Ladies and gentlemen, welcome to the Godrej Consumer Products 3 Q FY 2022 earnings conference call hosted by Emkay Global Financial Services. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ashit Desai from Emkay Global Financial Services. Thank you, and over to you, sir
Yeah, thanks, Faizan. Good evening, everyone. It's a pleasure to host the management of Godrej Consumer Products for their Q3 earnings call. I'll hand over to Pratik for the initial introductions, post which we'll go ahead with the management comments. Over to you, Pratik.
Thank you, everyone. Good evening, and welcome to the conference call of GCPL. We hope that you're all staying safe and healthy. We will be covering this evening the results for the quarter and nine months ended 31st December 2021. On the call with me, from GCPL is Ms. Nisaba Godrej, Executive Chairperson, Sudhir Sitapati, Managing Director and CEO, and Sameer Shah, CFO. We'll start with Sudhir talking about our performance in the quarter. Over to you, Sudhir.
Thanks. Thanks, Pratik. Good evening, everyone. I hope you and your families are safe and healthy, and thank you so much for joining the call today. I'll first start with an update of our performance. We've had a mixed quarter in Q3 FY 2022. While our overall sales grew by 8% and we remain on track to achieve double-digit sales growth for the year, it was driven entirely by price-led growth and flat volume growth. On the other hand, while our overall EBITDA de-grew by 2% and PAT declined by 1%, the quality of our profits has improved. In Q3, we were down 210 basis points on EBITDA, similar to the drop in Q2. However, this was driven by sequential improvements of 70 basis points in gross margin and 90 basis points in increased A&P investments.
Our performance, while different across geographies, was similar in being near flat in underlying volume growth. Home care was 3%, personal care was 12%, India was 8%, Indonesia was -2%, but even here volume was actually flat, and Africa was 12% with also flat volume. The big story for the quarter is really flat and muted volume performance. Our reading is the significant price increases we've had to take. In our experience, this level of inflation is unprecedented, like we saw in 2008 last, and it does affect volume growth in the short term, largely through pipeline reductions. It may also affect discretionary spending, and add to downgrading, and have an impact on real income.
Given the relatively non-discretionary mass pricing of our portfolio and our good performance on market shares, we think that some kind of volume growth will come back in the next few quarters. We have two areas we'd like to call out which require deeper assessment. One is Indonesia, and the second Household Insecticides in India. In Indonesia, during the first wave of COVID-19 in mid-2020, we launched Saniter, a disinfectant brand. While the brand did very well during the COVID period, the larger macroeconomic situation and frankly, perhaps too much focus on Saniter at the expense of our core portfolio meant that the overall results weren't great. Now, with the pandemic impact waning and increased investment in the core portfolio, our core volumes are starting to grow. The Saniter base is pulling down overall results.
Indonesia's results will take a few quarters to improve. It may even get worse in the near term as the Saniter comparator becomes very large, but we are convinced we're on the right track Household Insecticides in India was lower than our expectations this quarter. We have always mentioned in the past that HI is a category that shouldn't be seen on a quarter-to-quarter basis. We believe that there was an adverse seasonality in South and East of India, while the season was quite good in the North of India. Overall category has seen a pattern of high and low consumption over the past few years. There was, in the comparator, a high consumption driven by COVID, more people staying at home, and increased consumption on health. We do see low consumption driven by waning COVID fear.
However, leaving these seasonality and COVID impacts aside, we fundamentally believe that there is huge potential to grow in the HI category in India. Indonesia, with twice the GDP of India, has 2.5x the consumption Household Insecticides and has successfully premiumized the category into aerosols. Our number one priority in the medium term is to drive category development and scale up growth Household Insecticides. on the margin front, we felt that costs had peaked, and we should see strong improvements in gross margins and moderate EBITDA improvements.
However, the commodity market, especially the palm oil fractionate that we use, PFAD, continues to be choppy. The bigger story of medium-term gross margin expansion and moderate margin expansion remains intact with significant investments in A&P. We continue to have a healthy balance sheet, and our net debt-to-equity ratio continues to come down.
We are on a journey to reduce inventory and wasted costs and to deploy this to drive profitable and sustainable volume growth across our portfolio through category development. On the people front, after 11 high-impact years, Sunil Kataria, CEO of our India and SAARC business, has decided to pursue an external opportunity. I will directly run the India and SAARC business as CEO in addition to my responsibilities as MD and Global CEO. As always, our values matter the most at this time. We were recently ranked number one among the top 100 companies in India for sustainability and CSR initiatives in 2021. This ranking is based on a survey conducted by Futurescape and published by The CSR Journal. We remain committed to doing our best to truly live the Godrej way and serving our people and communities. Thank you.
This is the operator. Sir, should we start the floor for Q&A?
Yes, we can.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone 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. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The first question is from the line of Abneesh from Edelweiss. Please go ahead.
