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Edited Transcript of GODREJCP.NSE earnings conference call or presentation 6-Nov-19 9:00am GMT

Q2 2020 Godrej Consumer Products Ltd Earnings Call

Mumbai Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Godrej Consumer Products Ltd earnings conference call or presentation Wednesday, November 6, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Nisaba Adi Godrej

Godrej Consumer Products Limited - Executive Chairperson

* Pratik Dantara;Associate VP, Mergers & Acquisitions

* Sameer Shah

Godrej Consumer Products Limited - CFO of India & SAARC and Head IR

* V. Srinivasan

Godrej Consumer Products Limited - CFO, Compliance Officer & Company Secretary

* Vivek Gambhir

Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director

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Conference Call Participants

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* Abneesh Roy

Edelweiss Securities Ltd., Research Division - SVP

* Amit Sinha

Macquarie Research - Analyst

* Arnab Mitra

Crédit Suisse AG, Research Division - Research Analyst

* Ashit Desai

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Harit Kapoor

Investec Bank plc, Research Division - Analyst

* Kaustubh Pawaskar

Sharekhan Limited, Research Division - Senior Research Analyst

* Kunal Vora

BNP Paribas, Research Division - Analyst

* Nillai Shah

Morgan Stanley, Research Division - Equity Analyst

* Percy Panthaki

IIFL Research - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Godrej Consumer Products Q2 FY '20 Earnings Conference Call hosted by Emkay Global Financial Services. (Operator Instructions) Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Ashit Desai of Emkay Global. Thank you, and over to you, sir.

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Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [2]

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Yes. Thanks, Anish. Good afternoon, everyone. We'd like to welcome the senior management team of Godrej Consumer Products and thank them for giving us this opportunity.

Now handing over to Pratik for initial introduction followed by opening remarks from the (inaudible) team.

Over to you, sir.

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Pratik Dantara;Associate VP, Mergers & Acquisitions, [3]

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Thanks, Ashit. Good afternoon, everyone. Thanks for joining us today to discuss the quarterly performance. We have with us Nisa Godrej, Executive Chairman; Vivek Gambhir, Managing Director and CEO; V. Srinivasan, CFO and Company Secretary; and Sameer Shah, Head of Finance, India and SAARC Investor Relations.

We'll now have Vivek share his thoughts on our performance and then we can open up the call to Q&A.

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [4]

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Good afternoon, everyone. It's great to be talking with you. I'll share a few highlights of our performance and then we will be very happy to answer your questions and take your feedback.

It was a relatively mixed quarter for us, though there are a lots of positives that we can take away in terms of the outlook for the next 2 quarters.

In terms of what worked well for us, our volume growth in India was strong. We delivered the highest volume growth in the last 5 quarters in our India business. What was also encouraging was that the volume growth was broad-based across categories.

The second highlight was a continued strong performance in Indonesia on both top line and bottom line with a 13% constant currency sales growth.

The third encouraging part of our performance in this quarter was the recovery in our insecticides business. As you know, that business has been facing some challenges over the last 2 quarters, but it was very encouraging to see a recovery in performance and more importantly, our optimism that this recovery should only accelerate over the quarters ahead.

The fourth highlight that we were pleased about was our profitability improvement in Africa. I think that journey has started and will only improve in the quarters ahead. And overall, we've been pleased with the expansion that we've seen in gross margins and EBITDA margins across the board.

What could have gone better for us, I think, a lower sales value growth in India. It was a bit of a conscious call to drive volume growth, but certainly, we will look to see how we can improve on our value growth in India going forward. The sales challenges in Africa, hopefully the worst is behind us as far as Africa sales is concerned, and you will see better performance in Africa sales going forward as well.

The third was a relatively soft performance in Hair Colours in India, largely because of a high base. But there are also corrective actions that we've taken to be able to get a growth start strongly in Hair Colours. So overall, a mixed quarter in terms of lots of positives to take away, but also some areas where we need to execute better.

As far as going forward is concerned, we are hoping for a gradual recovery in FMCG in India across both rural and urban, and our efforts will be -- is to improve on the volume growth momentum that we've seen over the last couple of quarters. Quarter 1, as you know, our volume growth was 5%, last quarter it was 7%. Our intent will be to actually further improve on this volume growth momentum in India.

The second will be intensifying our trust on innovation. There is a slew of products that are being launched, which are very disruptive starting with Good Knight Gold Flash, which is probably the biggest innovation in the LV category over the last decade or so. A very disruptive launch that is being scaled up.

The second is continuing momentum on our launch in incense sticks and Expert shampoo hair color. The initial momentum on all of these is quite encouraging. And the fourth launch to get excited about is the refresh of Godrej Expert Crème to be able to address some of the challenges that we faced over the last quarter or so.

Beyond these 4 major launches, there are lots of other launches that are in an experimental stage, some of them are e-commerce launches, some of them are modern trade launches. So across the board, you will see a continuing thrust on innovations from us.

The third from an outlook perspective is Indonesia, where we are hoping to sustain both the strong top line and bottom line trajectory, that you've seen in the first half of the year.

On Africa, the focus will be to improve the top line, while building on the profit improvement that we saw in the last quarter. And finally, you will continue to see profit improvements as far as Latin America is concerned.

So those are the quick highlights from -- of our performance. I'll quickly walk you through some of the key slides in the presentation and then we will be happy to answer any questions that you have.

