in order to get there. I would say number 1 is not just the clarity of strategy, but the shared belief in the strategy or the shared knowledge of the company in the strategy is high because we have not really changed strategy.
I would say that is the number one thing that worked for us. I think the number two thing that worked for us was in terms of is I think there's been a lot of focus on talent, and that's been a pro and a con, by the way. I think in the first few months after I joined, for a variety of reasons, including the great resignation, a lot of changes, we had a lot of attrition. I think that attrition, A, has reduced. B, we have managed to bring back some of our top talent back into the company. C, we have managed to get some really good talent from outside to join the company.
I would say it's both a hit and a miss, a hit, a miss, because certainly we had higher than what we wanted attrition in the first six, eight months. I think a hit because I feel a lot more confident of the internal talent we promoted, talent that's come back and so on. I would say strategic clarity and talent have been big hits. In terms of misses, I think the depth of the issue in Indonesia, I think the depth of the issue in household insecticide, I think was quite clear to us. It takes time to solve it. And just because the depth is clear doesn't mean the answer is clear.
I think in Indonesia, I think there has been a bit of a miss in terms of the depth of the issue that we should probably have seen earlier. There were a lot of signals that also we acted and so on. I would say that we could have probably read the macro the company situation better in Indonesia faster. I guess that would be a big miss. I would say in... I don't know if it's a miss. I mean, you know, you know, it has been a period of unprecedented volatility, you know, apart from, you know, the end of COVID and then Ukraine and the palm oil and inflation. Probably our cost focus in Africa should have been better than it was. I think our top line focus was very good.
You know, probably if we were better focused on costs in Africa, maybe we would have dealt with the volatility better. Look, this is a black swan event, so I'm not 100% sure about that. Certainly Indonesia we should have read better.
Thank you.
Thank you, and all the best.
Thanks.
Thank you. Our last question is from Swati Jhunjhunwala from BT Capital. Please go ahead.
Yes, thank you for taking my question, congratulations on the good set of numbers. Just two questions. First is, what are the sell sides that you've taken in the nine months of FY 2023 versus Q4 FY 2022? Second on the volume growth. Just not to harp on it much, you said that volume growth will improve going forward. We've seen that price growth has been leading the top line in the last few quarters. Going forward, do we expect a better mix of price growth versus volume growth to maybe 50/50 levels or any guidance that you can give on the price growth side for the next year?
Price growth and SKUs are all available in the public domain, so it's relatively easy for you to find what the price growth is. I mean, going forward, I think it is fair to say that we had a hyperinflationary scenario in the commodities that we operated in in first half. We were also sitting on household insecticide on a very high COVID base in the preceding year because that category did indeed grow consumption during COVID. Both those kind of moderated in the first half of FY 2023. Going forward, we expect them to improve. The balance between price and volume we expect will reverse from where it is right now.
I think one last point I want to answer to the last question on probably what we did well, in this year is despite the extreme volatility that we faced on many fronts, you know, there's been COVID, there's been Ukraine, there's been a big management change here, et cetera. Two things we did well. One is we continued investing behind our brands even when profits were under pressure. Two is even though we prioritized cash in a year like this, which is probably the right thing to do in a volatile year, and we probably end the year with record cash growth. I think that is probably a good lesson to learn from a highly volatile year, because ultimately many of these are financial metrics and cash is reality in a tough year like this.
This is probably something that has been a good year for us.
All right.
Thank you very much.