Ladies and gentlemen, welcome to the Q4 FY22 earnings conference call of Godrej Consumer Products Limited, hosted by ICICI Securities. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Aniket Sethi from ICICI Securities Limited. Thank you and over to you, sir.
Thanks, Steven. Hi, good evening, everyone. Thank you for joining. At ICICI, it's our pleasure to host the senior management team of Godrej Consumer Products Limited for their Q4 FY 2022 earnings call. I will hand it over to Mr. Pratik Dantara for the further proceedings. Thank you, and over to you, Pratik.
Thank you. Good evening and welcome to the conference call. We'll be covering this evening the results for a quarter ending 31st March 2022. On the call with me from GCPL is Mr. Adi Godrej, Executive Chairperson, Sudhir Sitapati, Managing Director and CEO, and Sameer Shah, CFO. We'll start with Sudhi talking about our performance. Over to you.
Thanks, Pratik. Good evening, everyone. I hope you and your families are safe and healthy, and thank you for joining us on the call today. I'll first start with an update of our quarterly performance. We've had a weak quarter in Q4 FY 2022 with a few silver linings. While our overall sales grew by 7% and we achieved double-digit sales growth for the year, the growth within the quarter was driven entirely by pricing. Our overall EBITDA without an inventory theft in South Africa de-grew by 9%, driven by unprecedented global commodity inflation and scale leverage deleverage in Indonesia. PAT, without exception, declined by 4%. Our core geography of India grew top line at 9% with a 2-year CAGR of 21%.
While the sales was largely driven by pricing and UVG was down by 3%, on a two-year CAGR basis, UVG grew by 12%, and on a three-year basis, it grew by about 2%. The silver lining in India, however, has been that EBITDA grew by 14% with EBITDA margins expanding by 100 basis points. This points to our ability to take measured price hikes to counter inflation. However, the recent inflation brought about by the Ukraine crisis will hit our P&L majorly only in Q1, and we again expect a relatively sharp drop for this quarter. Indonesia delivered a particularly weak performance with sales declining at 15% and operating EBITDA at -48%. This has been driven by tough market conditions, the sharp fall in COVID-19 related categories, and a big reduction in our inventory in modern trade and distributors.
Poor sales compounded by the cost inflation at a 200 BPS investment in ATL, which we continued despite the gross margin falls, has meant that the EBITDA drop has been precipitous. The silver lining here is that there are early signs of the Indonesian market recovering. For instance, our offtake growth without Saniter, our COVID portfolio and accounts where we get data is much better than primaries and has started to grow. With our strong market position, media increases resulting in recent share gains and our determination to reduce our trade pipelines, we expect things to start improving from Q3 FY 2023. Both LatAm and Africa witnessed strong growth, with LatAm growing upwards of 30% and Africa growing in the mid-teens. Africa, however, had very poor margins due to an unfortunate theft of inventory in South Africa.
The growth flywheel in Africa has started to move, but we need to simplify our business and significantly strengthen governance and controls to prevent a recurrence of this unfortunate event. LatAm has performed extremely well on both top line and bottom line. Our pre-hyperinflation EBITDA has now crossed 20%, and we generate close to INR 80 crore of cash in this business in FY 2022. In terms of categories, while market growth continues under pressure, market shares are broadly good and there's nothing new to report. Our prognosis for FY 2023 remains broadly unchanged from what I spoke to you last quarter. We anticipate double-digit top-line growth with low single-digit volume growth.
Bottom line is hard to predict, but if costs moderate to MYR 6,000 for palm oil, about 7%-8% lower than where they are today and $100 for crude, we should see some margin expansion, especially in the second half of the year. Our personal view, however, is that palm oil may moderate even further, and that is generally good news for us. Our game plan is to grow category development driven by relevance, access, and marketing investments, and funded by a digitally enabled simplification of our organization. We have a slew of category developments in Q1, which we believe will dramatically build relevance of our categories. A few that we've launched in April and May are that in hair color we are the market leaders with more than 1/4 of the market. In India, more than half the category operates between INR 10 and INR 15.
In April, we've launched Godrej Expert Rich Crème at INR 15 to drive penetration of the crème format by recruiting the early gray consumer living in middle and rural India and accelerating new trials with first-time users. We are backing this with increased media investment, large scale visibility, and leveraging our distribution reach. Another big initiative that we have taken is in household insecticide, where we have dropped the price of Jumbo Fast Card from INR 15 to INR 10 to drive recruitment in the category, as nearly a third of new triers are entering the category through incense sticks. Again, we are backing this with media investments and on-ground activations. We will be happy to share more of our category development initiatives in Q1, because some of them will only happen in June and July, in our next meeting.
Our journey on simplification is another silver lining and is making good progress, and the category that we created in Q3 FY 2022 is yielding early results. Our cost to serve, which is a measure that we look at, which is total costs minus material costs minus working media. Material costs and working media are what we serve, everything else is a cost to serve, is down by 250 basis points in Q4. When costs stabilize, this will give us significant fuel for growth and digital transformation. Investments are only part of the story in digital transformation. People and culture are more important, and towards that, we are making two senior appointments of people with significant experience in digital transformation. Akhil Chandra, Business Head for Indonesia and ASEAN, has decided to pursue an opportunity outside Godrej.
