Low ad spend, cost cuts push Godrej Consumer's net up 20%

The consolidated net sales of Godrej Consumer grew 5% to Rs 2,047.51 crore against Rs 1,957.38 crore a year ago

The consumer arm of the Rs 13,500-crore Godrej Group reported a 20 per cent growth in consolidated net profit for the three months ended September 2014 to Rs 234.53 crore versus Rs 194.97 crore a year ago. Consolidated net sales of Godrej Consumer (GCPL) grew 5 per cent to Rs 2,047.51 crore versus Rs 1957.38 crore a year ago. This was marginally lower than the Bloomberg consensus estimates of Rs 2,182 crore. However, the company clearly did better on the net profit front with the Bloomberg consensus estimates pegged at Rs 229 crore.

Contributing factors were lower ad spends, which as a percentage of sales was 350 basis points lower than the 13 per cent number reported in the June quarter. Precisely, ad spends was 9.5 per cent of sales in the September quarter, which GCPL MD Vivek Gambhir said would increase in the coming quarters.

Total expenditure of Rs 1,741.25 crore in the September quarter grew 3 per cent over last year (Rs1686.05) and 4 per cent over the June quarter (Rs 1,668.91 crore), which the company said was a result of a cost savings programme called Project PI that it had introduced a few months ago. "The project is about profit improvement where we are looking at each line cost and seeing how we can become efficient," Gambhir said.

Thanks to these savings, operating profit grew 18 per cent in the second quarter, higher than the 5.5 per cent reported in the June quarter.

On the sales front, the company attributed its weak performance in the September quarter to the challenging environment around. "While sequentially the overall home and personal care category growth has improved, challenges still remain. The sentiment pick-up has to translate into sales growth. Having said that, the sector is seeing the first signs of recovery and we see this getting better in the second half of the year," Gambhir said.

Specifically, GCPL was aided by its soaps and hair colour portfolios, whose sales growth for the quarter was 13 per cent and nine per cent respectively. Household insecticides disappointed with a two per cent sales growth, which was nine per cent in the June quarter. Hair colour, on the other hand, grew 14 per cent in the June quarter. GCPL derives 45 per cent and close to 20 per cent of its domestic revenues from household insecticides and hair colour respectively.

Gambhir said that the company poor show in household insecticides was on account of the deficient rainfall in the north and central parts of India.Typically, household insecticide sales pick up during the monsoon season thanks to increased mosquito and pest activity.

But the surprise package was clearly soaps, which is the second-biggest category for GCPL, contributing 35 per cent of its domestic revenues. The 13 per cent growth in soaps was completely price-led, but was way ahead of the two per cent value growth that the company saw in the June quarter. "Volume growth continues to be negative for the category, but if you look at the numbers sequentially then the deceleration has come down substantially. About 6-7 months, the degrowth on the volume front was sharper at about 7-8 per cent, now it is about 2-3 per cent," Gambhir said.

Soaps growth was led by its key brand Godrej No. 1, which saw greater sales traction in the second quarter led new media focus. The company is also expected to pass on the gains of benign commodity costs (notably in palm oil, a key soap input) to consumers in the coming quarters. The company is also expected to ramp up distribution of products such as Expert creme hair colour into smaller towns and cities as it eyes greater growth. Expert also gives GCPL 30 per cent of its hair colour sales, which the company is looking to grow.