Yeah, thanks, sir. My first question is on hair color in India. When I see the base, it was not very high. On a two-year basis, the base was around 10% growth. We don't have the number this quarter specific, but you have called out that it's a soft quarter. You have scaled up the five-minute shampoo. If I see mobility for customers in Q3, it was broadly normal. Many companies have called out that discretionary spends, discretionary demand has been fairly good in Q3. In that context, hair color soft performance, how do you see that?
Yeah, no, I think in hair color there are two or three things going on in hair color. One is we took a very sharp price increase on part of our portfolio, and that affects inventory. So even within the quarter, we saw that we took the price increase in September, and typically what happens is the old stock gets stocked up and then the new price. So there's a price transition. There was also, if I'm not mistaken, Sameer, a very strong competitor of shampoo hair color in the base. I think the good thing in our hair color business is we continue to gain share in India overall in hair color.
Just to add, Abneesh, I mean, on a two-year CAGR basis, growth were, you know, close to high single- digits. We are not too overly worried, I mean, on the hair color performance in the quarter. Yeah, I mean, on the face of it, optically it was a relatively soft performance, but on a two-year CAGR basis it was quite fine.
Sure. My second and last question is on advertising spend. In the December analyst meet, Sudhir, you had said that you'll be de-linking the media spends from short-term goals. You had also said that you will cut down on the non-media and ATL. My question is, when I see your advertising spend this quarter on a YOY basis, there is a saving, so it is YOY flat, so there is a 57 basis points saving as a percentage of sales. Market leader in soaps, obviously, they don't give category-wide spends, but on an overall basis, HUL did cut down significantly on ad spends. Is that helping your overall ad spends also in terms of soaps and non-media ATL?
No, I think, Abneesh, while the overall media may be flat YO Y, and, you know, YO Y has various things. If you look at it sequentially in absolute crore rupees, it has significantly gone up in Q3 versus Q2. Ultimately media is a good thing to look at sequentially because, I mean, rupees crores, and that is generally our strategy. Some of these media investments, you know, Abneesh, they don't pay back immediately, but they pay back pretty soon. We will continue to do that as we go along because our strategy remains committed to category development.
There will be some, you know, volume bumps, as all of us know, in the next few quarters. I think if we are razor sharp on category development driven through increased brand investments, we'll come out of this quite well.
Just one small follow-up. Reversal of impairment on BBLUNT in the India part, so INR 15 crore. Could you elaborate why that has happened?
Abneesh, we have remeasured actually the fair value of our investment from BBLUNT. Just to refresh, we had impaired it in fag end of FY 2022. The remeasured fair value is much higher than actually the book value, and that results in impairment reversal in the quarter.
Okay. That's all from my side. Thanks a lot.
Thanks, Abneesh.
Thank you. The next question is from the line of Avi Mehta from Macquarie. Please go ahead.
Hi. So my first question is on the HI space. Now, you are right that, you know, quarterly there is seasonality. I just wanted to kind of understand from you, this is the second quarter of soft performance, and that also on a two-year basis. Would the reading or read through in your argument, would it be fair to say that market shares are not kind of are kind of remaining healthy, or and it's an industry issue? If you could just kind of give us more clarity on why this is happening and where, you know, what can drive a change so that we can understand that better. Thank you.
No, thanks, Avi. No, firstly, you know, market share, like in hair color, we are gaining in Household Insecticide on a MAT and on an LTM basis and on an LM basis. So whichever way we look at it, we're gaining share in Household Insecticide. I think Household Insecticide had a very high, and you'll see it in the next few quarters as well. COVID, you know, it had a very strong COVID tailwind, and therefore it's lapping now relatively tougher comparators. But I think the bigger issue that you said remains, which is we have to, over the next few quarters, find a market category development trigger Household Insecticides in India and grow that category. Models are available for us in the rest of the world.
It's just for us to adopt and invest and do it with discipline. I would say it's an unsolved problem. I mean, it is a fluctuating category, but the honest truth is that we've got to solve this problem, and I hope we'll do it in the next few quarters.
Sudhir, the COVID impact was seen more and the COVID benefit was more in the third quarter and, sorry, fourth quarter, right? We saw second quarter and third quarter was a supply-side issue that we were facing. There was some impact because of that. Which is why I was confused from a two-year CAGR also. For the last two quarters, we are seeing only what, maybe, you know, mid-single-digit or something of that sort kind of growth. Is it, is it that the industry itself is, you know, taking some time to come off? Because I'm comparing on a two-year basis.
No. See, I tell you the thing is, yeah, no, I think that's a valid point. I think we do feel like the South and East has had a relatively poor season in these few months, and that sort of accounts for it. Yeah, but you know, over a slightly longer period, you will find very high COVID basis. I think in Q1 of
I would say that actually, I mean, we had a relatively high COVID base. I think as Sudhir was saying, Avi, what's happening is, you know, because of these patterns of high consumption, low consumption, perhaps we are in, you know, very short term in a low consumption generally environment, right? As a result of which our overall growth rates are relatively lower, but market shares are, you know, sort of moving up. Again, I mean, as we had called out in December analyst meet also, we just reiterated that we will see, you know, couple of hopefully base, you know, key consumer bets and, you know, ongoing execution of it in coming quarters, which should, you know, kind of get us back to, you know, kind of desired growth rates.