Rajesh Sethuraman will be joining us to take over from Akhil as the CEO of ASEAN from July 1. Rajesh has spent 21 years at HUL and Unilever, leading teams across categories and divisions in South Asia and Africa to deliver significant value for the business. In his previous role, he led Unilever's execution of its largest digital transformation program across Asia, Africa, and the Middle East. We are also appointing Vijay Kannan as the Head of Business Transformation and Digital for GCPL. Vijay will report to me and serve on the Global Management Committee. He is currently the Global Chief Information Digital Officer of Shell's $20 billion lubricants business and has had past experience as HUL's IT Head and prior to that in Asian Paints. Vijay's brief is simple: If we were a digital-first company, how would we dramatically look at reducing our cost to serve?
Thank you very much. I'm very happy to take questions.
Thank you very much, sir. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. 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 Edelweiss. Please go ahead.
Hi, Sudhir. Thanks. My first question is on hair dye pricing in India. We have seen the Crème hair color pricing in India remain in that INR 25-INR 30 rupee for many years in India, and now we have come out with a disruptive pricing at INR 15. Two, three questions here. One is: How do you drive average revenue per user per location here? Last five years, I have not seen much movement here. Second is: How do you take care of cannibalization from the INR 15 product? And third is: Competitive intensity and parlor presence remains a key work in progress. If you could discuss that also. Thanks.
Yeah. Abneesh, thanks for that question. I think there are two, three things. One is, you know, the penetration of the hair cream category is sub 20% in India, and as I said in the last two meetings, one of our jobs is to drive market development. Category after category, you will see that access has been a key driver of category penetration. I would say that, generally what we observe when we bring access into a category is penetration goes up pretty exponentially, and frequency of use also goes up in general. I'm anticipating both of these happening. There is a pretty clear use case that we discovered for this, which is, you know, we are communicating it, which is the first silver hair or touch-up.
There are a lot of consumers who have just got early silver hair or a short crop of hair, like men, for whom we were anyway noticing that the thirty rupee pack had, you know, was being used two times. We feel that there's a unique case. In general then, you know, I don't know if there will be some cannibalization, Abneesh, but these are fast-growing markets, and I anticipate that the thirty rupee product will continue to grow, albeit at a slightly slower pace. We hope that the access that we create into the category will drive a lot of growth.
I mean, to your point on salons and so on and so forth, we have an excellent professional business that is growing really well, and we target salons in B and C, so we are covering our base in the kind of our fastest growing parts of our business. It's a small part, but growing really fast. The opportunity in India is enormous for a category like this to grow for many years. I hope this move will reignite growth in the category.
Sure. That's useful. My second and last question is on the Africa business margins. If you could quantify the impact from inventory shrinkage and what are the checks and balances you are ensuring that this doesn't, say, recur in South Africa or any other international geography? And how do you see Africa margins in the near term and medium term? Because my sense is this item will not recur. It's a one-off. How do you see in the next 50 quarters time horizon?
Hey, Abneesh Roy, this is Sameer here. Yes, I think a couple of things. One is, we have put in or we will, I mean, you know, kind of put in stronger, you know, checks and balances, including, say, something like third-party physical verification happening, you know, every quarter, as well as work on strengthening both our business processes as well as internal controls to avoid this recurrence in future. So that, you know, something like this doesn't recur, you know, again. In terms of margins, just to give you a bridge, I mean, if you look at the overall margins, including this pilferage, the drop is actually close to around 900 basis points. 300 basis points is because of pilferage, and maybe 350 basis points is because of pilferage.
250 basis points is because of upfront marketing and go-to-market initiatives in some of the countries where growth has been, I would say, you know, quite strong, and that's something we should remain extremely confident of, even in the coming quarters and years. The rest, I would say 300-350 basis points will be because of lag between increase in input prices and end consumer prices, which we will mitigate through price increase. To answer your question, I think there should not be, you know, margin deterioration in Africa, at least on a full year basis, in FY 2023. If any, I mean, we should continue to be on the trajectory of gradual, you know, margin expansion on a YoY basis, even in FY 2023.
I mean, Abneesh, despite this, you know, we have kind of improved our margins in FY 2022, and a combination. I mean, it's a difficult time even there because of input prices, but a combination of the increasing salience of FMCG and the growth leverage that we're getting on our businesses because we're growing fast, we expect broadly kind of moderate margin improvement to continue in the medium to long term.
Okay, that's very useful. That's all from my side. Thank you.
Thanks, Abneesh.
Thank you. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, sir. Just wanted to understand some of your initiatives. This crème which is launched at INR 15, what is the difference between that and the basic product you have at INR 30, INR 35? Is it just a lesser quantity of crème or is the product itself different?
No, it's just a sachet. I mean, it's the same brand, so it's just the principle of a sachet which makes it more accessible for a certain cohort of consumers in small town rural India with a short crop of hair. It's just,
It's just basically a lesser grammage of the same product. You still have inside two separate sachets which have to be mixed and so on, right?
