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Godrej Consumer Products Limited Q3 & 9M FY10 Conference Call Transcript

12.00 noon, Monday, January 25, 2010

Moderator: Ladies and gentlemen, good afternoon and welcome to the Godrej Consumer Products Limited Q3 FY ’10 earnings conference call hosted by Alchemy Shares and Stock Brokers Private Limited. As a reminder all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions at the end of today’s opening remarks. If you should need assistance during this conference call please signal an operator by pressing “*” and then “0” on your touchtone telephone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ajay Thakur of Alchemy.

Ajay Thakur: Good afternoon, ladies and gentlemen. On behalf of Alchemy Shares and Stockbrokers, I welcome you all to the third quarter earnings conference call of Godrej Consumer Products Limited. To discuss the results, we have with us Mr. Adi Godrej, Chairman, Mr. Hoshedar K Press, Vice-Chairman, Mr. Dalip Sehgal, Managing Director and Mr. P Ganesh, Vice President (Finance & Commercial) and Company Secretary. First of all, I would like to congratulate the management of Godrej Consumer on a very good set of quarterly numbers. I shall now hand over the floor to Mr. Adi Godrej for his initial remarks followed by Q&A session.

Adi Godrej: Thank you Ajay and good afternoon everyone. I welcome all of you to Godrej Consumer Products Limited third quarter and nine months conference call. Joining me today as mentioned by Ajay are Mr. Hoshedar Press, the Vice-Chairman of GCPL, Dalip Sehgal, Managing Director and P. Ganesh who is vice-president Finance and Commercial and also the company secretary. I will first take you through our numbers for the quarter and the nine months after which I will discuss developments in our domestic and international businesses. Please note that our consolidated results include the results of the 49% share of Godrej Sara Lee Limited, which is held by us with effect from June 1, 2009. During the quarter our consolidated net sales increased by 53% to 518 crore. PAT was up by 112% to Rs. 85 crore. Earnings per share for the quarter stood at Rs.2.76. The Board of Directors has declared a third interim dividend of 100% , which translates to Re.1/- per share. For the nine months ended December 2009, our consolidated net sales were up 46% to Rs. 1,532 crore. PAT for the period was higher by 118% at Rs. 248 crore translating to a nine months of EPS, non-annualized of Rs.8.35 per share. Enhanced volumes driven by improved distribution and penetration contributed to strong topline growth. Improved sales mix combined with lower raw material cost resulted in a strong profit growth. W e continue to invest behind our brands. A&P spends were up 69% for the quarter on a consolidated basis. W e are encouraged by the continued strong performance of both our domestic and international operations. Our soaps business continues to grow ahead of market with a

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market share of 10.3% for the quarter. We recently introduced Godrej No.1 moisturizing soap. It offers consumers beautiful, moisturized and soft skin even during winters and has been extremely well received. Our hair colour business also grew

strongly during the quarter. The quarter also saw the launch of additional shades of plum crazy and wine red under the Renew brand taking the total number of shades to eight. The quarter also marked our foray in to the hand hygiene category with the launch of Godrej Protect Hand Sanitizer, hand wash and antibacterial wet wipes. Godrej Protect Hand Sanitizer integrates the instasanitize technology that kills 99.99% of most common illness causing germs in 15 seconds. It is available in blossom, original and citrus variants. Coming to our international operations Keyline Brands grew by 7% during the quarter in spite of the tough economic conditions in the UK. Sales for the quarter was Rs. 35 crore while PAT stood at 1.7 crore. Kinky has continued its strong growth traction with sales increasing by 39% over Q3 2008-2009. Sales for the quarter crossed Rs.24 crore while PAT was an impressive 3.1 crore. Rapidol too had a good quarter with sales at Rs.21.3 crore, a growth of 50% while PAT stood at Rs. 4.2 crore. Our share of Godrej Sara Lee sales for the quarter under review stood at Rs. 121 crore while our PAT stood at 19.5 crore. As you are aware in December 2009, the Board of Directors passed an enabling resolution for raising an amount of up to Rs. 3,000 crore, which will be used inter alia for driving inorganic growth. We look forward to continuing to deliver strong operating financial performance and creating even further value. I once again thank you for joining us on this conference call and will now be happy to discuss any questions or comments that you may have.