On Slide 3, we just have listed our financial performance key highlights in terms of 3% constant currency comparable sales growth at the consolidated level and 9% growth in EBITDA at a comparable level. In India, the net sales growth was lower at 1%, but margin expansion and in international, it was 7% constant currency comparable growth rate with a healthy 30% increase in constant currency EBITDA basis.

Slide 4 just lists our exceptional one-off items. Nothing to report here, but we can answer any questions you have about this later on.

On Slide 5, we show the bridge between reported and operating EBITDA margin. Again, not much to report here and as you can see here, the reported EBITDA margin for India and Indonesia continues to be very healthy and has improved significantly and the journey has started to further improve the margins as far as the Africa cluster is concerned.

On Slide 6, you can see our key balance sheet data. On all the areas, whether it is in net debt-to-equity ratio, a return on capital employed, operating return on capital employed, all the ratios are trending in the right direction, and we are hoping to further build on those in the quarters ahead.

Now turning to a quick overview of our various businesses starting with India on Slide 8. As I mentioned, it was a strong 7% volume growth, and we've seen a sequential pickup in volume every quarter for the last few quarters. So every quarter you're seeing an improvement as far as volume growth is concerned.

The growth was led by new product launches, strong marketing campaigns and consumer offers. In terms of EBITDA, we have continued to expand our EBITDA margin by about 40 basis points year-on-year.

On Slide 9, we detail our [robust volume growth] across all the various categories. The good news is that across the board as far as volumes are concerned, we've seen a very balanced growth across all the various categories.

Starting with our category reviews on soaps. Our soaps delivered a mid- to single-digit volume growth, a strong volume growth, and we continue to gain market share. There are lots of micro-marketing initiatives with -- specific [ST] has been launched with specific markets. And so the momentum in soaps continues in spite of a challenging environment in the category.

In insecticides, on Slide 11, you're beginning to see a recovery with sales growth of 4%. Some of the price offs in Liquid Vaporizers have been driving our growth, and we are seeing good market share gains in the HI category. On the insecticides front, what we've been seeing is that some of the illegal incense sticks have been plateauing at the 11% to 12% mark over the last few months and a lot of actions are being taken at the Industry Association level to be able to safeguard consumer interests. Our own naturals agarbatti is also scaling up well. We've also recently launched our Good Knight Gold Flash, which is a very disruptive innovative next-generation LV.

We are starting with the South first and as the season picks up, we will scale this up in other markets of India as well. We have also launched the HIT mosquito racquet in e-commerce and a HIT rat glue pad in select markets. This is part of our journey to continue to expand our presence and play in the broader pest control category.

In Hair Colours, the performance was relatively softer on the back of a high base and a bit of a slowdown that we saw in discretionary category, and a somewhat weaker performance in Godrej Expert Rich Crème. As a result of that, we are relaunching Export Crème hair color across markets with a new proposition.

Our Godrej Expert shampoo hair color in the southern space has been scaling up well, and we are now taking it nationally across other markets in India. And we've also launched Godrej Anoop Ayurvedic anti-hairfall oil on e-commerce as an experiment to see how this does and then depending on the success of that, we will scale it up further.

We also are taking strong actions on the e-commerce business. Our e-commerce business continues to grow very strongly and, along with that, we've also launched our direct-to-consumer websites for Godrej aer and Cinthol. You will see further category launches in the quarters ahead. That's the quick overview of our India business.

Turning to international. As I mentioned, it was a mixed performance with about a 4% growth in sales, but a healthy expansion in EBITDA -- EBITDA growth.

So if you turn to Indonesia, which is on Slide 18, Indonesia delivered a 13% growth in constant currency terms. The growth was, again, very broad-based across insecticides, air fresheners and baby wipes. We've continued to gain market share market in insecticides. A lot of the work on expanding our distribution footprint to Project RISE and having a stronger presence in GT is working very well, and our EBITDA margins have continued to remain healthy with the expansion led by strong growth margin and a prudent management of costs.

In the Africa cluster, the performance was mixed with strong growth and profitability, but some challenges that we experienced on the sales side. South Africa and the Rest of Africa cluster have performed very well. We saw a temporary slowdown as far as our West Africa cluster was concerned largely on the basis of a slowdown in the overall macroeconomic environment. In terms of share, our share gains continue across the board, particularly in Nigeria and Kenya for dry hair. The scale-up of our wet hair business continues and we'll see further momentum going ahead. As I mentioned earlier, the outlook for us is to be able to improve our top line, while being able to also sustain the profitability improvement that had -- we saw in the last year -- our last quarter.

So that is a quick snapshot of our overall business. As I mentioned earlier, our expectation is to ride on the gradual recovery that we have seen in India and improve our volume growth momentum. But faster innovations will continue across the board, both in India and across all our markets. In Indonesia, we are looking toward sustaining both the top line and bottom line trajectory. And in Africa, we're working towards improving the top line, while building on the profit improvement.

We will be very happy to now answer your questions and take any feedback that you have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take the first question from the line of Alok Shah from Edelweiss.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [2]

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This is Abneesh here. Congrats on a good recovery in the India trade business. My first question is related to HI. So first is illegal agarbatti have been stagnant for the last 8 months. So what is the key reason here, is it the agarbatti launch by the legal players? Or is it the consumer ads because I think consumer ads have been happening for a fairly long time, right?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [3]

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I think it's a combination of 2 or 3 things, Abneesh. One is, I think, some of the actions that the Association has taken in terms of factory rates also are educating wholesalers and consumers largely through -- about the challenges with this particular category. I think in some ways that is beginning to show some impact. As you know, these things take some time before we can work with the governments to be able to launch these actions.