Yes. Yes.
Okay. Okay. I also wanted to understand this launch of Goodknight Power Activ+ at INR 80. Again, here also, is it a different product from your base product, or is it just a smaller or lesser grammage product compared to the original one?
No, I think Goodknight Power Activ+, you know, we always had a flanker brand on Goodknight in some markets. Goodknight Active is just a flanker brand in a few markets that we operate, which we think are price sensitive. It is not a smaller pack or anything like that. It is in fact. We were always selling Goodknight Power Activ+ and, you know, the refill we had, and we just brought back the machine in a few markets where there was demand and where we felt we needed a flanker.
Okay. But is there any difference in the product itself or it's just basically that those markets cannot sustain the normal price point and therefore you want to sell at a lower price point, but you don't want to ruin the brand and therefore you're launching a flanker?
No, the Gold Flash is a value-added product compared to the Active Plus.
Right. Understood.
No-
There is a difference in the product itself.
Yes.
Okay. Just a quick one on the HI strategy. It seems that the, I mean, while you said you will announce more initiatives, till now, whatever initiatives you have done is just basically trying to lower the price points and therefore make the product more accessible. In your opinion, do you think the major roadblock for growth in this category is that, I mean, affordability, is that the major thing? Because we have products like coils, for example, available in a single piece at very, very low price points, and still the penetration is where it is. Do you think that the reason is something else and not affordability or a price point?
No, Percy, I think that price point is only one part of it. I do think the reason is something else. I think in the interest of confidentiality, perhaps we can discuss this in the next analyst meeting. We will do something quite soon here, but I'm only talking about things that we've already done, which is in the public domain. You'll understand that, it's not proper for me to publicly talk about what we will do. We are. Look, we're not running away from the issue that we are the market leaders of household insecticide. My own hypothesis is that the category needs development. Often, you know, to speak in general terms, Percy, the three things that drive category development are relevance, access, and sampling.
In the case of crème, that is an example of access. You know, across these three dimensions in all the categories, let me give you an example of relevance on something that we have just launched. I can be free to talk about it. On air, which is our, you know, air freshener business in India and Indonesia, we have recently relaunched air with the proposition of when guests come home. That's an example of relevance building, where you're not just saying that the air freshener smells good. You are saying why you should enter the category, which is when guests come home. That's an example of relevance. There'll be plenty of examples of other things that I'll be able to talk to you as and when we launch it in the market.
Right. At this point of time, are you at liberty to discuss, which of these three is the most, sort of, the one which you need to address the most, in HI or it's too premature to talk about that as well?
I think once we do it, we'll talk about it, because why talk about something that isn't there, right? I think, in general, all these three are important for category development, and all of them we will work at. Even in hair, there's a relevance there, which is the first silver hair. That is what we are communicating. There is access and, you know, on sampling as and when we do it. We'll maybe discuss HI in a little bit more detail the next quarter on what our game plan is, and maybe we can talk more comprehensively what we're doing once we've done it in the market.
Sure. Last question from my side. The illegal incense sticks, which was a huge problem, earlier, and then as COVID came, supplies were disrupted, et cetera. Now where does that product stand in terms of market share? Is it at pre-COVID levels? I mean, if you can give some data on that, in terms of market share, what it was pre-COVID, how much did it fall to at the trough, and what it stands at today.
You know, yeah, it's roughly where it was pre-COVID. It's not growing at the rapid pace that it was growing pre-COVID, at least in the post-COVID phase, but it's still there and it's still growing. It's still, frankly, you know, something that consumers shouldn't use. One of the reasons that what we have done, which is to drop the price of Fast Card from INR 15 to INR 10 is so that people at the same price point as incense stick get a safer legal solution.
Right. Understood. It's at about 12%, if memory serves, the market share.
I mean, as Sudhir mentioned, Percy, it's close to pre-COVID levels, but yeah, it's hovering around, I think, 13%-14% mark.
Okay. That's all from me. Thanks, and all the best.
Thanks, Percy.
Thank you. The next question is from the line of Priyam Dada from VT Capital. Please go ahead.
Hi. Thank you for taking my question. My question was regarding the raw material side of the insecticides business. I want to understand what kind of raw materials are used in this business.
We use actives. We use chemicals. Huh?
Improved links. I mean, indirect materials.
Yeah, indirect link is crude, but yeah.
All right. My second question was regarding the HI strategy you already answered. Here, what are we doing? I understand that you cannot disclose all of it right now, but I want to understand how, like, how are you trying to penetrate deeper into the rural areas, and how is the demand in the rural side of it?
Yeah, I mean, again, you know, it's the same answer that I gave Percy, which is, I can tell you how we're thinking about it, which is relevance, access and sampling. An example of access is bringing down the price of Jumbo Fast Card from 15 to 10, of which we're seeing very good results since we've done it, you know, a month and a half ago. We'll come back to you specifically on what we're doing in these dimensions in the next few months. What we've done in April and May is we've acted on hair color. We have made a big intervention in air care, largely in the area of relevance and kind of just increasing the media salience.