Moderator: Ladies and gentlemen, we will now begin the question and answer session. At this time, participants who would like to ask questions, may please press “*” and then “1” on their touchtone telephone. If your question has been answered and you wish to withdraw the question from the queue please press “*” followed by “2”. You are requested to use your handsets while asking a question. To ask a question please press “*” and “1” at this time. Our first question is from the line of Abneesh Roy of Edelweiss Capital.

Abneesh Roy: Sir, congratulations on good set of numbers. If I see, the market share this time, the numbers are slightly lower quarter-on-quarter. Your product innovation has become aggressive, your rural distribution 6200 additional villages have been added and 95 super distributors plus monsoon has been poor, so if I combine these three factors where are we missing the picture. Is the industry growth higher, is the Nielsen number a problem as being seen in many categories. Can you elaborate on that?

Adi Godrej: I would like to just make a couple of comments on that. Our market share in the winter months in soaps is usually a little lower than in the other quarters because we do not have a glycerine soap, we have just launched the No.1 moisturising soap, so in future I expect our winter months shares also to be good, so our soaps are typically more summer oriented, so our shares tend to be a little lower in winter, but our share in this quarter was much higher than our share in the same quarter of the previous year. The other thing that we must bear in mind now is that all the growth is

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volume led. In the past quarters the FMCG sector had a considerable amount of value increase led growth to which we will not see now onwards.

Abneesh Roy: But what about the hair colour, there seasonality would not have that kind of an impact?

Adi Godrej: Hair colour also our growth was also 17% which is quite good. If you look at the overall FMCG growth rate, our growth was very good.

Abneesh Roy: Quarter-on-quarter there is some difference, from 34.5?

Adi Godrej: Yes, but that is also decided on the base on the corresponding quarter of the previous FY, for example in the second quarter of the previous year, we had a decline from the second quarter of the year before that, whereas in the third quarter of last year, we had a good growth over the third quarter of the previous year, so I don’t think one should be too concerned about the quarter-to-quarter growth but one quarter to the other. I think the nine-month growth will be a good projection of where we are headed.

Abneesh Roy: Those numbers for the nine months?

Dalip Sehgal: Let me just put it in perspective. The soap market in this quarter has grown by 5.5%.Our sales have grown 13%.Hair color, the market has grown at 11%, our sales have grown at 17%. The nine-month picture also is similar. If you look at hair color, cumulatively three quarter our growth is 25% and the market growth would be between 12 and 13%, so that should give you a sense of where we are. Nielsen data from time to time can fluctuate a bit, what I am quoting to you are the hard numbers.

Abneesh Roy: We have expanded our distribution in the hair colour segment in salons. Have the sales started improving due to this and do you continue to maintain that under this expansion in market share yearly, that continues to be insight for you?

Dalip Sehgal: Both the points, one on salon and barber operations, we are now covering 50,000 salons regularly, like I have been saying the overall size of what we sell in to the salons may not be very large. I think we see this operation at two levels, one to build our brands and franchise with consumers especially in hair colours and the other of course is improve visibility at these touch points. As far as share improvement is concerned, I think we are committed to growing ahead of the market in both the categories.

Abneesh Roy: Once last question back to the soap market share. The No 1 player has become active in terms of price cuts of ad spends, plus raw material prices have moved up in the last few quarters and in such an inflationary raw material scenario, the regional players start losing. If I combine these two factors, do you think we are confident of increasing our market share in the next few quarters?

Dalip Sehgal: Like I said even in Q3 just to put the number right, our share this quarter is 10.3 versus 9.5 in the same quarter last year. We have got 80 basis points improvement and year to date we are at 10.3 versus 9.4, so that is almost 100 basis

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point improvement over the last year, secondly you are saying raw material prices going up and hence pressure etc., I think on raw material, as far as we are concerned we are pretty much covered like we have been saying till about April-May. As far as losing out in a price increase kind of a situation is concerned, I do not really subscribe to that view.

Moderator: Ladies and gentlemen, before we take the next question, we would like to request the participants to limit their questions to two during the initial round of questions and answers. Our next question is from the line of Zi Yue of CIMB Principal.