The actions will get further intensified because the Association is now launching an ad in movie theaters and also in news channels, initially starting with Andhra Pradesh and Maharashtra. So that bolster advertising on television and in theaters will also hopefully further build on pushing back the impact of these incense sticks. That's one.

Second is as you were mentioning, I think a couple of players are -- one new player have also launched incense sticks. To a certain degree, I think that's also now beginning to -- beginning to show an impact. We initially started in Andhra Pradesh, but they've now scaled this across the 6 to 8 most important states as well.

And then the third of all, you know typically as you see is that each format has a certain amount of relevance in the consumer's life, and so when you see an initial amount of adoption, after the initial adoption, I think some of the formats do reach a natural state as far as a certain [salience] is concerned and that's the natural thing that we are also seeing in this category as well.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [4]

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On the new launch, which happened recently on the Gold Flash. So my question is it has got visible flash vapors, so can that be a concern because consumers may feel that this is too much of portent and now, in North India, we are seeing anywhere all this pollution-related issue. So is that a consumer behavior which has also can affect -- some pushback can happen because of this?

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Nisaba Adi Godrej, Godrej Consumer Products Limited - Executive Chairperson [5]

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This is Nisa. So as you know, our learning has always been with LV, but LV was loved for 2 reasons, correct? One that there is no burning going on, so there's nothing that can catch fire, you can knock a coil down and stop. So very safe from that the way. Very safe from a health perspective as we sort of know and also this continuous protection, correct? But the other thing that we know from various sort of sources, including the amount of viewers' usage that goes on in the category, the growth of incense sticks, which are very highly dosed with all sorts of illegal pesticides, is their efficacy is also very important. So when it comes to these visible vapors, vapors are visible because what we figured out and as we -- the dosage that's coming from the LV over the full night is the same as it would have come in the past. But mosquitoes get really knocked down or really pushed out if you can blast for the little while and then come back to normal. We have not technically been able to figure out how to do that in an LV before. This is a project that we've been working on for a long time. I think some of the heating technologies, some of the plastic policy (inaudible) with vendors from Germany and America. So we've cracked this.

So from a consumer perspective, the vapors are very, very light, correct? It's very, very light. So if you put it on, I mean -- there's no white background, you do really have to look at it. But consumers really appreciate it, saying that it's not just the smell, but we can see something during this flash time and they're also saying we're seeing mosquitoes knocked down, which we didn't really in other vapors. So the trick really is you always that every 4 hours, you do this blast, and that really takes up the efficacy.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [6]

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I've one more follow-up on HI. So on the anti-mosquito racket, so the pricing is much more expensive than the [unorganized]. And second, currently, your product is available only on e-commerce. So obviously, the bigger market is in the physical distribution. So there, I see that you need new distribution because the shops which sell these rackets are the stationery kind of shops. So are you planning a physical distribution also in this product?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [7]

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Yes, I think, Abneesh, what we will do is initially launch it in modern trade. Depending on how modern trade does, certainly, the next phase could be in premium general trade and some other outlets. So I think we've been quite happy with the initial success that we have seen and certainly the plan is to be able to scale this up across other channels as well.

With regards to your question around pricing, this is a product with a much longer warranty, and it's a much superior product versus some of the unbranded private labels that you would see. And our hope is that with the kind of trust and equity HIT commands, we should be able to sustain this kind of a pricing at this more premium level.

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Pratik Dantara;Associate VP, Mergers & Acquisitions, [8]

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And just to add Abneesh, the effect of pricing on e-comm at this point is around 399, which is like 25, 30 percentage higher than other (inaudible) guarantee (inaudible)

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [9]

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It's a much more superior product, Abneesh.

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Abneesh Roy, Edelweiss Securities Ltd., Research Division - SVP [10]

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Okay. My second and last question is on the haircare. So here 2 sub-questions. One is the shampoo hair color, now pan-India, you're taking it. Can there be cannibalization given this is a INR 25 versus INR 30 for the crème sachet? And second on the anti-hairfall oil, you want to relaunch this in a quarter wherein hair oil has seen one of the slowest growth. So what is the thought process behind relaunching the hair oil?

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Nisaba Adi Godrej, Godrej Consumer Products Limited - Executive Chairperson [11]

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So I think the hair oil is that we're not really a big oil player, but we have this very potent formula that we have sort of had in our portfolio for the long time, but we weren't really doing anything with it. We see on -- and I think there's category growth, but there's also channel growth in terms of what we're seeing happen in modern trade and on e-commerce. So right now, this hair oil launch is just with the premium oil, is a launch on e-commerce because we think there's a big opportunity there for something like this. If it does well there, we will take it to other channels.

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [12]

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I think with this (inaudible) shampoo Hair Colours, to begin with, Abneesh, there's a differential pricing, which we have in states in India. So southern markets, the pricing is INR 25, where crème [salience] overall is relatively lower; in the rest of the country, the pricing is INR 29, which, I mean compares quite close to INR 30 price point for the crème.

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Unidentified Company Representative, [13]

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And you've seen this also if you look at penetration rates for crème, it's about a 13% penetrated category today, Abneesh. So there's tremendous opportunities to upgrade powder users to other formats, which are more value added. So some will gravitate more towards our shampoo hair color, some will gravitate more towards crème. The propositions are quite different, but given the headroom for growth, I think there's plenty of opportunity for multiple formats to thrive.

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Pratik Dantara;Associate VP, Mergers & Acquisitions, [14]

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And also as far as the potential frequency of purchasing shampoo hair colors would be far superior as compared to crème hair colors.