I hope you see some of our advertising both on Aer Pocket, which is what we use for bathroom, but we're also very excited with the living room format, which in our Indonesian market is our second-biggest SKU. We believe that has terrific potential in India. Without doing any kind of marketing, it was anyway growing very fast. Now we anticipate with marketing it will grow even faster.
All right. One more question I have regarding the Indonesia business. What have you done to turn around the business? As you've mentioned in the call, what changes are we having there that the business is turning around?
See the business, the big change that we made from about November onwards or December onwards was to increase our media support. See, that is a business which has very high gross margins and high EBITDA, but relatively low ATL. Our strategy there is to increase our ATL, which we have done. As a combination, both I think of the Indonesian markets also, the sense I get is that I don't think it's out of the woods, but there's certainly a lot of positive news is coming out of Indonesia in terms of categories starting to grow again, but also in terms of our own market shares, we are seeing some movements. Unfortunately, it's going to take, you know, another two quarters, which is this quarter and the next for it to show in terms of sales.
Because the truth is, over the last two, three years, the market also shrank and, you know, we built up inventory through our pipelines.
All right. Thank you, and all the best.
Thank you.
Thank you. Before we take the next question, a reminder to the participants. Anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Alok Shah from Ambit Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Sudhir, my first question is, essentially, you know, what Percy also asked. One is on what you mentioned, the relevance, access, et cetera, on the HI. I also wanted to check with you that are you also working on the efficacy? Because, you know, while relevance and penetration to my mind, I mean, your consumer is fairly aware of Goodknight as a brand, but, maybe, you know, the incremental recruitment may need some kind of tweaks in terms of the efficacy of the product. Wanted to get your views on the same if possible now.
Well, I just prefer to answer, if you don't mind, I'm not ducking it or anything, but why don't we discuss the HI strategy? I'm happy to talk about aer and haircare because it's in the market now. I mean, HI also because, you know, season starts in June really with the monsoon coming in, so a lot of our action will, you know, is just some time away. Perhaps that's a better time to talk rather than, you know, as a discipline.
Efficacy is something that we're always working on.
Yeah.
Right from the actives, what actives can we register and use and what products. I think that's a strength of GCPL. That's, you know. We're always upgrading our products also.
Okay. My second question was that, you know, the presentation mentions about, you know, gaining share in 85% of the categories in domestic business. So, you know, just wanna check that are there pockets of oil and hair color where we could be losing or, you know, those are small categories, where we may not be gaining share?
No, I don't think that is it. I think in liquid detergents, the market is, you know, we have Ezee, which is a specialist wash, and we define the market as liquid detergents and a lot of main wash is entering liquid detergents. I think it's more mathematical than anything else. Actually, if you ask me, in spirit, it's 100%.
Okay, got it. Lastly, just a clarification to, you know, the explanation on the EBITDA margin for Africa. What I understand is, while the reported EBITDA margin's down some 600-650 odd basis points, overall it is 900, but the INR 200 crore or INR 300 crore revenue kept would not get factored in because it would be exceptional. Is that understanding correct?
Correct.
Okay, perfect. Thank you very much, and wish you good luck.
Thanks, Alok.
A reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the lineup, Abhijeet Kundu from Antique Stock Broking. Please go ahead.
Hi. Thanks for the opportunity. My question was on, you know, we have seen very intense summers this time around. Which are the categories which will get benefited and how has been the initial response? I mean, how has been the initial response with the intense summer for you?
You are talking of peak summers?
Summer has been really intense, so which categories can benefit?
Yeah. No, I mean, it benefits soap. It generally very, very hot periods are not in favor of household insecticide, but it's anyway, May is not peak season for us, but soap it will benefit.
Okay. Have you seen any benefit of that in your aer as well? Or it has been more of, you know, the initiative taken by you that is driving demand. Because, as per our channel check even aer has done very well. I mean, during April and May.
Yeah. No, I mean, I think that, you know, look, a lot of the initiatives that we, I spoke about, which is basically on hair color, on aer, we've rolled out in April. I can just say that, the initial results are as per expectation. Again, you know, we can talk about results next quarter, but certainly these are powerful, category development initiatives, and we're very bullish about how they work for us.
Okay. That's it for me. Thanks.
Thank you. A reminder to the participants, anyone who wishes to ask a question may press star and one. The next question is from the line of Trilok from DIAM Asia. Please go ahead.
Yeah. Hi, good evening. Thanks for the opportunity. I wanted to, you know, ask when the initial comment that you highlighted, you know, that even the Q1 seems to be a little constrained in terms of margins. Are you referring to, you know, further sort of, you know, pressure beyond what we have already seen? Or, you know, what. If you can, you know, comment on that'll be helpful.
The Ukraine crisis started about three months ago, right? Which is in the middle of last quarter. At that time, last quarter, we were still sitting on older price stocks, so, you know, we have kind of managed EBITDA. Now, this new inflation will take us a little bit of time to adjust to. I mean, I'm not overly worried about it, but certainly, you know, palm today is quoting at 6,500 MYR. It had gone to close to 7,500. Pre-Ukraine it was 5,500. It's somewhere in between its peak and where it was pre-Ukraine. 5,500 itself is a high price. The new stock that comes in is coming in at higher costs.