Zi Yue: My question is if we still go back to the raw material price, I believe palm oil probably is one of the major raw materials for Godrej Consumer. May I know if you take any hedging or what is the cover of your future raw material cost?

Adi Godrej: First of all, let me clarify, we use palm oil derivatives, not edible palm oil and the prices that we have currently in cover are much lower than in the previous year. We have covered well in to the next six months. Another factor which is helping us very considerably as edible palm oil is now importable to India duty free, palm oil refiners are importing the duty free palm oil and the derivatives from that are available in India at prices which are considerably lower than the corresponding prices of importing those raw materials. We are taking advantage of that situation, so our raw material situation is quite benign. It will continue to be benign for the next two quarters. Moreover palm oil prices over the last couple of weeks in line with the crude oil prices have started coming down very considerably.

Zi Yue: So I can safely say that the margin will probably be maintained even though the palm oil got some fluctuation in the last quarter. You have mentioned that you have this No.1 Moisturizing soap which is partly a winter care, so I probably expect that in future the quarter to odd quarter balance will be smaller in future?

Adi Godrej: We expect so.

Zi Yue: On the external acquisition. What kind of products are you likely to acquire in your portfolio?

Adi Godrej: Our targets are generally in the developing world and in areas where we are strong, so hair care, household insecticides; these are the target categories we are looking at.

Zi Yue: You are mentioning that you are raising 3,000 crore right?

Adi Godrej: Upto 3,000 crore the Board has approved, to be raised depending on what acquisitions come about; we will raise the amounts as required.

Zi Yue: Just to confirm the number you mentioned the soap market for the third quarter, soap market grew 5% and your sales growth is 13%, is it volume or in the revenue side?

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Dalip Sehgal: Revenue, value, but most of the growth this quarter is volume. This is the value number; the bulk of the growth in value has been on account of volume growth. There is not much of a pricing lead growth in these numbers, so if you look at the market, out of 5.5%, almost 4-4.5% is volumes.

Moderator: Our next question is from the line of Percy Panthaki of HSBC.

Percy Panthaki: My question is on your sales split up, which you give. There is an exports category in the standalone which has been put this time which I have not seen in the last few quarters, so is it some regrouping of numbers or is it something new you have started? Can you clarify?

P. Ganesh: This is actually a regrouping of the numbers. We have kept the category soaps, hair colour for the domestic and exports has been carved off.

Percy Panthaki: In which case if I take your soaps it is 60% in Q3 last year versus 58%, so that is not comparable, correct.

P. Ganesh: Yes, that is right.

Percy Panthaki: Can you give me an idea how much the growth is in your domestic soaps business Q3 this year over last year?

Dalip Sehgal: 13% is the growth in soaps versus market growth at 5.5 and hair color growth is at 17% versus market growth at 11.

Percy Panthaki: 13% out of which you are saying bulk of it is volume growth , has the volume growth in Q3 on a year-on-year basis been any different from the volume growth in Q1 or Q2 again on a year-on-year basis.

Dalip Sehgal: It has been a little lower both for the category and for us.

Percy Panthaki: Secondly on acquisitions, I just wanted to understand the overall strategy there. Wouldn’t you like to target acquisitions in geographies where you are already present and build up scale? Are you actually looking at newer geographies and smaller size acquisition, which may be spreading yourself, a bit too thin?

Adi Godrej: I think it is a good question. I think our first priority for acquisition would be in India. Second priority would be in countries where we are already present and the third priority will be in other developing countries.

Percy Panthaki: You would be looking at Africa and UK a bit more aggressively than let us say Asia or something like that.

Adi Godrej: Africa definitely more aggressively. UK being a developed country we would look at it very selectively and only strategically.

Percy Panthaki: The 51% Sara Lee stake acquisition, any kind of expectation as to when that would completed?

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Adi Godrej: It entirely depends on when Sara Lee completes the sale of their household and body care business. They have already sold their body care business to Unilever and sold a part of their household care business to Procter & Gamble and that triggers only as and when Sara Lee are out of the business which has not yet happened, so it is difficult for us to predict when.