The second bit was on the margins. While you have clearly called out a focus on driving double-digit sales growth, would it be fair to argue that, you know, because there's input cost pressure, because there is a mix change in Indonesia, in near term, FY 2022 margins are likely to be under pressure with the EBITDA level? Or you would kind of work on cost control. If you could kind of help us repeat that as well. Thank you.
Yeah. We, I think the model remains the same, right? That's how we work on improving the quality of profits and, well, again, in Q3, the overall margins in terms of contraction are more of the same as we saw in Q2. We are pretty pleased with the quality of profits in terms of sequential expansion in gross margins, reinvest that back for growth. Growth will come, right, in coming quarters because there'll be a lag between investments and the growth. My sense is that models should continue even in very short term. I mean, we are relatively optimistic that this trend of sequentially improving gross margins, at least in India, should continue.
We will also continue to see higher investments, and we will perhaps also start seeing, you know, kind of lower margin contraction, or if all goes well, actually even margin expansion in India. I think Indonesia is going to be a little, you know, kind of other way around, where in very short- term, I mean, we will see a bit of you know, challenges in terms of sales because of high sanitizer base and also working on some of the core, you know, kind of key consumer bets, which will take a quarter or two. Secondly, we had abnormally, you know, kind of high base, I think some 35% EBITDA, you know, margin quarter four.
Well, sequentially again, we think the margins, I mean, could expand even in Indonesia, but on a YOY, of course it would be, you know, on the lower side. On the whole, you will see, I mean, you know, sequentially improving, you know, kind of, quality of profits with higher gross margins, part of it getting reinvested back for growth. As Sudhir said, I mean, the bigger story of, you know, moderate EBITDA margin expansion, medium gross margin expansion, very much remains intact.
Okay. Thank you, Sameer. If I may, bookkeeping, any guidance on the tax rate for FY 2022, because we've seen a, you know, good reversal in this quarter, so that will be 2022 and 2023. Thank you.
Yeah, no, I think this quarter has a deferred tax reversal in Indonesia, because we had to remeasure our deferred tax assets because the tax rates actually moved up by 2% over there. I think we can stick to 22%-23% range only for next year.
This is for FY 2023, right, you're saying? For 2022, it might be slightly lower given this reversal.
Correct. Correct.
Okay, perfect. Thank you. That's all from my side, Sudhir. I'll come back in the queue for other questions.
Thank you.
Thank you. The next question is from the line of Manoj Menon from ICICI Securities. Please go ahead.
Hi, team. A couple of questions on, you know, the overall. One on Indonesia, just wanted to know your perspective on-
Sorry to interrupt you. The audio is breaking from your line, sir. Please check.
I don't know. I'm actually talking very close to the mic. Is that okay?
It's fine, Manoj. Thanks.
Thank you. Okay. No. On Indonesia, Sudhir, Sameer, and team, you know, just wanted your views on, you know, on let's say, how do you see the macros, minus sanitizer, et cetera? Because, you know, ultimately in a discounted cash flow, you know, the underlying does matter. It's not really about year-on-year. What I'm trying to understand here is, you know, after many years of, let's say, macro headwinds, at least in my understanding, you know, that there is a general view, that Indonesia as a country, as an economy, is let's say likely to see a cyclical upturn. I just want to check how are you looking at it?
Why that matters is that, you know, your view, whether it is, you share my, let's say, optimism, if I can use that word, will depend on the plans you make. So that's the question number one. How do you see Indonesia macros over the next, you know, year, 18 months, et cetera, as it stands today?
I mean, maybe I'll pass on the question on macros to Sameer, but I do feel that we are seeing green shoots in the revival of our core business volumes even in Q3, Manoj. I'm quite optimistic that over the next quarters, while the overall numbers may not look great, the core part of our business may be back to growth, I think, after several quarters. I think that also augurs well for the macros. I don't know if there's anything to add on that.
Yeah. No, I think the headlines on macros, Manoj, whether you look at GDP, whether you look at, even the overall, you know, cuts within FMCG, food, non-food are, you know, kind of gradually improving, right? Currency is also stable, so we do believe that, you know, macro will see, you know, or continue to see gradual recovery as we have seen, you know, at least over the past couple of quarters. In terms of why the performance is what it is, I would say part because of, you know, sort of a base of hygiene sanitizer. And also again, what we had called out in December means that, you know, the over-investment perhaps on sanitizer may be marginally at the cost of, you know, core, which is what we are correcting at this point in time.
We remain very optimistic and, you know, we share your optimism, I should say, on macros, but more importantly, you know, the potential of Indonesia's business in medium to long- term.