We will of course judiciously do, and I think you all should have enough confidence given our India margin performance last quarter, despite all the difficulties we faced everywhere else, that we are able to kind of over a period of time do.
Obviously today only that ban has been lifted, so probably that could also bring some relief, you know, hopefully.
Of course.
What kind of pricing actions you have taken at the portfolio level, to mitigate this inflation so far?
No, that will be, I mean.
Yeah, I mean, if you just look at Q4, Trilok, I think the UPG is close to around 12%, right? So-
No, I'm talking about, you know, in this quarter we are talking about, because what is already been done is done, right?
Yeah. I think incrementally we keep on taking, you know, price increases, especially in personal wash portfolios. It's difficult to aggregate and call out as to what it will be because some has got executed, some will get executed as we speak. Direction in my sense is the UPG will go up in Q1 as compared to what it was in Q4 at overall portfolio level.
Yeah, I think like all companies, frankly, you know, we have to take judicious price increase. One is we can't shock consumers, so we've got to do it. Two is for speculative costs we can't price. If there is a speculative cost, like for example palm at MYR 7,500 and all, we always knew and now before testing, I didn't know that Indonesia ban has been lifted today. It'll be good news for us. But you know, in the short term, these things are, we can't react to them in pricing in the short term for very speculative and business continuity. When we have to buy, we have to buy. I think you just have a look at it in that context.
Sure. Understood. Just last note, from a new, you know, kind of pricing accessibility in both the categories that you alluded to, is there, you know, is it fair to assume that those will not be, you know, I mean, gross margin dilutive or something of that sort? Because obviously penetration is important, but yeah. Wanted to hear a thought from that.
I mean, you know, I think the important thing in this business, as I said, is to drive volume growth. I think we have very healthy EBITDAs in this business and, you know, we will, I mean, our objective is not to drop that. Our objective is primarily to get category volume growth in first. You must remember that some of these categories, you know, like hair color and all operate at anyway very high gross margins. They're actually, even if they're dilutive to the category, they are accretive to the company very often. I would still say that gross margin is super important, but volume growth for us and category development is more important.
Sure. Thank you. I'll come back in queue. Thank you very much. Appreciate your time.
Thank you. The next question is from the line of Krishnan Sambamoorthy from Motilal Oswal Institutional Equities. Please go ahead.
Yeah. Hi, Sudhir. As part of your strategy discussion in December, you had highlighted two things. Both are related, so I'll take both of them. One was the relative inability to drive category development, which, for which initiatives, have been taken as you have highlighted. The other thing that you had highlighted was high complexity with too many SKUs. Anything that you want to highlight on that front and work that has been done so far?
Yeah. No, I mean, listen, complexity is there, I mean, I had said that, you know, one of the strengths of the organization is innovation and R&D and our ability to drive new products, and I hope I can speak about a few of them next quarter. One of our weaknesses is complexity, and complexity is in SKUs, but in many other areas. I mean, let me give you an example of air, right? Which is the communication that we have done, which is when guests come home, you should have air. Maybe at some point we can send it across to all of you, the communication. We have done exactly the same communication with no changes in Indonesia and India in Stella. Now, that's a reduction in complexity, right?
Because two people were working on it, two advertising agencies were working on it, two people were producing the film. I mean, it's just an illustrative example of reduction of complexity. SKU complexity reduction is on, and it is, it's an ongoing process and a pretty sharp one at that. There are many areas of complexity like this one, where when the same advertising works across the world, why spend money and, you know, complicate life by having different things. There's very much a war on complexity and simplification that is going on across for us.
Very clear. Thanks, Sudhir.
Thank you. The next question is from the line of Avi Mehta from Macquarie. Please go ahead.
I just wanted to clarify, you know, just on the near term margin bit, and if I heard you correctly, on FY 2023, you are essentially. Would it be fair to argue for a pickup in the second half at EBIT level? That would mean that the earlier comment of sequential EBITDA margin expansion is no longer valid. Was that the correct read through from your statement?
No, I think what I said, and I think Sameer will clarify, is that if costs, even if we're conservative with costs, we expect some slight margin improvement in FY 2023 over FY 2022. If costs go to where we hope or where we think they will go to, it may even be better than that. That is, that's what I read out. Sameer, do you wanna add anything to that?
No, I think that's the clarification, Avi. You know, there will be a light path. I mean, the very short term, just because of severe commodity inflation, there will be you know, kind of margins pressure. By the way, we'll continue to invest for growth. What we will also see is you know, upfront marketing investments for a lot of category development initiatives. At this point in time, with all the assumptions, even including on commodity, we do believe that FY 2023 should see you know, margins expansion. Again, as Sudhir mentioned, the entire focus will be on you know, sustainable UVG during the course of the year. Yeah, I mean, at this point in time, we do believe that there should be margin expansion in FY 2023.