Percy Panthaki: A figure of 800 crore for that 51% was quoted in the media, do you think that 800 crore is a firm figure or can it fluctuate?

Adi Godrej: It can fluctuate. It is based on the valuation, 800 crore figure is the figure quoted in the media. We have also taken permission from our shareholders up to certain level, but if it fluctuates we can always go back to the shareholders.

Percy Panthaki: What would be the reason for the fluctuation from that figure?

Adi Godrej: Because it is based on a valuation based on discounted cash flow, depending on what are the predictions and what is the WACC rate taken for discounted cash flow, the figures could vary.

Percy Panthaki: But would the variance be in a large range or could it be within plus or minus 10%.

Adi Godrej: Well, that is difficult to say. It depends. It is very difficult for us to say what an independent valuer would look at the WACC rate at a particular point of time, depends on when the valuation is done. WACC rate would also vary from time to time.

Percy Panthaki: My last question is on the soaps business in terms of competitive activity on the ground. We have seen HUL improve its product for Breeze in terms of TFM, we have seen advertising on Rexona, Lux and Hamam presumably in the last six, seven months, I believe I do not know how far I am true that Godrej No.1 would not only be taking share from Breeze but to an extent from Lux also, so with the relaunch of Lux and the relaunch of several other brands how has that affected you and how do you think it will affect you in the future?

Dalip Sehgal: You are absolutely right. First of all in terms of saying that the competitive position in the market has increased and all the launches that you have mentioned are absolutely right. I think our portfolio also has been very active both on Cinthol and on No.1. Our brand investments have been significantly higher. To give you a sense our total brand support is almost 50% over the same quarter last year. Overall shares, if you look at Q3 last year, we were at 9.5% share, we were at 10.3% share in Q3 2009, so we have gained about 80 basis in a fairly competitive market.

Percy Panthaki: What specific actions would you take to counter the competition that is coming in from players like HUL? I know your general strategy has been to increase your distribution penetration, go in to rural areas, give a value for money product and all that will continue, but is there any specific counteraction or specific reaction that you will have to the actions by HUL?

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Dalip Sehgal: I think it is not one specific competitor.

Percy Panthaki: Sure, general competition, not necessarily HUL.

Dalip Sehgal: I think by and large as and when competition sort of raises the game, it is obviously necessary for us to do that as well and like I told you our brand support expenditure has gone up by 50% and some of it obviously has to do with the reality of the marketplace.

Percy Panthaki: Any particular strategy on a regional basis that you are following which you might want to change in light of the increased competition? What I am trying to just gauge is that you have had a very successful run, you have had a very effective policies in terms of go to market and I understand what those policies are, but has the increased competition lead you to tinker with that strategy in some way?

Dalip Sehgal: No, I do not think we are tinkering with that strategy. I think the strategy needs to stay in place. What changes from time to time are the tactics in the market place, the activation that you do, strategically the three or four things that you spoke about whether it is rural, whether it is investing more behind the brand, having more regional focussed media, focus on small packs, all that will strategically continue.

Percy Panthaki: In terms of tactical focus, is there any change there?

Dalip Sehgal: In terms of tactical like I said when for example in the market place we do find that for example a lot of promotions are going in to the market, then I think we need to proactively do something about and that is one of the reasons why you will find that both in terms of advertising and promotion which is a brand support money that I spoke about, it has gone up by about almost 50%.

Percy Panthaki: Can you cite any specific activation schemes or promotions that you have run in the last three months?

Dalip Sehgal: We ran a very successful Nano offer in the north. We have run a couple of other promotions as well. We have had a slew of launches as well. We have had No 1 skin moisturizing soap. We have had two new SKU on the Cinthol original in the south and we have launched smaller packs in practically all the soap brands, so there has been a fair bit of activity both at the trade level and at the consumer level.

Moderator: Ladies and gentlemen, before we take the next question we would like to request participants once again to limit their questions to two per participant as there are several participants waiting for their turn. The next question is from the line of Himani Singh from Elara Capital.

Himani Singh: Congratulations on a good set of numbers. One question that I have is since this quarter and in the past quarters we have seen growth in the topline coming off from higher volume base and since we have 6200 additional villages, 95 super stockists and 1570 sub stockists coming on with the company, I wanted to know what

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would be your outlook on the volume growth that we can see going ahead in next six months or one year on the back of this new addition?