The business plans which you make, or which you've already made, let's say, for the next 12-18 months, is assuming a certain recovery, right? I mean, can I interpret it that way?
Absolutely.
I think it's assuming a certain recovery in our core business, and the sanitizer base is what it is. The rest becomes mathematical, and that we can't see growth honestly coming for the next three, four quarters, given the way the numbers are stacked. Yes.
No, Sudhir, Sameer, look, I'll tell you. Let's roll forward three months, six months, nine months, 12 months. Look, I think you know, if you could help us, let's say you know, a memo, MIS number saying, look you know, ex-sanitizer this is the growth, that would be super helpful given this one-off you know, in some way which is there. Because I'm trying to look at the trajectory rather than the noise in the number.
To be honest, Manoj, it's very difficult to call out anything from specific numbers.
Okay. Even qualitatively will-
Call out.
Sure.
No, I think, I mean, our plans are looking robust. Again, what I can share, I leave up to your expertise to convert our English into your math. Ex-sanitizer for sure, I mean, the plans are looking robust. More importantly, beyond the financial plans is the, you know, kind of key consumer bets plus plus which we are, you know, looking at executing over a period of time. As I said earlier, I mean, very short term, I mean, you know, kind of there will be, you know, subdued performance. Maybe from, you know, quarter one or quarter two of next financial year, overall as well as ex-sanitizer for sure, I mean, the growth rates as well as the overall margin profile will be better off.
Understood. Secondly, just quickly coming to India, you know, given the typical interplay of gross margins and the ability to invest, you know, in newer categories and newer launches, A&P basically, how do I think about the next 12 months, 18 months, the way you are planning currently on NPDs?
I think, Manoj, firstly, you know, the strategy is not at least for the next 12 months, as I said in the earlier quarter, based on too many new things. It's based on category development on our core businesses, Household Insecticides, even the others, air and hair color. The gross margin, we hope to see, you know, a medium recovery. Actually, we believe we're actually in the middle of recovery of gross margins, and we hope to see that, as things go, unless, you know, there's some major shock in commodity even further than what it is today, which one never knows. Some part of it we will plow back into EBITDA, and some part of that we'll put into brand investments.
Very clear. Thank you, Sudhir. Last question, if I may, and I'll come back in the queue. Look, you know, given the unprecedented input inflation what we have seen, let's say, after 10-odd years, you know. At least in my sense, talking to a few FMCG CEOs, listed, unlisted, put together, the sense which I get is that there is a fair amount of trepidation to, let's say, implement further price increases if, God forbid, if there is a further inflation. You know, would you agree with this hypothesis? Because basically there are, you know, CEOs who are worried that if, let's say, crude goes from $90-$120, I'm just putting some numbers so that I'm conveying this correctly.
You know, that the ability to actually take a pass-through without really having significant adverse effects of price elasticity, I don't think that confidence just doesn't exist today. Would it be correct to make this statement?
I mean, it will not be very pleasant for us if costs go up significantly further than what they are today. I mean, look, again, you know, the way to look at the Godrej portfolio is our business is pretty non-discretionary. It is pretty marked. So in some sense, inflation benefits us in the medium term. But when you have hyperinflation, you know, we have to keep consumer interest at heart. It's not that you can't price. I mean, these categories are not structurally elastic, you know, soaps Household Insecticides, people need to use them.
We tend not to, you know, pass them on suddenly, which is why, you know, we have reasonable confidence that if the commodity is roughly where it is over the next, you know, whatever, nine to 12 months, this is a journey of margin. If there's a sudden rise in commodity, I guess from our point of view, we'll keep consumer first, Manoj. You know, if we will, we'll do what's right for consumers first, and then we'll, you know, we're in this for the long game, and we'll sort of postpone the margin expansion.
Just to add, Manoj, whereas the commodity basket is not just crude, right? I think the bigger, you know, impact comes in from, you know, palm oil prices, and they are at their, you know, lifetime historic, you know, sort of high. Again, I mean, it's anyone's guess as to what will be the direction, I mean, medium term, but let's see, I mean, how that, you know, kind of shapes up. So from crude, I would say I mean, we do get impacted, but the impact is, you know, honestly not that big as compared to what it is from palm.
Sure. Thank you, Sudhir and Sameer. I have a few follow-ups, actually based on the response what you said. I'll come back and meet you or take it offline. Thank you so much. Good luck.
Thank you.
Thanks, Manoj.
Thank you. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, team. My first question is on Indonesia. You called out the Saniter issue, which is, I understand that. Although I don't think on a two-year CAGR basis it should make a difference. In any case, we will ignore that. Excluding Saniter, if you could just rank, starting from best to worst, the three categories that you have in Indonesia, without giving me any numbers or anything on a two-year CAGR basis, which has done the best, which has done moderately, and which has done relatively not so good? That's my first question.