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Nisaba Adi Godrej, Godrej Consumer Products Limited - Executive Chairperson [15]

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There's different usage pattern between the 2 products.

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Operator [16]

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Next question is from the line of Sameer Gupta from India Infoline.

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Percy Panthaki, IIFL Research - VP [17]

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Sir, Percy here. I have a few questions on the Gold Flash product. So firstly, if I see the composition label, let's say, is 1.6% translucent. So is it -- I mean on the face of it, it looks -- the chemical composition the same as Goodknight Activ+. So is there any difference at all in the chemical composition or not? That's question one.

Question two, this is -- I understand the way it works is that there is something different in the refill and something different in the machine. So the machine has a higher heating capability, and a refill has a different type of coil, which is more absorbent, so it, therefore, pulls more liquid, which can, therefore, be heated by the machine and disperse faster. Now if someone uses the new refill in an old machine, the effectivity will be lower because you're getting the benefits of the new wick, but not the benefits of the new heating system.

So just wanted to know to what extent the efficacy will be lesser? Will it be lesser by 20%, 50%, 80% by how much?

And thirdly, you haven't mentioned the number of nights that this will give which you usually, mention. So what is the reason for that and since this is giving out a burst, is there a chance that the number of nights will be lower?

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Nisaba Adi Godrej, Godrej Consumer Products Limited - Executive Chairperson [18]

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Okay. Thanks, Percy. If you want to join our R&D department you're welcome. He's summarized it quite well. So you are right that we have actually not changed the refill, the chemical composition (inaudible) in the refill. I think you must remember that LV works as a system between the machine and the refill. So there's a lot that we can do between that.

So as I mentioned when I answered the earlier question, the trick that we were trying to get, which we in our work in mosquitoes and how in aerosol or a fast card or an incense stick works, is that they're not continuous, correct? So they're -- you're not spraying it continuously or the burning of fast cards just for 3 minutes. But what it does is it gives you the initial blast. So basically say you if you had 10 units in an LV and you're giving out 1 unit every half an hour. This is not -- I'm not giving you actually exact numbers. You were giving out 1 every half an hour, what we're saying give out 4 in half an hour and then give 0.5, 0.5, 0.5 and then give out 4 because actually what gets knocked down and efficacy to happen with -- and because you've done so much knockdown, the 1 going to 0.5 in the rest of the time works really well. So that's not the exact formula there, it's a formula which I don't want to be really exact about on this call. So that's how that really works.

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Percy Panthaki, IIFL Research - VP [19]

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But does it still work for 60 nights?

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Nisaba Adi Godrej, Godrej Consumer Products Limited - Executive Chairperson [20]

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Yes, so this will -- the longevity is the same as the earlier one, correct? Because it's higher at one point and then lower at the other points. I really -- and we'd love to have your feedback, please do use the product because we really feel that from an efficacy point of view, this is quite a sort of breakthrough, but I think the proof in the pudding is people using it and obviously, it's doing well.

I think your second question was about the refill and the machine. I think one of the things even with advanced -- our earlier machines is that we used to have this lock system, which eventually people sort of broke. I think here we have a few advantages. One is that we are patenting -- in the process of patenting this system. So people will not be able to copy their refills and put it in here. I think therefore this system is quite hard to copy the sort of technology, but there's a patent.

In the Gold Flash machine, only our refill fits in as of now. Another refill per se wouldn't fit in, but even if you fitted in an ordinary refill it wouldn't flash because it's the heating system with this special wick that needs to work together. In the same way, the flash refill can fit into other refills, but it would just give you the normal efficacy that you got from, say, our Activ+ refills, it wouldn't be sort of very different.

So say if someone has an old machine, and they do happen to buy a Flash refill, it will give them the same sort of performance but you're not going to get the flashing. You need to the system for it to work, but people want to still buy our refills and put them into other machines, that works just great for us too. So it's been designed that way.

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Percy Panthaki, IIFL Research - VP [21]

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Understood. Very clear. Secondly, just wanted to touch upon Indonesia, your growth at 13% constant currency is a really good growth. So if you could -- I know you will not share the exact numbers, but if you could just give some flavor on what is driving this, is it the new haircare launch? Or is it even in the old portfolio you have 3 main products, your HI, baby care and air freshener? So is it almost equally led by all 3 subsegments? Or is it clearly sort of one of the subsegments is growing faster? So any flavor on that would help.

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [22]

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Well see across the board, the growth has been very broad-based. And so the growth has been strong across insecticides, across baby tissues, air fresheners as well as hair colors. On the margin, the growth in insecticides has been slightly higher, but that is driven by also very favorable insecticide season. So some growth has come through the benefits of a stronger HI season, but what's encouraging is that along with that, the growth has -- it's all more than double-digit growth for all the 4 categories. The reasons for the growth are again, multiple. One is the benefits that we have seen from project price and the amount of additions we are seeing in active outlets, some of the work we are doing to reconfigure distribution system in general trade. The second is a lot of innovations have been launched, but it's early days. Some of the, I think, traction we are seeing on innovation continues to also provide us with a good growth trajectory.

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Percy Panthaki, IIFL Research - VP [23]

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Understood. Understood. Just one follow-up on this. I think last quarter you had mentioned that there is an inventory pipeline run down by some modern trade players, et cetera. So would there be any reversal of that this quarter and you'd be getting sort of a pipeline fill-in this quarter or no?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [24]

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Very negligible, Percy. Not material at all, yes.