Dalip Sehgal: As you know, we do not give any guidance on next quarter numbers. I think basically if you look at what has been happening in the last three quarters we have grown significantly ahead of the market. Just to recap again, I think our soaps growth have been 13% versus market growth at 5-5.5%, our hair colour growth is 17% versus 11% for the market, so our intent is to grow ahead of the market but no specific numbers can obviously be provided.

Himani Singh: And will you continue the super stockists in our distributional channels?

Dalip Sehgal: Absolutely, I think the three-year plan on village coverage was to go to 50,000 and we are still committed to that and the small town coverage was to go up to 8,000 and we are very well on course in terms of meeting those objectives.

Adi Godrej: Between the higher promotional and advertising spends and the higher distribution reach which we are planning our aim is to increase our volume share ahead of the category volume growth.

Himani Singh: Since we are saying that we are covered till April around for our raw material crisis, but even if we look at the FMCG pack, not necessarily from the soaps angle, but from the FMCG pack the raw material prices are moving up. Since we have already taken the SKU route, can we see another round of price hikes by the company or in the sector by the competitors?

Adi Godrej: First of all our coverage of raw materials is well beyond April and number two we are seeing in the last couple of weeks raw material prices again coming down as you know crude oil has come down from around the $83 per barrel level to around $73-74 per barrel level, vegetable oils have also started coming down, so there is a change in direction of raw material prices. As of now, we do not see either us or the industry taking price increases in the near future.

Moderator: Our next question is from the line of Pritesh Chheda of Emkay Global. Please go ahead.

Pritesh Chheda: Congratulations on a good set of numbers, just taking the last question on the raw materials side, if not wrong, you said the key materials have been booked until April.

Adi Godrej: Beyond April.

Pritesh Chheda: Beyond April. Second, a lot of news flow has come on the inorganic growth side about you interested in Sara Lee’s balance stake. If you could just give a broader idea as to what we are looking on the inorganic side in terms of the Sara Lee’s business portfolio especially or is it Sara Lee’s entire home care or the insecticide side

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of the portfolio plus the balance stake that we have or it is only the balance stake of Sara Lee.

Adi Godrej: I cannot comment on individual acquisition opportunities. I think generally, I have explained that we are looking at the developing world. We are mainly looking at the household insecticides and hair care categories. These are our primary objectives and the Board has approved up to 3,000 crore for fund raising for further acquisition. For confidentiality reasons, we cannot comment on any individual target.

Pritesh Chheda: On the subsidiary side, that is Kinky and Rapidol, there is a big swing in numbers, if you could throw more light in terms of the profitability in the quarter for Kinky and Rapidol and whether it is sustainable in the near future?

Dalip Sehgal: I think if you look at both the South African businesses, they have grown almost by 50% in terms of topline and that has resulted obviously in better bottomline growth as well. I think the reasons for the topline growth is two or three things, one within South Africa itself we have increased the footprint for Kinky which used to sell essentially through 20-22 of our own stores, it has gone in to retail trade as well and the other is that as part of the One Africa strategy that we have, we have moved both the brands in to more number of countries, so I think both South Africa business as well as the African business helped in that 50% growth.

Pritesh Chheda: There is no seasonality element per se in the quarter, so one can look at the efforts and the results are the same then these numbers should be largely sustainable in the forthcoming quarters as well.

Adi Godrej: There is a little bit of a Christmas effect, so that could be a little bit of it, but generally if you look at the other quarters also, these businesses have been growing strongly and we had mentioned when we had acquired the Kinky business that this is a huge category, the scope of geographical expansion is also high and that we see a strong growth potential over the next few years and we are now strategizing that growth that is coming about.

Pritesh Chheda: Just a couple of clarifications on the soaps and the hair colour growth that we had for nine months. For hair colour, it is largely a volume growth for the full year. What would it be for soaps in terms of volume growth for the nine-month period?

Dalip Sehgal: No, I think just to correct, the first six months we have had price increase and volume growth in both the categories and whats happened in Q3 is that bulk of the growth, we have got 17% growth in hair colour and all of it is volume and we have got 13% growth in soap out of which probably around 10 is volume and may be 2-2.5 would be about for growth.