I can give you directional input again, Percy, and not actually, you know, specifics. Yeah, I mean, what I can begin with is, you know, hygiene portfolio, the growth rates, I mean, would be close to mid-single- digits in, you know, rupee terms. That's the big, you know, kind of base impact which we were, you know, calling out. Unfortunately, it will remain at least for next, you know, quarter to two. I think in terms of, you know, sequencing largely, I think both HI and air fresheners, I mean, remain in, you know, positive zone on a YOY as well as on a two-year CAGR basis. Baby wipes is where we continue to see, you know, challenges on a YOY as well as on a two-year CAGR.
Percy, I don't want you to take the impression that, you know, Indonesia is all about the Saniter base. As both Sameer and I said in the past that during the COVID period, I think we would have done things differently in hindsight. I think there's a lesson here for all of us, which is when there's a big shock like COVID, one tends to just change all one's plans and, you know, go behind something new. You know, as a consequence, sometimes one forgets the core, and I guess that's the lesson. Of course, this kind of period nobody's really faced before, so it's not fair to blame anyone because it's a really volatile situation.
That's the lesson to learn, which is, regardless of the volatility, one has to be focused on the core of one's business. Whatever is new, one has to invest in it only, you know, within proportion. I guess that's the lesson we have learned as a business.
Understood. Secondly, I just wanted to understand, as far as the India HI business is concerned. See, the overall top-down view is very well understood. Lack of penetration, you have to grow penetration, you have to grow usage, you have to upgrade people to new formats, et cetera. That's the top-down story that sort of any consultant or any even player in the market, if he analyzes this, he will come out with these steps that need to be taken. But if you can just sort of give a better idea or a little more detailing. Of course, I'm sure not everything can be said due to competitive reasons. But whatever you can in terms of the actual steps that you are taking, so as this top-down story actually plays out.
Because till now it's always remained a sort of opportunity, but that opportunity has not fructified fully. What will you do to make it fructify?
No, I mean, Percy, it'd be hard for me to say that. Maybe in the next quarterly meet or the meet, quarterly meet after that, once we've done what we have to do, you know, we can talk about it because it's not correct for me to speak. Look, I mean, category development has three or four general things that one has to do. You know, one has to first find a trigger for category development. Why should somebody use the category? That is question number one. Question number two is one has to invest significant amounts of A&P behind it. One has to get lots of trial, distribution, and affordability. I mean, these are like just first principles of category development.
How we play that in HI, I guess we'll tell you once we do it or once it's public, but this is how we have to think about it.
Understood. One last quick question. How would you look at FY 2023 as an overall sort of context for us analysts? Would you say that with FY 2022 margins being under pressure, and here I'm talking about at the EBITDA level, would you say that there's a fair degree of probability that FY 2023 will see YOY margin expansion? Also, in terms of the top- line growth, given that FY 2022 already has seen some amount of price increases on that high base, do you see FY 2023 top- line led more by volume or more by pricing on a YOY basis?
Yeah, Percy, I think I've spoken about this in the last quarter, and I think broadly the view remains unchanged, which is if commodity costs are in the vicinity of where they are today, which is a big if, but let's start with that because these are very high prices, they could go either way, then I would expect that in do nothing it'll be low volume growth, but I hope we can do better than that in terms of volume growth. Because I think it'll come to, I mean, I hope if we do a good job, we'll go beyond low volume growth. From low volume growth to somewhat reasonable volume growth. There will be a high price. I think there will be good gross margin expansion, and there will be medium EBITDA expansion.
This is how I would still say, looking at the cost situation. This can change, of course. If there's a sudden inflation, as you said, if PFAD goes to $1,600 or crude goes to $120, we'll have to come back with a different view. Given where we are, this is the view that I would have. You'll be able to then do the math in where you think we'll end up.
Understood. Thanks a lot, and all the best. That's all from me.
Thank you, Percy.
Thank you. The next question is from the line of Vivek Maheshwari from Jefferies. Please go ahead.
Hi. Good evening, everyone.
Hi, Vivek.
Hi. Two things, Sudhir. One is on the, again, on the India business. You know, I hear you on the category development, and these things will take time, and you have articulated it well, you know, now as well as in December. You know, do you think there is a need to be a bit more aggressive on, let's say, distribution expansion? You know, I recall, I think about seven, eight years back, Unilever in a matter of 12 months tripled its direct distribution reach. Do you think something like that could be done, or do you think, or, you know, given the current portfolio? Because I know the two companies' portfolios are very different.
What is your sense on, you know, let's say, targeting distribution first, which is more, you know, in your control as against, let's say, category development, which takes its own course?
I mean, my answer is outside India, I think there is a lot of scope for numeric distribution. I think our distribution is less than our demand. I think in India, there is scope in targeted ways for distribution increases. In some parts of the country, there is scope for distribution increases. I think the broad story in India is that demand has to come first and distribution next, Vivek. Whereas perhaps outside India in our own business, it's the other way around. With some exceptions, so it's not like there's no big distribution task, but that's my instinct on India.