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Operator [25]

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Next question is from the line of Arnab Mitra from Crédit Suisse.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [26]

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My first question, again, was on the Gold Flash. Just one specific question that because this is a machine change that a consumer has to do given your past experience of express and dual switch, does it take a lot of time and sustained advertising effort for consumers to junk their existing machine which is working and actually go for a new machine? And does this slow down the impact -- time it takes to create an impact and the time period you have to advertise for this. So I just wanted your thoughts on that.

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Nisaba Adi Godrej, Godrej Consumer Products Limited - Executive Chairperson [27]

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So I think in any sort of machine and refill system, whether it's Gillette or other systems, you present a higher version to the consumer and what we've done is that we've kept the pricing at the same level to what we are in the market versus taking a premium for this, just given what market situations are so that the conversion on choice between this and the old machine is much easier.

We are actually going to make this the main machine for all our advertising, manufacturing, will all be focused on this. The renewal rates for machines happen every 1 to 1.5 years. So the renewal rate is quite fast. We also feel that one is our own renewal rate of our own machines, but we feel that this proposition against competitors' machines is pretty strong. So once -- and there's going to be big advertising investment and once word of mouth also kicks in that this really is the more superior LV in the market, we hope to go faster than the usual renewal rate, but even at the usual renewal rates, this should do pretty well.

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [28]

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Arnab, definitely, the plans are for us to be very aggressive as far as backing this with strong investment. Initially, we started with the south because that's where the season is right now. But by quarter 4, this will get rolled out nationally as well, but certainly, because the product, we believe, is very disruptive, we are going to aggressively back it with the right level of marketing investment.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [29]

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Okay. Second question was on the other segment...

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Nisaba Adi Godrej, Godrej Consumer Products Limited - Executive Chairperson [30]

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Arnab, I think one more point to this is (inaudible) of the upgrades comes from sort of burning format, correct? And one of the issues with incense sticks has been this very high efficacy, correct? Very highly dosed sort of knockdown. So we really feel that this should sort of drive more growth in upgrades again because from a value proposition to someone, they're now getting all that safety continuous and stuff. But now a new level of efficacy. I think, if I can be -- put it simply, I think, some of the burning formats with some of the stuff that's gone on in the market for the last 3, 4 years has sort of restaged the benchmark for efficacy and this LV has come in and said, okay, we've understood the consumer, we need to give you the best sort of system in the category, the most preferred large format, but we are taking the efficacy up in, not just in -- and the way it goes and also to add to that, it's actually visible, you can see it.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [31]

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That's quite clear. The second question I wanted to ask was on the other segment. Now this has been -- this has become a large part of your business in India, it has been growing very fast this quarter but there seems to have been a slowdown. Is it just that the business has achieved a certain scale where it's not possible to grow that fast like a 20%-plus, which you've been doing? Or is it not something to be read at a quarterly level and you do expect growth here to be much ahead of the current levels?

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Sameer Shah, Godrej Consumer Products Limited - CFO of India & SAARC and Head IR [32]

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This is Sameer here. No, I think first of all growth kind of normalized to the kind of growth rates which you have seen historically in other categories. However, what we are seeing is a little bit of sluggish demand and hence, impact on the overall growth due to car air fresheners. Also in the [base], specifically in this quarter, we had male grooming launch, which at this point in time is largely now kind of B2C as well as an e-comm play. So that's the reason for the 10 percentage growth in this quarter, but it should sort of go back to relatively higher growth levels in the coming quarter. But car air freshener remains a little bit of a watch out in the overall air freshener portfolio for us.

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [33]

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Also some of the categories and others are a little bit more discretionary in nature and some of the consumption slowdown, I think, has impacted these discretionary categories a little bit more I think. But as Sameer was saying, the growth rate should hopefully be much better in the quarters ahead.

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Operator [34]

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Next question is from the line of Amit Sinha from Macquarie.

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Amit Sinha, Macquarie Research - Analyst [35]

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My first question is on HI segment, again, and going back to your starting commentary on optimism in the segment going forward. Just wanted to understand where is the more confidence coming from? Is it based on your own initiative, the new product launches, which is expected to give you higher market share gains? Or is it to do with the category revival itself?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [36]

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See, I think, at an overall level, if you look at category growth rate, and Nisa has mentioned this before as well, if you look at the basic growth rate of active consumption, which is basically the chemical that goes into HI, that's been relatively quite healthy over the last 3 or 4 or 5 years, right? We've had a couple of bad periods as far as drought is concerned, but fundamentally, this category still has a significant amount of growth potential. So our confidence is stemming from the fact that look, the category growth rates have been quite strong. We were a little bit behind the curve as far as incense sticks is concerned. That area has been addressed. We have now a next-generation LV that has been launched as well. We're launching a fleet of other products to expand the category and go into the other pest area as well. And there will be a bunch of, I think, new launches that you will also start seeing. Some of them might be experiments that we do in modern trade or online first.

But clearly, from a product perspective, as far as consumer needs are concerned and various price points are concerned, our confidence is coming from the fact that this is actually a fairly attractive category and our product initiative should enable us to capitalize on that growth potential in the category.

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Amit Sinha, Macquarie Research - Analyst [37]

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Okay. And basically -- so there is also a big optimism, which is based on the new product, which is Gold Flash, right? I mean because that is -- that will supposedly become your main LV product in the segment, right?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [38]

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Yes. I think it will take time to scale up, but certainly, the optimism is very high that this should be a very disruptive game changer.