Pritesh Chheda: On a nine-monthly basis for soap and hair colour if you could just give the volume growth?

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Dalip Sehgal: I think we will have to work it out and we can give it to you separately.

Pritesh Chheda: Approximate if you have it in mind?

Dalip Sehgal: The soap growth cumulatively is about 25 odd percent for us out of which probably around 15 odd percent would be volume and for hair colour the cumulative growth has been around 26 out of which roughly about 16-17 would be price increase.

Pritesh Chheda: 16 would be price increase. Many thanks to you and all the best.

Moderator: Our next question is from the line of Aniruddha Joshi of Anand Rathi.

Aniruddha Joshi: Congrats for an excellent set of results. Just wanted to know what is the growth due to expansion of distribution network?

Dalip Sehgal: Our growth, if you look at rural growth, they have been around 39%.

Aniruddha Joshi: 39% is mainly due to expansion of network.

Dalip Sehgal: Some of it is expansion of network; other part of course is increase in brand share as well.

Aniruddha Joshi: Urban, if you can?

Dalip Sehgal: Urban on a cumulative basis is about 20%; rural on a cumulative basis is 40%.

Aniruddha Joshi: With the rising raw material prices whether we keep covering, lets say we are covered till April or May and probably then we would have to buy it on a spot basis or would we continue to cover it for the future months after April and May?

Dalip Sehgal: We tend to do both, depending on how the prices are , we are buying both locally as you know and there is a fair bit that we buy locally as well.

Aniruddha Joshi: We are covered till April and May at a much lower price, so probably if we move in to June or July then we would be buying at a much higher rate, so probably we will see a sudden decline in margins at that point of time or if opportunity comes we will cover it again, may be in February or March.

Dalip Sehgal: Obviously we would, if the opportunity comes we would cover it. We would not wait till June or July to cover.

Moderator: Our next question is from the line of Vivek Maheshwari of CLSA.

Vivek Maheshwari: First question, in the presentation you have mentioned that the FMCG sector continues to grow at a lower pace could you elaborate on this in terms of the reasons as well as your outlook on the sector as a whole?

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Adi Godrej: We feel that because of this sudden inflation in food prices for the low income urban population a larger percentage of the wallet is now perhaps being spent on food over the last two months and that might lead to slight lower spends on FMCG, so the growth acceleration in FMCG has come down a bit, the second reason is that the growth we were showing in earlier quarters including both price increases and volume growth, going forward there will be very little value growth coming out of price changes and therefore there will be a slowdown in the value growth rates going ahead. I expect once the Rabi crops are in which are expected to be very good, then the effect of the food inflation will disappear, but you must remember that the high value growth rate that we saw in Q1 and Q2 will come down a little bit because there will be hardly any price inflation effect of value growth going forward.

Vivek Maheshwari: I mean what essentially you mean in the presentation is from the value perspective or are you seeing volume growth or some deceleration in the volume growth as well.

Adi Godrej: A little bit as I explained because of the food inflation but it is marginal. That is why you see whilst our sales growth in this quarter has been lower for the two reasons I mentioned to you that in the previous quarters our profit growth has been sustained because profit growth depends on volume growth and not on value growth.

Vivek Maheshwari: Second thing you mentioned about edible palm duty free imports. Of the total raw material that you consume, how much would be coming in from local sources and what is the outlook or what this percentage could be in the next few quarters?

Adi Godrej: That depends on the relative prices but of late a very large proportion of what we have been buying has been local. So it depends on what is more economical but generally over the last couple of months we bought a tremendous amount of local raw material.

Vivek Maheshwari: Would you be able to quantify in terms of mix.

Adi Godrej: That varies from time to time. The prices keep changing but I would say that there are weeks in which more than 50% of our purchases are local.

Vivek Maheshwari: What is the kind of price differential between the two approximately?

Adi Godrej: That again varies

Vivek Maheshwari: But the range.

Adi Godrej: It is a commodity and also the materials are not exactly comparable either.

