Godrej Consumer Products’ results echo the domestic volume growth story


Mass consumption seems to be on the revival path. On Wednesday, Godrej Consumer Products Ltd announced 10% domestic volume growth—joining its peers in the packaged consumer goods market—that surprised the Street. In recent weeks, Marico Ltd and Dabur India Ltd reported better-than-expected market growth, while Hindustan Unilever Ltd saw more modest but nevertheless decent volume growth.

Management commentary from these companies has been positive about growth recovering in subsequent quarters. Some big companies, such as Colgate-Palmolive (India) Ltd did not do well though.

One shared problem is that sales growth in the eastern states and rural markets has suffered after the GST (goods and services tax) roll-out, due to their reliance on the wholesale trade channel. This channel’s throughput has been hit as it struggles to function in a fully tax-compliant environment.

This has also meant that growth has not been uniform across categories for companies. Godrej Consumer Products, for example, saw soaps contributing significantly to growth. Soap sales rose by 26% in value terms, compared to overall sales growth of 11%, with volumes leading growth. Soap sales also benefited from a low base, as sales declined by 10% in the year-ago quarter.

The management said it is seeing early signals of smaller soap marketers ceding space to their bigger rivals, but also cautioned that it’s early to say if this will sustain.

While soaps did well, the household insecticides business saw slower growth, partly due to a high base but also because sales of mosquito coils were affected because of GST-related after-effects. This may continue, but the company wants to focus more on modern repellent formats where margins are higher. In hair colours too, sales were partly affected by the wholesale channel problem. Godrej Consumer Products is hoping to revive growth through new initiatives. How it does in these two segments needs to be watched as they collectively contribute to two-fifths of domestic sales.

In the international market, sales grew by 9% in constant currency terms, lower than the June quarter’s 11%. But sequentially, Ebitda margins improved in key markets such as Africa and Latin America. Ebitda stands for earnings before interest, tax, depreciation and amortization.

The company has given comparable (year-ago figures differ due to GST) Ebitda margins, which shows an increase of 180 basis points. It said that net profit grew by 14% and margin also improved by 90 basis points on a comparable basis. A basis point is 0.01%.

Now, Godrej Consumer Products’ profit numbers were not as much of a surprise. But if the revival in volume growth sustains, and especially if it spreads to other categories, then profit growth could step up in the second half. That explains why its shares were up by 3.5% on Wednesday, although it already trades at a price-to-earnings multiple of 45 times its FY18 earnings and 38 times its FY19 earnings, based on estimates of earnings compiled by Reuters.

The risk to the Street’s cheery reaction (and outlook) is if the other two categories continue to underwhelm.