Does that mean, Sudhir, you know, when we look at your, let's say, rural salience as compared to, you know, some of the other companies, you are quite under-indexed. Does that mean that this portfolio, particularly the HI, is less relevant to rural, which is why you think that, you know, distribution upside? Because I would have thought that distribution upside could have been significant, at least, you know, from a rural salience perspective, given that the starting point for you is far lower than, you know, for some of the other companies. Can you clarify that part?
You know, our soaps business is very well distributed in rural, so we have a pretty good rural salience in our soaps business. Our overall salience is low in HI. It is not that we don't have. I mean, I've traveled now to several parts of India with GCPL, including last week, when I was in rural Tamil Nadu. I find our rural distribution very good for GCPL, especially in soaps. Now the question is in our Household Insecticide product. I think category development involves, you know, driving rural demand for Household Insecticide. If we do that, it will go on the back of our, which is really good.
Which is what I mean in India, that for some of these categories, hair color, HI, and in hair care, we have the distribution network in India are built on the back of soaps. We have to build demand for this, for these three categories, and let them go to where they have to go. Then perhaps you can ask a question on the next round of distribution, Vivek.
I see. Okay. Okay, sure. Second thing, you know, somewhere I know again, the context was different, but somewhere you mentioned that, you know, the input price inflation is similar to, you know, what you had seen probably in 2008. That's a comment that a lot of, you know, a lot of companies have made. You know, either a GCPL- specific India business comment or industry, you know, side comment. When we look at, let's say, 2008 or let's say 2009, India's margins for GCPL at the EBITDA level were down about 500 basis points or so at the EBITDA level, I'm saying. This time around, you know, the margins have been relatively tighter.
When you think about when you say that category development will need investments and trial, and whole host of things, despite which you expect that medium-term EBITDA margins will still moderately go up. This is despite the fact that the starting point is not as bad as it was in 2000 or FY 2019 at that point of time. Can you clarify, is there a possibility of margins first going down and then moving up?
I mean, there's always a possibility, but I would say again, you know, it depends a lot on costs. I would still say, as sitting where we are, we're sitting on relatively low comparator of gross contribution. That is step one. Step two is, we have a very, very aggressive, cost- saving programs, which actually we've implemented this year as well. One of the reasons, despite the kind of gross contribution, dilution we've seen EBITDA margin dilution in India is there's been a terrific cost, controllable cost program, which we will continue going into next year. Thirdly, you know, one of the silver linings is we also expect to see leverage because our industry is, you know, affected by commodities, which are inflating.
We certainly expect our turnover growth to be significantly greater than general inflation, and therefore, we will get leverage. These are the three sources of margins, Vivek, and I'm reasonably confident that we will, with these three sources, be able to invest in the brands and show moderate but not huge EBITDA improvement.
Yeah, I think just to add, Vivek, the point is not just, you know, gross margin expansion, but also this big controllable cost drive. It kind of straddles across, you know, functions like supply chain cost, X, you know, materials, or even, you know, kind of your margins. I mean, purely from a sales system perspective. Non-working media investments also in the overall marketing piece. Of course, what we call as HR, you know, kind of clusters, right? Overall overhead. There is a very strong, you know, kind of plan on that front. We, I mean, believe at this point in time that we should get, I mean, you know, kind of good enough, you know, savings coming in from those controllable costs, which will get redeployed, you know, for investments which in turn should drive growth.
A combination of that plus gross margins recovery should result in moderate EBITDA margin expansion.
Vivek, just to answer your question on distribution, I think, once again, which is, you know, physical and mental reach are equally important. At all points in time, one has to look at where is the bottleneck. I think a lot of the efforts in some of these categories is to first increase mental reach and then distribute. Physical reach will follow. This physical reach is not the only thing that is in our hands. Mental reach is equally important and in our hands.
That's very interesting. Just on the point of margins, I think my only submission will be, you know, a growth which is at the cost of margins is not that bad, given that, you know, all the FMCG companies are sitting on, like, literally like 5% margins. So even if you invest behind A&P spends and get growth, I think the market will view it much more positively than what probably you will fear. Yeah, thank you, and all the best.
We always have in the past, also, right? That if there is a very serious trade-off between, you know, growth and margins, we'll be skewed towards growth and not margins. That remains, you know, very much intact.
Looking forward to that, Sameer. All the very best.
Thanks.
Thank you. The next question is from the line of Alok from Ambit Capital. Please go ahead.
Yeah, hi. Thank you. Good evening. I just wanted to check on the Indonesia business. What could be the risk or threat to your hypothesis of growth resumption? Here again, I'm excluding the macros. I'm excluding the Saniter. Could that be category-led risk, distribution, or any other risk that you can think of while we talk about growth resumption?
