Godrej Consumer Products (GCPL) said that the FMCG firm is expecting a weak growth in the fiscal third quarter with sales growth anticipated in mid-single digit for the period. In a regulatory filing, the company highlighted demand headwinds and unsupportive weather conditions impacting growth.
“The demand conditions in India have been subdued for the past few months which is evident in FMCG market growth. Despite the demand conditions, GCPL has over the past six quarters consistently delivered an average organic UVG of ~7 per cent on the back of category development supported by innovations and media investments,” it said in its Q3 business update.
The surge in palm oil and derivatives prices to the extent of 20-30 per cent on-year has impacted the soaps category, which represents approximately 1/3rd of the company’s standalone business revenue. In order to partly offset the cost increases, Godrej Consumer has taken price increases, reduced grammage of key pacs and also reduced various trade schemes. While such pricing actions typically have minimal impact on category consumption, Godrej Consumer maintained, they do result in reduced inventory across wholesale and household pantry. “Historical patterns indicate a normalization in volume growth following price stabilization, which we anticipate occurring in the next few months,” it added.
Godrej Consumer further stated that the weather conditions too have been unsupportive, with delayed winters in the North and cyclone in South India, which, it added, affected the Home Home Insecticides (HI) segment, contributing to around 1/3rd to its standalone business. This has impacted HI category growths in the current quarter, it said.
The rest of the portfolio, the FMCG firm said, is demonstrating robust performance and expected to deliver double digit UVG. However, “given the significant contribution of soaps and HI to the overall business mix, the standalone business is expected to report around flattish UVG and around mid-single digit sales growth in this quarter”.
The Standalone business has historically had normative EBITDA margins in the range of 24-27 per cent. The previous year’s third quarter (Q3 FY24) had delivered exceptional margins of 29.7 per cent, outside of the normative range, driven in part by favorable commodity prices. “The current inflationary environment has created pressure on the margins. The company maintains its commitment to strategic investments in media and other areas like rural van distribution, etc. despite these challenging conditions. However, due to the confluence of factors discussed above, we anticipate a temporary downward breach of the normative margins this quarter,” Godrej Consumer Products said in a statement.
GCPL’s international business
Godrej Consumer Products stated that its international business continued to do well on their relevant strategic initiatives. Indonesia business, it said, is expected to deliver continued superior performance with mid-single digit volume growth and high single digit sales growth. In line with the earlier guidance, the GAUM (Godrej Africa, USA, and Middle East) organic business is expected to see volume decline due to reduction in trade stocks and portfolio simplification. GCPL said, “The effects of these actions would be largely completed in Q3FY25. However, we continue to do well on our profitability journey, and this is likely to be the fourth consecutive quarter of healthy EBITDA margins for GAUM. These are exceptional situations in standalone business that the management believes are transitionary and not structural. Hence the management remains focused on navigating these near-term challenges while maintaining strategic investments for long-term growth as these negative trends are likely to persist for a few months.”
Brokerage view
Meanwhile, an analysis report by JM Financial said, “GCPL’s business update for Q3FY25 points to weaker than expected performance.” While management had called out possible volume impact on soaps in its Q2FY25 concall, unfavourable weather led impact on HI came as a negative surprise. The impact on India EBITDA margins is also likely to be higher than envisaged (temporary downward breach of normative margin range of 24-27 per cent vs earlier commentary of 24-25 per cent margins in near term). Other India businesses and International business performance remains on expected lines. “We cut our FY25-27E earnings by 4-7 per cent to factor in weak (margins) Q3. Q4FY25E will be a key quarter for Soaps (how volumes shape up considering pricing actions & competitive intensity from HUL) and HI (mgmt. hoping to see conclusive results of new molecule based LV from Q4). In our view, current challenges are more transient in nature,” the brokerage firm said.
Other key announcement
The FMCG firm also announced that Vijay Kannan, Head of Business Transformation and Digital, will be leaving the company to relocate to the United Kingdom to be with his family. Further, it added that Rajesh Sethuraman, CEO of Godrej Indonesia, will lead the Business Transformation and Digital agenda in addition to his current role. “Rajesh has significant experience in this area. He has previously led the digital transformation of Unilever’s operations across many markets in core sales and planning operations, from order to cash processes, successfully designing integrated operations, and leveraging technology and partnerships for business success,” it said in another regulatory filing.