Perfect. Just the other bit on Indonesia, would it be also correct to argue that the margin trajectory would mirror the sales trajectory, i.e. when sales growth comes back in Q3 , margins should also move back to the pre-COVID levels?
I think so. I think that's what will happen.
As I told you, it may take Q2 because the economy, I mean, CPG, did contract for two years and then, you know, there are consequences of contraction. Yes, I anticipate there too, both because of judicious price increases there as well and because when, you know, growth comes back, we'll get back our leverage.
Leverage. Okay. Perfect. Thank you. I look forward to hearing on the HI side in next quarter. Thank you.
Thanks.
Thank you. The next question is from the line of Jaykumar Doshi from Kotak. Please go ahead.
Yeah. Hi. Thanks for the opportunity. In the opening remarks, you mentioned that you expect palm oil prices to correct by 7%-8% and maybe further, you know, also. Can you elaborate on that? Do you have visibility on the output or supply that will come starting June from Indonesia? If Russia-Ukraine conflict continues for a longer period and then the supplies from those markets of other edible oils, you know, if that situation continues, do you still feel that palm oil prices will correct by June or September?
See, in the palm oil case, there have been three underlying drivers of price hike. One is even pre-Ukraine, there was a supply-demand mismatch, which I think will correct and I think is correcting. Two is that there has been the Ukraine crisis and sunflower oil from Ukraine. Three is that the Indonesian ban has further exacerbated the situation. Of these three, we are hoping two will correct. The third one, if it corrects at some point in time, we will get a further upside. But at least two of the three. One of the three seems to have been corrected already, somewhat. I didn't know this, but someone just mentioned that Indonesia has lifted it, so some slight relief will come there. I think, in May, June, we are anticipating crop and all.
Of course the soy, the sunflower pressure continues to be there on Ukraine. If that happens, then it'll go down to levels we hope for. We're not planning for that. We think that even somewhere in between that we'll still be able to eat through.
At this point of time, do you have visibility of the crop that will, you know, from Indonesia, Malaysia starting June of the new crop?
No, no, we are not at this point in time, but I think all the early indicators are that there should not be, you know, I mean, supply side, you know, kind of issue, at least from crop plantation, you know, front.
Essentially the demand supply mismatch that we saw for two consecutive years hopefully should not continue in the following year.
Well, that's the thinking at this point in time. I mean, it's not just in isolation, the palm oil. It's also, I mean, the sunflower oil, right? There are a lot of linkages, you know, to it. Yeah, let's see how it goes ahead. I mean, if this Ukraine conflict gets resolved, then definitely there will be, you know, further, you know, fall in palm oil prices is the hypothesis which we have. Let's see.
Thank you so much.
Thanks.
Thank you. The next question is from the line of Gaurang Kakkad from Haitong Securities. Please go ahead.
Yeah. Hi, thanks for the opportunity. Couple of questions. Firstly, on the India business, if you can share some color in between rural and urban growth as to how it is currently panning out.
Yeah. I think if you look at urban including alternate channels, the growth has been nearly 1.5x, you know, of rural, you know, for us. Directionally we have seen, I mean, because we are relatively under-indexed in rural, our rural growth have been, you know, on the higher side. I mean, in terms of demand trends, it feels like more of the same. I mean, we had called it out last quarter also that even if you look at two-year CAGRs and those trends, nothing much has changed, I mean, between, you know, both the markets.
Okay. Yeah. Secondly, in terms of the Africa business margin, you've called out the reasons for the margin fall. Leaving aside the one-off, the two factors, largely RM inflation as well as upfront marketing spends, impacting margins by around 600 basis points. Largely for the Africa margins, we had an earlier guidance of margins given in FY 2021, going to around, say, 17%-18% in the next four to five years. Largely, if you look at margins, this year also margins are largely likely to remain in this 11 odd percent kind of a range. Then do we stick to that guidance of 500-600 basis points improvement in the next two, three years?
What gives us the confidence for that?
Yeah, I mean, that's the game plan, and nothing much has changed, you know, on that thinking. There could be a year, you know, plus minus in that, you know, journey. As we have called out earlier, I mean, you know, better, you know, favorable category mix, scale play. I mean, even, I mean, you know, a very sharp, you know, kind of control on wasted cost is all what we think should, you know, aggregate to, you know, this margin expansion or better, you know, kind of ROE in Africa over a period of time.
No, I think this year also, while this quarter has been exceptional, both because of the one-time loss and because of commodity, Africa business also, by the way, is very crude-linked because our dry hair business is plastic. This year we have had margin expansion of about 100 basis points.
On a full year basis.
On a full year basis.
Yeah.
You know that journey of 100-150 basis points a year, even this year despite the last quarter we are on, and, I mean, this quarter was exceptional both for the pilferage and for the cost increase. That kind of margin improvement, 100-150 basis points a year for the next 4-5 years, we anticipate it will continue like it has in FY 2022.
Right. Thanks. All those, like, strategy in terms of the four- to five-year guidance of, say, premiumization, product mix improvement, cost efficiency, largely those are on track. You think you can achieve those margins in FY 2026-2027. Largely a year or so miss is fine, but largely we are on track in terms of the guidance.