Firstly, Indonesia has a salience of about 15% to our business, so we have to look at it in that context, you know, when we're looking at risks going forward. Within that, there's a lot of scope in terms of in Indonesia. There's a lot of scope on physical distribution. I would say that is even more important than mental reach. You know, we've got to increase our physical distribution in Indonesia, which I guess is something we've got to execute and do. We've got to again invest behind our brands, which we probably need to do more of. There's a macroeconomic risk. I'm not saying that we.
You know, we factored this in when we are giving a rough commentary on what's likely to happen in Indonesia, which is we don't see growth for the next few quarters. Can it go worse than that? Perhaps it could, but you'll have to see, you know, how much worse on 15% or 13% of the company is what it is today for us.
Got it. My second and last question is on the, you know, statement when you say about seeing new go-to-market initiatives in Africa and micro-marketing initiatives in personal care. To the latter, I'm assuming still you are looking at distribution expansion or states, you know, further reaching into newer territories within India. But in Africa, is it new geographies or is it new distribution platforms? What exactly is that you're doing? Thank you.
No, I think in Africa, I would say the number one priority is physical distribution. You know, I feel like, we've got a great portfolio in Africa, increasingly of our FMCG products that are doing really well, both in hair and more recently even in Household Insecticide. Our number one priority is to drive physical presence in Africa.
That would be largely in the general trade, I'm assuming. Would that be through wholesalers or distributors? How does that really go?
Yeah, I would say like our number one focus country in Africa is Nigeria. I think general trade through retailing, and building a good, solid retail infrastructure in Nigeria over the next 12 months, would be the big priority in Africa. Yeah, I feel like our FMCG business in Nigeria in particular, and Africa in general, is at a tipping point.
Got it. Thank you very much, and wish you good luck for the next few quarters. Thank you.
Thank you. The next question is from the line of Abhijeet Kundu from Antique Stock Broking Limited. Please go ahead.
Yeah, hi. Thanks for the opportunity. My question was related to India business, where you are saying that in HI as well as in hair colors, you know, category development will be the core job to do going ahead. Now, what we understand is, you know, through our channel checks that there has been, before the category development happens, GCPL has been focusing on discontinuing some of its non-moving SKUs across categories. So would that, and it would, as you had said in December, that you would also focus on bringing down the inventory levels and the whole way of working. So did that have any impact in the current quarter?
If not in the current quarter, will it have some amount of impact on sales in the, you know, in the coming quarters? Yeah, that's my question.
I mean, look, my general experience on inventory and SKU reduction has been like benefits pretty soon. I anticipate that to happen. I feel like we will go behind inventory reduction. I think it'll be a key KPI for us next year. No, I don't expect inventory reduction to lead to a loss in volumes. Obviously, we will be sensible when we cut inventory and not things which are a strong consumer franchise. We will not obviously cut that.
Any view on SKU reduction, and that will really boost the results? Thank you.
I mean, in general, you know, both inventory and SKU reduction, it usually takes up volumes because, you know, the pipelines are clogged, and when you clean the pipeline, what moves fast tends to move faster. So it's generally a good thing to do, sensible about both SKU and inventory. Given that premise, these are both good things to do.
Okay. We'll achieve that. Thanks.
Mr. Kundu, does that answer your question?
Yeah. That's been my question. Thanks. That's it from my side.
Reminder to the participants, anyone who wishes to ask a question may press star and one. The next question is from the line of Shirish Pardeshi from Centrum Capital. Please go ahead.
Yeah. Hi. Good evening, Sameer and Sudhir. Thanks for the opportunity. I have three questions. The first question, I'm harping on what you tried to explain us from the distribution. Would you be able to share our net distribution or weighted distribution for the categories like soaps and HI? And further, if you can break it up, urban and rural. That will give the confidence what is it that we are looking the development.
I don't think we can share our internal distribution numbers. These are relatively easily available, on AC Nielsen, for the categories, so I'm sure you can pick that up from there. I mean, I can tell you that the distribution is very good. It's a strong suit in India. I mean, beyond that, I don't know, Sameer, whether we should be able to.
No, I'm sorry, Shirish Pardeshi. I mean, we can't share this, I mean, from confidentiality perspective, it's not in larger, you know, public domain, right? I mean, the reach, direct, indirect, as well as rural, urban, that too for-
At least, Sameer, you will be able to share how what is the difference between in terms of the larger opportunity we are talking about? I mean, I agree that the Nielsen numbers are not freely available, and we don't have the access to that, so maybe if you can give some more color qualitatively.
Yeah, I think what Sudhir shared, right, earlier. I mean, it's not just physical reach, but also mental reach, right? In soaps, we are well distributed in terms of reach. We just need to, you know, kind of leverage that soap distribution reach for HI and hair colors. Before that, we need to kind of invest in terms of generating the demand, especially in rural or even, you know, kind of with urban poor, you know, consumers. That, that's going to be the approach, right? I think the other piece is not just going to be increase in reach, but also increase in productivity in the outlets in which we reach. That's the other thing which we are going to, you know, work upon in terms of unique lines and, you know, so on, so forth, Shirish.