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Vivek Maheshwari: On SPUs how much would be the SPUs either for domestic business as a whole or may be for soaps and hair colour separately. As in less than 10 rupee pack how much would it contribute to your overall domestic revenue in the 10 and 5-rupee pack?

Dalip Sehgal: The overall sale in volume terms is about 12.5% which is about between and 6-7% same time last year.

Vivek Maheshwari: And this is for including both hair colour as well as shampoo.

Dalip Sehgal: No this is just the soap. We do not have shampoos. Hair colours, we have only a 10-rupee pack size in our main brand, which is Expert and we have 5-rupee and 10-rupee price points in Nupur as well.

Vivek Maheshwari: And lastly what would be your urban rural mix right now as we speak.

Dalip Sehgal: It would be about 42%rural and the balance is urban.

Moderator: Our next question is from the line of Mr. Amit Hiremath from Enam AMC.

Amit Hiremath: It relates to our hair colour segment where I can see that the market share has actually dipped from 33.8% to 33.1%, which is a dip of 70 bps, against that the rural market share has actually increased by 400 bps .So is this an indication of we losing our market share in urban area and if yes then what is the reason?

Adi Godrej: I do not see the rural market share increased by 400 bps in the earlier quarter.

Amit Hiremath: I am sorry it is 40 bps.

Adi Godrej: But you must remember that such a small change in market share in a survey like AC Nielsen is to my mind can be attributable even to statistical error, there is no great accuracy at that level. Our gross has been ahead of the category growth what AC Nielsen reports as market share may not actually be the market share on the ground for example as Dalip mentioned our actual sales growth in the quarter was ahead of the category growth as indicated by AC Nielsen.

Amit Hiremath: Since our emphasis is mostly on the rural area we will be penetrating more into rural area would that mean that you would be sacrificing on the margin front because the rural guys would be preferring the lower end product, so overall hair colour margin would be deteriorating because of this.

Adi Godrej: No, I do not think so because our portfolio of hair colour is clearly at the middle range. Our prices are definitely much lower than say L’Oreal’s prices but our profitability even in low price portfolio is very high, profit to sales ratios are much than our competition.

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Amit Hiremath: How much of our sales are through organized retail chain?

Dalip Sehgal: Less than 5%.

Moderator: Our next question is from the line of Hozefa Topiwalla of Morgan Stanley.

Hozefa Topiwalla: Congratulations on a very good performance. Just two questions from my side, the first is if you can comment on the emerging competitive landscape particularly in soaps with ITC and other local regional players also upping the ad spends and of course hair colour you can spend some time on the top end there on competitive environment and the second question is on the international business particularly Rapidol and Kinky preformed exceptionally well this quarter, what are the drivers for this growth and what should we expect going forward for the international business.

Dalip Sehgal: Let me take the second question first. The drivers for both, if you see the two African businesses they have grown extremely well, almost 50% topline growth and that is the result of a larger footprint within South Africa for Kinky and a larger footprint across Africa for both the businesses, so that is one of the key reasons for the growth. As far as the soaps landscape is concerned just to sort of reiterate as far as the market share position in Q3 is 10.3 for us versus 9.5 in the same quarter last year and as you know because of seasonality in the soap market we should look at a year on year comparison as far shares are concerned. The competitive landscape, you are absolutely right, is much stronger now than it was probably a year ago and I think we have taken measures in terms of both launching new variants on No 1, launching new SKU on Cinthol and spending 50% more money on brand support than we did last year.

Hozefa Topiwalla: Just a follow up on both these. What kind of growth can we expect for the international business going forward? Which are the new markets you targeting and particularly with respect to ITC they seemed to have gained nearly 70-80 bps of market share in the last couple of months in soaps. So if you can just comment on what are they doing, which is resulting in this kind of sharp gain?

Dalip Sehgal: I think if you look at the share gain that ITC has had, obviously it is on a very small base, I am sure you are aware of that and fact is that the overall share on the both the brands is less than 1.5% but they have started from a base which is very low, so obviously there is some gain. As far as the international businesses are concerned clearly as part of the One Africa strategy we expect both the businesses to show healthy growth in the quarters to come.

Moderator: Our next question is from the line of Neelam Khubnani of First Global.