I think so. I think it was a quarter miss of Q4. I think we were on track to kind of, you know, steadily increase margins in the business to achieve the kind of numbers you're talking about.
Sure. That helps. Thanks a lot.
Thank you. The next question is from the line of Abneesh Roy from Edelweiss. Please go ahead.
Yeah, hi, Sudhir. A few follow-up questions. First is on e-commerce in India. We have seen HUL now, for example, get 20% of business digitally, and from e-commerce 7%-8%. Many companies are getting that. Where did you peg GCPL in this? Could you also talk about which e-commerce, how are you placed there? Are you getting some benefits from there? How would you peg GCPL's presence in quick commerce with some of the larger players, competitors?
Yeah, I think on e-commerce, the right way to look at it is not just about salience of our in e-commerce and what is e-commerce salience. I think there are two or three measures that we look at. One is our share within e-commerce, which we're happy with. Two is our findability, you know, when people search for our categories, and we're quite happy with that. Three is that it must be accretive in terms of margins to our portfolio, which we think there's still work to be done on. That's how I would look at e-commerce. I think rather than just worry about a salience as a number and just under all circumstances increasing it, like in any other channel, one has to take a balanced view of e-commerce.
Of course, it's a rapidly growing channel and we are participating and our shares are good there, so we're quite happy with where we are. That's how we look at it. Quick commerce is doing really well. I mean, in the recent past and in general, quick commerce definitely benefits short tail, you know, because people, you know, quick commerce inventory is led to be limited to the winners in the category and in all the categories that we operate in, we're either number one or number two. We are certainly from a consumer point of view, what I've heard from consumers is that they're very happy with quick commerce. We'll have to wait and watch, Abneesh.
I think the way we have to look at any channel is as and when a channel emerges, we have to resource for it and make sure that we get fair share within that channel and at the right profitability, right? I think that resource for it and then let the channel emerge. After all, we don't play a role really in the development of the channel.
Right. My second question is on the changes which has happened at the senior leadership level. In the last 3 years, if I see Africa business head came from Nestlé. We saw remarkable improvement once he came. Now in Indonesia, a ex-Unilever, ex-HUL guy is joining. Sudhir himself obviously from HUL. And now the tech head also from a good MNC experience. My question is there any cultural issue which arises from all these very senior appointments? Because all these appointments are from lateral. How are you addressing if any cultural issue is there? Are most of the senior level appointments done or you think in the next 1-2 years? I'm not asking for any guidance, but just wanted to understand, is the team now in place?
I think. Thank you for that question. I think, if we, you know, there's also been a lot of promotions from people internally also. I just wanna, you know, put that out. Sameer has recently taken over CFO. There's a number of senior people who, you know, are doing bigger roles after Sudhir came in. I think our philosophy has been that as much as possible, you know, that we'll have people internally take roles, but where we do not have someone or we want particular expertise, say like in this digital transformation, we will go outside. You know, I think when we select people, we do select them for a cultural and value fit, because otherwise at senior levels it's very hard for them to come in and operate.
You know, I know you do see Sudhir Sitapati from HUL, Dharnesh Gordhon from Nestlé, but you know, we do see them as the individuals they are and how they will not just fit into Godrej's culture, but improve it and make it stronger. I don't think this cultural fit will be an issue. I think one strong thing that I've always felt about Godrej is that we are relatively humble people and always willing to change and get better. I think this new talent coming in will be a good refresh. I think we went through this a decade ago. You know, at that time also we had very good high growth and you know, company did well and I think it's time now to strengthen the leadership team.
You know, there's equally a number of people who are from within the company also.
Sure. Thanks. Just one last follow-up on the Indonesia leadership. So when Africa business head change had happened, within very short time we saw remarkable improvement in the margins and sales growth both.
Obviously he took a lot of corrective action in the marketing campaigns, more effective. Similarly in terms of distribution, he made a lot of changes, more deeper distribution and lot of analytics usage, et cetera. In Indonesia, when you are getting this person from Unilever HUL background, is the similar potential available here or already most of these things are well run in Indonesia, so that, the opportunity is not available? I'm not asking on margins or numbers. I'm just asking on the business side, is there a lot of headroom to improve immediately?
No, Abneesh, I think, you know, both Dharnesh and now Rajesh are both top-class professionals and contribute, but very often these have their own dynamics going on in the market, you know, which are ups and downs. I think Suffice it to say that, you know, these things have to be looked at in the medium term, and short term is not the right way to look at it. Somebody comes and, you know, puts things right and it starts growing immediately. That rarely happens actually. I would definitely say that I'm anticipating and hoping that the Indonesian business in the medium term does really well under Rajesh's leadership, just as GAUM has done under Dharnesh's.
Okay. That's all from my side. Thank you.
Thank you. The next question is from the line of Aniket Sethi from ICICI Securities. Please go ahead.
Hi. Thanks for the opportunity. Sudhir, if you can discuss the thought process on divestment of BBLUNT. If I recollect, the company always had ambition in fashion and premium hair colors. Is it part of the business simplification process? What are the current ambitions for premium hair colors going forward?