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Amit Sinha, Macquarie Research - Analyst [39]

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Sure, sure. And secondly, on Africa business. Would you like to share any outlook for the rest of the year because you mentioned that you expect some turnaround in the second half, just wanted some details out there?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [40]

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I think we are not happy with the growth that we saw in Africa in the second quarter. So certainly -- and a lot of innovations and new product launches are in place right now in braids, in nonbraids, in the wet hair segment as well. Quarter 3 tends to be the biggest quarter for the business. And so as you look at the pipeline of new products that we are launching, along with the work that the teams are doing as far as improving distribution are concerned, I think, our hope would be to show a much better top line growth than what you saw over the last couple of quarters and be able to sustain the profitability improvements because if you get that kind of top line growth we are aiming for through operating leverage, certainly there is opportunity for further expansion as far as markets are also concerned.

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Amit Sinha, Macquarie Research - Analyst [41]

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Any particular geography you would call out for where you're doing most of amount of work, and which can turn around in the near term?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [42]

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No, across the board, I expect the geographies to show an improvement, whether it's East Africa, South Africa, the U.S. business as well and Rest of Africa. The one I think area of concern that we are still navigating is our Nigeria business, because we are seeing a certain amount of a consumption slowdown, but there, again, we've launched some more affordable braids, we've launched some more premium products as well to participate in all the various segments there.

But I think in terms of the watch out, the one that we are still -- see how it evolves, is mainly our Nigeria business. Now the good news is that over the last 2 or 3 years, it's been a tremendously strong performer for us. So I'm hoping that we see stronger growth in Nigeria, but that's the one concern area that we do have in our Africa portfolio.

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Operator [43]

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Next question is from the line of Harit Kapoor from Investec Capital.

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Harit Kapoor, Investec Bank plc, Research Division - Analyst [44]

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Just had a few questions. Firstly, given the fact that you have a slew of launches planned in India, do you expect the mix of ATL versus BTL kind of change a little bit for the second half of this year because even the promotional intensity or sales promotion has been quite high and advertising growth has been a little low. So I just wanted to get your thoughts on that.

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [45]

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Yes. So I think the overall pool, the way we look at it internally, which is advertisement spend, trade promotions and then consumer offers, even in quarter 2, actually has moved up significantly on a year-over-year basis. Now depending upon category, we'll play dynamically. We will want to press on 2 of the 3 levers to drive stronger growth rate. But yes, we've included directionally in second half of the year with the number of new launches, whether it be in powder insecticides or scale-up of shampoo Hair Colours nationally as well as the Crème refresh, we will see higher advertisement spend. We have been relatively tight on trade promotions, sales promotion spend even over last kind of 6 months. The consumer offers and price offer are largely in force, which completely depends on the competitive intensity.

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Harit Kapoor, Investec Bank plc, Research Division - Analyst [46]

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Got it. The second question was on Africa. So the weakness that you've seen in the first half of this year, is it more to do with the geography-specific thing? Or is it either dry hair or wet hair where you have seen a category growth issue?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [47]

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I think it is definitely geography-specific. It's not across the board, but -- and obviously, there are certain macroeconomic challenges that one experiences in these geographies that we are learning how to deal with it better. Having said that, also I think our learning has been that we need to really intensify our new product launches, particularly from braids to nonbraids, and that's taken us some time to be able to actually have a very compelling set of products in the nonbraids segments as well. Those are now all in the market as we speak.

And then second of all, I think, the scale-up of wet hair took us longer than what we would have probably expected. But there, again, if I look at the kind of launches and the work that's happening on the ground, it gives us enough confidence now that at least we should start seeing improvements in top line because a lot of the building blocks are now in place in terms of our product pipeline on both dry hair and wet hair.

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Harit Kapoor, Investec Bank plc, Research Division - Analyst [48]

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Got it, sir. Third thing was on the India business, sir. If you could you just give some sense on what you would have done on the distribution side for the first half. Is there anything to call out there in terms of either in rural or outlet addition, et cetera?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [49]

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It's been a continuous journey for us, a huge amount of work has been going on in terms of both outlet expansion, both in urban and rural and also what we call middle India. The second part is also a lot of work continues to happen in terms of improving productivity of the channel. And the third area is, I think, stronger efforts are happening, particularly on the modern trade and e-commerce side as well, to have a much more differential segmented channel strategy.

So I think, across the board, there are initiatives happening on how to better use technology, how to train our salespeople better, how to use more powerful analytics, along with continuing to expand our coverage.

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Harit Kapoor, Investec Bank plc, Research Division - Analyst [50]

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And last thing was more bookkeeping, if you could just help us with the consolidated tax rate kind of expectation, post the changes on the tax cut side. So how do we look at it this year and for the next year?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [51]

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So to begin with, I think we recently announced tax rate assets don't impact us because we continue to remain in kind of exempted tax locations and effective tax rate is more of the same. So for this fiscal year, my sense is on a consolidated basis, we should be in that range of 20 to 22 percentage, very close to the [back] end of this fiscal year, we will refresh what will be our effective tax rate for India as well as international business and hence consolidated for next fiscal year.

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Operator [52]

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Next question is from the line of Kaustubh Pawaskar from Sharekhan.

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [53]

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Sir, my question is on the Africa region. In the call, you just mentioned that some of the regions are working good for you, in fact, South Africa and rest of the Africa and Middle East, that region has grown, while West Africa has slowed down. So can you just give us the bifurcation how much quantum of revenues is coming from these 2 regions? And what kind of growth you have seen in this region in past few quarters?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [54]

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So roughly, Kaustubh, all these 5 sub-clusters are close to an average 20 percentage saliency to do with the Africa and U.S. business for us. So there is nothing much to sort of pick and choose in terms of saliency with each of the sub-clusters have to do with overall Africa and U.S. business.

