Godrej Consumer Products Ltd. Earnings Call Insights: Hair Colour Creme and Darling Business

Godrej Consumer Products Ltd. (532424) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Hair Colour Creme

Abneesh Roy – Edelweiss: My first question is on the India business hair colour, 32% sales growth, if you could explain how much you are getting away — gaining share from the MNCs and are you also seeing some cannibalization or maybe upgrading from our own powder segment?

Adi Godrej – Chairman: I don’t think there is much upgradings on the powder sector, of course there will be some, but our new Hair Colour creme in sachets has done exceedingly well, we have grown in other segments also. However, it’s difficult to tell how much share we are gaining from the multinationals, because AC Nielsen data does not to our mind project entirely the total position in the industry, but clearly others are not growing as fast as we are. So, we expect we have gained considerably in shares. Vivek, you want to add any?

Vivek Gambhir – Managing Director, Godrej Consumer Products Limited: Yes, I think, Abneesh, at a rough directional level, our guess is that about a third of the growth has come from upgrading, about a quarter of the growth has come from share gains and the remainder has come from new users coming into the segment. So the largest driver has been penetration gains with new users coming in, the rest of the combination of both share gains and upgrading.

Abneesh Roy – Edelweiss: Sir, my second question is on the Africa business, what we are seeing is a diversion in consumer trends. South Africa, we are seeing some level of down trading. Nigeria, we are on the other hand saying up trading. Then we have Kinky issue also. Sir, my question is, when we are seeing such diversion in trends and Kinky is also facing consolidation and pressure on profits. Why are you so aggressive on launching new products and if you could give some clarity on why you expect Q4 Kinky should turnaround and why the problems are there?

Adi Godrej – Chairman: First of all Africa us a very rapidly growing market. We see tremendous opportunities in Africa. Despite the problems (indiscernible) and the general global economy, our Africa business is very accretive, and we think there is tremendous possibilities of further growth in Africa, but I’ll ask Vivek also to add.

Vivek Gambhir – Managing Director, Godrej Consumer Products Limited: I’ll add, Abneesh, and I will answer it a little bit more in detail. If you look at the ethnic hair colour in Africa, in Sub Saharan Africa, it’s about $2.5 billion ethnic Hair Care market, that market is about 55% dry hair, which is largely where Darling has played in the past and 45% wet hair. Wet hair has a mixture of relaxers, head nourishment and styling products. So our foray in launching these products in Kenya has been to participate more in the wet hair part of the market, which we believe is equally attractive. On I think the business in Kinky, clearly the performance of the business has not been satisfactory over the last few quarters and because I think there had been a number of initiatives that we have launched to close underperforming stores, there is a new leader for that business that’s on board. So we feel hopeful that over the next few quarters you will see the business getting turned around.

Omar Momin – EVP-Mergers & Acquisitions and Business Development, GCPL: This is Omar. I think two points to the first part of your question. Firstly, this industry is influenced a lot by fashion trends. So, it’s currently seeing the trend towards the product class, which is great and that’s the reason why you are seeing a down-trading in South Africa. But on an overall level, the way we drive innovation is through the introduction of new styles and these new styles are across all product categories and these new styles lead to create premiumization independent of which product category is currently in style. On the launch of new products in the wet space, it involves almost no incremental investment, because these will all be branded Darling. So the way we invest in the platform brand, we’re trying to maximize the infrastructure we have in Kenya to carry a lot more product categories through the same infrastructure and we will therefore see immediate financial results from that is it is not acquiring any additional investment.

Abneesh Roy – Edelweiss: Last question on the Indonesia business, if you could tell us in Q2 itself we’ll have the margins largely back to the normative levels and on the Mitu brand, if you could tell us how you are seeing the growth for the full year?

Adi Godrej – Chairman: See the margins in Indonesia won’t come back to the old levels, because for one year we have to distribute the food products without any contribution. We don’t lose any money, but we don’t make any money. So it comes in the top line, it does not come in the bottom line, so therefore the margins will remain low, but that doesn’t affect the overall profit for the business.

Unidentified Company Speaker: Abneesh, even if you take contract manifest the distribution part out, I think for the remainder of the business also I think we will see margin improvement next quarter, but I think the entire price hikes impact will take a couple of quarters. So while you could see some benefits in Q2, realistically you will see more benefits in Q3 as well.

Adi Godrej – Chairman: But we also feel that in Indonesia the margins are affected because of the very strong minimum wage hike in the country, which would also lead to better demand. So we expect sales growth will show itself in the next couple of quarters.

Unidentified Company Speaker: On Mitu, I think the team has done a lot of work to look at a relaunch to Mitu that will happen later on this year having said that the competitive intensity in Mitu still remains quite high in the country.

Darling Business

Abhijeet Kundu – Antique Stock Broking: Good set of strong sales growth across the board. My question was primarily firstly on your Darling business, where you have got impacted by the depreciation of Africa versus U.S. dollar. So what amount of raw material is sourced? Within Darling, what amount of raw materials was (imported)?

Omar Momin – EVP-Mergers & Acquisitions and Business Development, GCPL: For the entire category, the raw material is largely sourced from Dubai and it is denominated in U.S. dollars. So you are seeing this cost increase in terms of local currency terms right across the category. For the industry itself, about 50% to 60% of raw materials would be sourced from the (parties) in dollar.

Abhijeet Kundu – Antique Stock Broking: In case of LatAm operations, your current EBITDA margins are at about 3%?

Sameer Shah – IR: Yes.

Abhijeet Kundu – Antique Stock Broking: Which has seen an expansion of 540 bps. I believe in this you have not included that one-time exceptional cost which was there last year. Is that true?

Sameer Shah – IR: This is Sameer. Here, if you look at base quarter, the LatAm margins were 3 percentage after adding back INR6 crores of severance cost. If you strip out the severance cost, the margins were minus 3 percentage. Even in quarter one of FY’14, we did have severance cost and decided to give a comparison versus reported margins basis which the improvement in margins is around 550 basis points. Lastly, it happens to be traditionally the weakest margin quarter in Argentina for us…

Abhijeet Kundu – Antique Stock Broking: So on a sustainable basis, what would be the kind of EBITDA margin that you will be looking at? 6%, 7%?

Sameer Shah – IR: We would not like to get into a guidance on this front, but if you look at the trend of last two years, the quarterly margins have moved upwards on a full year basis quarter-over-quarter.

Abhijeet Kundu – Antique Stock Broking: In case of your U.K. operations, you have seen impact on margins, primarily due to the marketing expenses?

Sameer Shah – IR: Yes.

Abhijeet Kundu – Antique Stock Broking: (So on a – clear) to the margins to get to normative levels, you’re saying that your volumes have to pick up right?

Sameer Shah – IR: Well, I think the sales growth momentum is pretty strong. Even it is about Soft & Gentle, the organic sales growth has been very strong. What we are also doing parallelly is investing in building brands which will further drive the sales growth.