Yeah, no, I mean, look, you know, BBlunt's a great brand and it's got a great consumer franchise. I think we have, you know, as we articulated a drive towards simplification and the core of our business and getting. Most of that is market development of some of the categories, right? In that, we felt that the home for BBlunt was probably better somewhere else. It's just a set of choices that we make. If you were to ask me, while of course there are examples of premiumization like in Africa, in general, I would say that GCPL over the next few years should focus on category development. That's where the biggest bang for the buck is, and that's really where our focus is. I'm not sure BBlunt was a driver of category development of hair color or hair.
Will we focus on the premium part in India, let's say in the next 2-3 years?
I mean, look, you know, we have some premium brands like, you know, Cinthol in soaps is a premium brand, but I would still say.
Okay.
I think it's we have premium products in the category.
We do have premium products, but I would still say that, you know, some companies. It's, you know, it's difficult for me to simplify this into, like, one word, but some companies have this, you know, primary task of premiumization. I think our primary task is category development.
Yeah.
Understood. That's helpful. Second, a small clarification. In the presentation, it's mentioned that you are gaining shares in about 85% of the categories for the India business. So which exactly were the areas where you have lost some share?
I think I mentioned that liquid detergent, mainly because in the definition of liquid detergent, because we are Ezee as, you know, it's basically a specialist liquid detergent and it's classified in all of liquid detergent. That is going to continue because, you know, there's a big movement in main wash to move from powders to liquids, and Ezee doesn't really participate in main wash, in detergents.
Understood. That's clear. Thank you. Thank you and all the best.
Thank you. The next question is from the line of Jitendra Arora from ICICI Prudential. Please go ahead.
Hi. Just a couple of questions from my side. One, as you alluded to Africa margins improving on a yearly basis, and not being worried about the quarter. Assuming the crude stays where we are, we expect EBITDA margins in Africa to continue to improve for FY 2023. That's first. Second, on the palm oil, you alluded to 3 reasons why there has been a spike. Obviously second and third is something which is event-based and temporary, which is essentially your Ukraine situation or what happened in Indonesia in terms of ban. I wouldn't worry about that honestly because there is very little we can do or take it into consideration over a longer period of time.
However, the first one, which is essentially the demand supply, there is an increasing blend of palm oil in Indonesia, with the crude oil for their domestic fuel requirement, which has affected the demand supply equation in the market over the last few years, and that has led to the tightness. How do you see that resolving? Do you see incremental supply from Indonesia to cater to that? Or are you seeing any other geographic region which will be stepping up supply, given that this new source of demand has been there?
I mean, we are always working on blend flex and, you know, various oils and so on and so forth. But I think, you know, the pre-Ukraine, pre kind of Indonesia export ban, if you look at our India margins in Q4, they give you a good sense that we were, you know, on our way towards solving that. And, you know, by next quarter we would or this quarter we would have sorted that out. So even if there is a long-term supply demand gap in palm oil, you know, our brands and generally soaps is a category which is a relatively small user of palm oil in the larger scheme of things. Should be able to manage. I don't think, you know, this category is not going to be the one that gets massively affected by it.
It will be able to price up for it.
Right. About Africa?
I mean, in Africa, yeah, as I said before, I think we've seen actually despite, I mean, a Q4, which was a one-off, I mean, both in terms of cost and in terms of the pilferage. You know, we've seen margin improvements even in 2022, and we anticipate that to continue because, again, we are at a peak of oil prices. Already oil, you know, has fallen and so on and so forth, and crude also. So there also, you know, we can. It's a bit like our soaps business. We'll gradually take up prices and cover it up. So I do anticipate some kind of moderate margin improvements in Africa as well.
If the commodity plays out the way we think it will play out, if there's any further shock in oil, you know, none of us know in the volatile world we're living in. What I would say, other things being equal, we will continue the journey that we've actually started in FY 2022.
Essentially what we are saying is that there are enough price actions in place which will ensure that the current commodity costs are passed on.
I mean, certainly it is our intention to improve our margins in Africa, and, we are going to work towards that. It is not our intention to go to the numbers that I think we alluded to in the next few years, which is 17, 18 EBITDA kind of thing. That's certainly our objective. I think we've been, with this exception of the previous quarter, we've generally been quite successful also at it.
Thank you.
Thank you. The next question is from the line of Priyam Daga from VT Capital. Please go ahead.
Yeah. I needed some clarification on the market share side of it. On an industry-wide basis, some companies have had degrown in the personal care segment. We have had a strong personal care growth this quarter. Is it fair to assume that we've kind of gained some market share from some of the organized players?
I mean, if 85% of our business is gaining on a match basis, then, you know, we have gained, we've certainly gained. I mean, certainly soaps are doing very well in terms of market share.
Okay. Thank you.
Thank you. As there are no further questions, I now hand the conference over to Mr. Pratik for his closing comments. Over to you, sir.
Thanks, everyone, for joining the call. If you have any further questions, do reach out to the IR team. Thank you.
Thank you. Ladies and gentlemen, on behalf of ICICI Securities Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.