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [55]

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Yes, but going ahead, as [Sameer] mentioned, that we will see a better growth in the coming quarters. So obviously South Africa and Rest of Africa is doing good for you. The only issue I see is in West Africa where there is a consumption slow down. So there whether we can see some kind of improvement or that will continue to remain under pressure and the rest of the business will see improvement in terms of growth?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [56]

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No, see, I think, the issue is we have fairly high expectations from the West Africa business. So I think, going forward, you will still see a reasonable amount of growth in West Africa as well. But growth expectations I think if it falls short, then our hope is that South Africa, East Africa and the Rest of Africa will make up for that gap.

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [57]

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And we have seen at [current] level strong expansions in the gross margin, especially in the international business. India, we have seen operating margins going up by about 50 bps. Now going ahead, you have mentioned that there would be increase in the advertisement spends and promotional spends would be higher. So in terms of margins, will you be able to maintain the margins at the current level or there would be some kind of a dip in the margins?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [58]

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I think going ahead for international business, at this point in time, we remain very confident of volume expansion holistically for the rest of the year. In India, we have stated, even at the beginning of the year, the entire focus is on driving volumes growth and if in that journey we have to revisit our margins temporarily, we are very much geared up on that front. And it's very dynamic also actually at this point in time.

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Unidentified Company Representative, [59]

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I think our margins in India are very strong and too, given the kind of launches that we are planning, if there is a bit of a margin pressure that we face over a quarter or 2, I think it's the right call to take for the business over the longer term. I think that call will be fairly dynamic on a quarter-to-quarter basis, but the priority clearly is for us to invest in driving volume growth across the...

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [60]

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And any further pricing action can we expect in soaps? Or this will help you to see a better volume growth in the coming quarters?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [61]

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See, our strategy in soaps has largely been a follower strategy as far as pricing actions are concerned. So we will have to wait and watch. We are quite clear that we will not initiate any pricing actions on our own. We haven't done that in the past either, but depending on the competitive scenario, we will take a call in terms of what kind of pricing actions to follow if it makes sense to us. But we will not necessarily lead with any pricing actions on that -- on the soaps front.

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Operator [62]

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We take the next question from the line of Arnab Mitra from Crédit Suisse.

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Arnab Mitra, Crédit Suisse AG, Research Division - Research Analyst [63]

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I had just one follow-up question that you kind of alluded to the fact that incense sticks had kind of stabilizing at that level of share. So is there enough data points that you're picking up from your sales force as well as data that you think that this is now not an incremental risk to the business and other than the fact that you've launched your own incense sticks, is there any effort to address the lower-end segment of this HI market, while the Gold addresses the premium-end segment?

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V. Srinivasan, Godrej Consumer Products Limited - CFO, Compliance Officer & Company Secretary [64]

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I think, Arnab, our hope is that you are seeing this segment plateau at 11 to 12, but honestly, it's been only the last 4 or 5 months, right, 6 months, 8 months, right? So we will have to wait and watch because some of these players can be quite notorious as far as illegal actions are concerned. So we continue investing heavily at the industrial level, whether it's television ads, educating consumers, et cetera. So there's no let down as far as countering the -- and working with the government constructively to be able to counter this menace.

Along with that, I think, for the time being, I think the focus on more bottom of the pyramid products is the incense sticks. There are a couple of other interesting products that we have in the pipeline, but we will wait to make a decision on launching them until we figure out how well incense sticks does. But there's clearly more things that we can do from a product perspective, but I think, we will hold off on that until incense sticks are cleared up further.

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Operator [65]

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We take the next question from the line of Nillai Shah from Morgan Stanley. As there is no response from the current participant, we take the next question from the line of Nillai Shah from Morgan Stanley.

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Nillai Shah, Morgan Stanley, Research Division - Equity Analyst [66]

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Sorry I got disconnected. So I dialed in again. My question is essentially on there's change in strategy as far as the business is concerned clearly in India in favor of volume growth. Could you discuss a little bit on what should we change in terms of the culture the incentives to the salespeople. What has really changed for you to be able to sustain this growth going forward? And how far are you willing to go in terms of this endeavor of margins versus volumes over the course of the next, let's say, 2 years or so?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [67]

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I think, Nillai, to your question, the fundamental building block as far as incentives is concerned is still delta improvement and EVA. So that still remains a backdrop of the system. However, we have now put in additional mechanisms in place to be able to reward our employees to drive volume growth. So I think it's a combination which is driving between keeping the philosophy of EVA intact, but certainly, provide more incentives to be able to achieve this through volume growth is concerned.

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V. Srinivasan, Godrej Consumer Products Limited - CFO, Compliance Officer & Company Secretary [68]

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Yes, just to elaborate on that, Nillai, what we've done is historically, we never had any sales filter. In fact last fiscal year, for the very first time, we added a value sales filter and this fiscal year, actually we have graduated from a value to a volume sales filter. So it kind of more than checks the delta EVA, which is completely driven by, say, kind of operating profits, delta, but now there is a [slab] and a sales volume filter which sort of incentivizes as well as penalizes depending upon the volume growth performance.

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [69]

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That's why I think I believe that's the right way for us to try and balance all these multiple objectives.

