Godrej Consumer Products is the second largest FMCG (fast-moving consumer goods) company in India by annual revenue. The last two years saw the company’s performance decline as compared to its peers. A part of this can be attributed to the exit of its erstwhile CEO, Vivek Gambhir in June 2020, who resigned citing personal reasons. For a company with multiple brands and businesses spread across many countries, the absence of a stable leadership and a professional CEO was a setback. The management found a replacement in Sudhir Sitapati, who took over in October 2021 as the CEO and investors are banking on the change of guard to alter its declining fortunes.

Quick Takes

• Brand restructuring with the sale of Bblunt to Honasa Consumer for a consideration of Rs 84.5 crore in February 2022
• Consolidated revenues grew 8% YoY to Rs 3,325 crore in Q3FY22
• EBITDA for India business stands at Rs 476.1 crore in Q3FY22 down 1.53% YoY
• Latin America and SAARC delivered highest growth of 19% in constant currency terms with sales of Rs 198 crore in Q3FY22
• The personal care segment in India grew by 12% in Q3FY22

Performance improving over the last three quarters

Consolidated revenues for Q3FY22 grew 8% YoY to Rs 3,325 crore and net profit grew 5.2% YoY to Rs 527.6 crore. The company increased its product prices in response to the rising raw material costs, which helped the company maintain its higher sequential net profit streak for the third quarter in a row.

The Q3FY22 results saw a sequential rise in the consolidated revenues and profits of the company for the third consecutive quarter. While it operates in several geographies across the globe, each with its own set of challenges, the consolidated numbers point to an overall recovery for the company.

Commenting on the results, Sudhir said that they are on a journey to reduce inventory and wasted cost and deploy this to drive profitable and sustainable volume growth across the portfolio through category development.

While the business is spread across multiple categories across many countries, the India business is the highest revenue contributor with more than 50% in Q3FY22. This is followed by Africa, US and Middle East countries at 22%, while Indonesia contributed to 16% of revenues this quarter.

The YoY sales for respective regions also differ. In Q3FY22, while India business sales grew by 8% YoY, the Africa, US and Middle East business grew by 12% YoY. Latin America and SAARC were the best performing regions with a 19% YoY sales growth. Indonesia was a laggard registering a negative growth of 2% YoY. Apart from India, growth for all other regions is considered in constant currency terms.

In Indonesia, during the first wave of Covid-19 in mid-2020, Saniter, a disinfectant brand was launched. While the brand did very well during the Covid period, too much focus on Saniter came at the expense of the core portfolio. With the pandemic impact waning and increased investment in the core portfolio, the core volumes are starting to grow, but the Saniter base is pulling down overall results. According to the management, Indonesia results will take a few quarters to improve.

The revenue growth in the Africa, US and Middle East business is on account of dry hair and wet hair care products and the encouraging response to Goodknight Power Shots aerosol in Nigeria.

Along with the sales growth in respective geographies, it becomes pertinent to note the EBITDA margins from each of the regions. The India business delivered the highest EBITDA margin of 25.2% in Q3FY22 though lower by 3% as compared to Q3FY21. Similarly the EBITDA margins also reduced in the Indonesia business to 21.2% from 25.3% in Q3FY21. The margins nominally improved in the Africa, US and Middle East as well as LatAm and SAARC regions.

The India business not only contributes highest to Godrej Consumer’s revenues, it also earns the highest in terms of operating margin. LatAM and SAARC earn the lower margin for the company.

Coming to the categories that make up the total product suite for the India business, household insecticides and hair colour are the dominant categories with 39.5% and 31.9% respectively. Soaps follow with a significant contribution of 13.4% of the sales.

In Q3FY22, the overall home care category (household insecticides, room fresheners and fabric conditioners) grew 4% YoY with sales of Rs 908 crore. In household insecticides, a new product, Jumbo Fast Card was received well by customers. The company plans to leverage digital channels in order to further penetrate these categories.

In the personal care category (soaps, handwash, sanitisers and hair colour) soaps and hand wash continued to deliver double digit growth, thanks to the change in customer habits of frequently washing hands since the outbreak of the pandemic. Hair colour did not grow at the same pace as soaps but the management expects to improve this with new product launches. 

Among the issues identified in the India business, are the large number of SKUs. While the total SKU count is around 500, each store keeps only 12. The management intends to reduce these over time. Inflation of key raw materials, crude oil, palm oil and tin is another factor that will continue to be an issue over the next few quarters.

Maintaining its runner up position in the FMCG sector

Over the last two years, most FMCG players have seen a two-year net profit CAGR growth of more than 25% and Godrej Consumer products lags here with a two-year net profit CAGR growth of 18.5%. Hindustan Unilever continues to be the undisputed leader of the sector with more than 3X sales of its next competitor, Godrej Consumer Products. However, the Q3FY22 results see Godrej Consumer emerge with YoY revenue and profit growth metrics that are better than most other competitors.

In the fiercely competitive FMCG sector, Q3FY22 results saw Marico and Procter and Gamble delivering negative YOY growth on profitability. Dabur’s profitability grew nominally by 2.3% YoY, and Godrej Consumer Products was the runner up with a 5.1% YoY profitability growth. Hindustan Unilever led the pack with 18.6% YoY growth in profitability.

The YoY rise in both revenue and profitability can be attributed to hike in prices, in response to the raw materials and logistic costs. Price plays an important role in the FMCG sector and price wars are frequently seen across categories by rivals. Godrej Consumer Products has stayed ahead of the pack, in this quarter despite hiking prices of its products. Though volumes for categories like soap and hair colour were flat, the hike in prices added to the margins.

The path ahead - Roadmap set by new leadership

Investor expectations from the new CEO can be judged from the fact that merely on the announcement of his appointment in May 2021, the stock price gained 10%. Expectations are also high as he was earlier part of the leadership team at the FMCG leader Hindustan Unilever. What has made his task slightly easier is that the company started showing signs of revival two quarters prior to his taking charge.

Immediately after taking over, during a strategy meet in December 2021, Sudhir spelled out the direction and broad goals for the company. He emphasised that the company will continue to focus on three existing categories - Household Insecticides, Air Care, and Hair Colours - in both domestic as well as international markets for growth, as it believes there is "plenty of opportunity" in these areas. The company as per its retail strategy would remain channel-agnostic and follow the consumer first policy and be present whether online or offline, wherever shoppers shop.

Another key highlight was the identification of the high complexity of multiple SKUs leading to a lack of focus on the core business. Its inventory is 1.7x higher than ideal levels and hence SKU reduction would be a key focus area. A step in this direction was the sale of BBlunt brand to Honasa Consumer Pvt Ltd for Rs 84.5 crore in February 2022. Honasa Consumer is the owner of the Mamaearth brand of consumer products.

Post Q3FY22 results, Sudhir in a press release said that as the next year progresses, he expects volume growth to gradually recover but the EBITDA journey and the margin journey to go up continuously. For investors with an eye on the FMCG sector, Godrej Consumer Products is one to watch out for, particularly if new leadership is able to drive the FMCG behemoth towards narrowing the gap with the market leader.