Okay. Thank you. My second question is on the price.
Mm-hmm.
Would you be able to share how much price increase has gone into in nine months, this year, and the overall weighted inflation which we are having at this point of time?
Yeah. I mean, if you look at the latest price increase, it's there in the update also, Shirish, it's around, you know, kind of, 7%-8%. On a full- year basis, I think our price increase would be, I think, in the single- digits, you know, thereabout.
The inflation, what is it weighted today?
Well, I think it's very choppy, right? You have to kind of bake in, not just, you know, year-on-year replacement rates, but also what's gonna be, you know, kind of, expected, you know, commodity prices over a period of time. It's going to be also dynamic, right? We have called this out that we will be competitive in terms of taking price increase, but we also would kind of keep an eye on, you know, what's happening on the volume front. I think at this point in time, ceteris paribus, we do believe that, you know, our price increases which we've already taken, some of the price increases which will continue in coming, you know, months and quarters, should result in overall, you know, sequentially improving, you know, gross margin.
I think that, you know, kind of guidance, or strategy, at least in the medium term, continues until and unless there is a big, you know, kind of spike up in inflation, especially in palm, even from current levels.
Okay. My last question to Sameer. We have seen these senior management changes in this quarter, and maybe Sudhir can add, is there any further senior management changes required to drive the strategy and the distribution expansion, or is that already implemented, or there is no more departure which will happen?
Hi, this is Nisaba. This is Nisaba here. I think, you know, we do have changes that have happened even before Sudhir came, so I don't think there's any guarantee about, you know, no changes happening. But I think Sudhir, you know, and some of these are obviously even regretted losses, people leaving that we'd rather retain them. But I think Sudhir is very focused on making sure that, you know, we have the best team possible in place. You know, he's quite stated quite publicly also that his preference is to give opportunities to people within GCPL.
I think you might see the one-off people leaving, but there has been, you know, which I think Sudhir touched on, the sort of global category team that's being created, all with people, internally, which is, you know, already doing some really sort of good work, especially preparing for next year. I think to your answer, you know, we will always keep looking to have the best possible team together, and our preference will be for, you know, internal leadership.
Yeah. Thank you, Nisaba. Thanks for the information and all the best to you and the team.
Thank you.
Thank you. The next question is from the line of Ashit Desai from Emkay Global Financial Services. Please go ahead.
Yeah. Thanks for the opportunity. So Sudhir, Sameer, if I look at the domestic staff cost, the nine-month run rate is somewhat similar to what it was in 2018. Any changes or thoughts on how and what the sales incentive structure is? Also from an accounting perspective, the variability we have in staff costs is very different from what most other FMCGs have.
Yeah. Ashit, we have called this out in the past, right? Because we have this-
Yeah.
Variable performance linked variable remuneration, which in turn is driven by business performance. The reason why in the current quarter, as well as, I mean, on a nine-month basis, employee costs are lower, that's purely because of, especially in India, because of the relatively lower, you know, kind of performances. We also moved the metric couple of years ago, what was only EVA to EVA+ , you know, kind of sales. Maybe at the right time we'll also share with you all as to what the, you know, kind of metrics, you know, kind of going ahead. You know, so yeah, I mean, the variability is there, but it's largely driven by the performance link variable remuneration, which in turn is driven by business performance.
Any thoughts from the sales incentive structure? Any changes to that?
What do you mean by sales incentive structure? Do you mean the below the line, or do you mean the incentives we pay to our sales teams?
Incentives to sales teams, sir.
No, I don't think there's any change in thinking there.
Yeah, there's no change. I mean, there's no change over there, Ashit, I mean, on that front. Also, in terms of quantum, it's too small to move the needle either way. Yeah.
I mean, certainly look, strategically, you know, going back to one of the earlier questions, our intention is to, you know, get more value from our FOH. You know, I presented the last time as well that, you know, we are getting people to do bigger jobs and more jobs and so on and so forth. Strategically, this is an area that we will continue, especially in a time of inflation like this. You know, one of the ways in which we will hopefully deliver both, EBITDA and A&P is to squeeze out any non-consumer- facing costs, and that's very much part of the strategy.
Would you say, I mean, the staff costs have been flat, the reason is more to do with the lower performance- linked incentives, or these are larger changes within the organization?
No, no. This is largely, I mean, lower, you know, kind of variable remuneration because of business performance. As we call out, I mean, the overall controllable costs in which, I mean, employee cost is a subset. It's something which will, you know, kind of kickstart from, you know, next financial year, Ashit.
Got it. Thanks. That's it from me. All the best.
Thanks, Ashit.
Thank you. Ladies and gentlemen, we will take that as the last question. I now hand the conference over to Mr. Pratik Dantara for closing comments. Thank you, and over to you, sir.
Thank you everyone for joining. Stay safe, stay healthy. Thank you.
Thank you.
Thank you. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.