With regards to your second question, I think it's an evolving situation, certainly given where commodity costs are today, which are relatively benign. I think the focus and given the current demand situation where we are, seeing some slowdown, the focus on volume growth definitely is the right one for the next 2 to 3 quarters. Post that, we will have to take a call again in terms of what the demand situation looks like. Second of all, what the input cost environment is looking like.

And alongside obviously from our perspective, there's a fair amount of work that's happening looking over the next 2 years, beyond the next couple of quarters to try and premiumize the portfolio. And even because of revenue growth management, strategic pricing, a lot of work has been happening to be able to see later on down the road how are we going to be able to drive further value growth. I think in the near term the focus is far more on volume growth, but certainly over the longer term, we will find the right balance to drive both volume growth and ensure that it's close to value growth as well.

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Nillai Shah, Morgan Stanley, Research Division - Equity Analyst [70]

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That's very clear. Just the second part is on your comment that you would not drive or initiate pricing action in the soaps portfolio to an earlier question. But isn't it true that in more recent sort of quarters, your pricing action has been much deeper than competition?

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [71]

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No, actually if you look at the data on effective price per gram decrease, which is a combination both on consumer offers and effective price declines, we have been actually following competition. So our price per gram reduction has been lower than some of the other players in the market.

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V. Srinivasan, Godrej Consumer Products Limited - CFO, Compliance Officer & Company Secretary [72]

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Also just to add, Nillai, over here the strategy for us has been quite micro, at state level. So you will find actually 4, 5 different price points for the same SKU pan-India and a basket of brands we compete with are also very, very different in each of those states, right? So it's not actually a pan-India pricing strategy and neither a pan-India 1 brand, vis-à-vis we compete with. So it's very, very dynamic, very, very kind of granular when it comes to this entire price/mix architecture and also different kind of basket of competition in each of the states or cluster of states.

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [73]

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And Nillai, at least our perspective is that beyond the point, further pricing actions could become counterproductive for the industry because we have already seen fairly aggressive amounts of pricing actions. What this unfortunately does is it leads to a fair amount of pantry loading, right? And this was not a category, because of the higher penetration, people are not necessarily going to consume more or bathe more just because things are available at less amount of a price.

So beyond a point, I think, certainly given the palm oil pricing scenario over the last 6 to 12 months, there has been enough room to be aggressive as far as pricing is concerned. But let's see how that situation stands over the next 6 to 12 months. But certainly, there is a scenario where the pricing could get firmer and our belief is to focus far more on distribution, launching much more innovations, micro-marketing and then essentially follow other players to maintain competitiveness. But I don't think this is a category where it would make any sense for us to lead the pricing actions.

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Operator [74]

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Our next question is from the line of Kunal Vora from BNP Paribas.

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Kunal Vora, BNP Paribas, Research Division - Analyst [75]

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My first question how do you see this year's monsoon for the HI category? Would you say it was a good season with high mosquito infestation? And how does extended monsoon impact HI in the third quarter? That's the first, yes.

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [76]

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The monsoon season was relatively okay. Definitely, I think, in certain areas, rainfall was very good, but in some areas, we actually saw less-than-adequate rainfall. If a similar situation should happen in quarter 3 as well, I think the season should actually not be -- not bad. I think because of the overall consumption slowdown, there is certain amount of discretionary mess in this category as well, which is why the growth rates were not as high as they should have been because we think it impacts the overall consumption slowdown. But I think setting that aside, it wasn't a bad season from a monsoon perspective and quarter 3, our expectation should also be relatively okay as far as monsoons are concerned.

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Kunal Vora, BNP Paribas, Research Division - Analyst [77]

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Okay. Second one on Africa margin. How much of an improvement is driven by the base effect? And how much improvement is sustainable? Going forward, can we extrapolate these kind of margin gains or partly it was just because of the [global low base] which you had last year?

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V. Srinivasan, Godrej Consumer Products Limited - CFO, Compliance Officer & Company Secretary [78]

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So I think we have stated this again at the beginning of the year and in terms of our thought process that we would avoid expansion in Africa cluster margin anywhere between 100 to 150 basis points. So on a continuous basis year-after-year for the next 4 to 5 years. I think if you look at the trend, it's very short trend, but quarter 1 we had, I think close to 11.9 percentage margins. This last quarter, we have close to [10.5]. We should continue with that range. Structurally, there are a lot of initiatives getting rolled out in terms of cost-saving programs, favorable category mix, which gives us the optimism of this unit expansion.

So I think, we're very much on track in terms of this continuous margin expansion on a full year basis, not necessarily every quarter, but on a full year basis, in Africa cluster for the next 3 to 5 years.

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Operator [79]

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The next question is from the line of Sameer Gupta from India Infoline.

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Percy Panthaki, IIFL Research - VP [80]

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Yes, Percy, sorry, my question has been answered.

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Operator [81]

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Well, ladies and gentlemen, that is the last question for today. I would now like to hand the floor.

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Vivek Gambhir, Godrej Consumer Products Limited - MD, CEO, BR Head & Executive Director [82]

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Thank you very much for your questions and your feedback. As I had mentioned before, we are looking forward to a gradual recovery in FMCG in India and improving our volume growth momentum. Certain innovations will continue. On Indonesia, we are hoping to sustain both our top line and bottom line trajectory; and in Africa, the focus will be on improving top line growth, while building on our profit improvement. Thank you very much.

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Operator [83]

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Thank you very much. On behalf of Emkay Global Financial Services, we conclude today's conference. Thank you for joining. You may disconnect your lines now.