Neelam Khubnani: I would like to take the opportunity of having our management with us. I would like to share the vision of the management, you are already enjoying the stature of being India’s second largest soap manufacturer, but as we enter the new decade are we seeing like some new segments to be added to Godrej revenue, you had just entered on a personal hair care portfolio to be added, will we see some

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shampoo or conditioners to be provided to consumers or we seeing some brand extension of our Godrej hair color to some hair care products, what is our plan for this?

Adi Godrej: I think we have mentioned that we have launched a hand hygiene category, which is a new launch obviously you will understand, we cannot talk of what new launches we are planning to make in the future for competitive reasons, but clearly we will look at new opportunities as they arise and even in our existing categories both in terms of variants and products there have been considerable number of new launches.

Dalip Sehgal: I think if you look at what has been happening in hair colour, we have certainly launched under Expert range of colours apart from black, we have also under Nupur launched new pack sizes and we have new advertising going now on Experts, so we have lot of activity that is happening on the existing categories. We also see Protect with hand sanitizer; hand washes and wipes being the growth engine for the future.

Adi Godrej: And of course you realize that the acquisition of the 49% stake in Godrej Sara Lee they are also our new categories as far as Godrej consumer products portfolio is concerned.

Moderator: Our next question is from the line of Preeti Panchal of SBI Cap Securities.

Preeti Panchal: First is related to the Kinky business and I am referring to your performance update. This shows a 39% growth in revenues. Just wanted to understand is this only because of the Evolution range, which has been launched or is there something more to this?

Dalip Sehgal: As far as the kinky range goes the sales growth has been on account of not just the new Evolution range but also the fact that in distribution terms earlier we were going only through our own outlet, we now have started going into cash and carry as well. The other thing is that gradually we are also expanding the Kinky footprint in to the other countries.

Preeti Panchal: Regarding the PBT margins we have green come around 4.1% and 19.8% in this quarter, so what could be the reason for such high growth margins?

Dalip Sehgal: Two things, one is the scale advantage that you get once your growth happens like this and the second more benign raw material prices.

Preeti Panchal: Coming to the Sara Lee business, if you can share what was the rate of growth of sales in Sara Lee’s business in this quarter and nine months?

Dalip Sehgal: Sara Lee numbers, we can only give you the quarter numbers because on account of confidentiality reasons we cannot give you the comparable numbers for the same quarter last year at which point in time it was not part of GCPL.

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P. Ganesh: Of course, the current quarter numbers have been shared in the presentation.

Dalip Sehgal: The current quarter numbers are there and the previous quarter number from the date when we have started consolidating those numbers are in the public domain and prior to that the numbers are not there in the public domain.

Preeti Panchal: Can you throw some light at what rate the industry would be growing in India, home care products?

Dalip Sehgal: Household insecticide has been growing between 10% and 15% in the past.

Preeti Panchal: Coming to your standalone numbers, the performance update has shown exports at around 3%, which you had explained earlier in this concall. Can you please explain it again?

P. Ganesh: Essentially the export numbers, this breakup has been given in the performance update. If you look at the previous year the exports of hair colour it was all in the respective categories and currently what we have done is the domestic sales has been separated out and exports has been shown differently and that is the only change. It is only a regrouping.

Preeti Panchal: So this is essentially hair colour?

P. Ganesh: Hair colour and soaps.

Preeti Panchal: And lastly what was the price hike that was taken in the first half of FY10?

Adi Godrej: I do not think there was any price hikes in the first half of FY10. Price hikes were taken earlier, which reflected in higher prices in the first half compared to the corresponding previous year.

Preeti Panchal: Can you give a number to that?

Adi Godrej: It varies from SKU to SKU, there is no one number or price hike, there were different prices on different SKUs in different categories, different brands.

Preeti Panchal: Is it possible to give an average number for this?

Adi Godrej: We gave you the volume increases earlier in the concall, the volume increases and the value increases, the balance comes for price.

Preeti Panchal: If 25% will be nine month’s value growth and 15% was the volume growth, so 10% would be from this?

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Adi Godrej: No that 10% could represent price increase, it could represent mix change, it could represent everything

Dalip Sehgal: But that is the value component.

Moderator: Our next question is from the line of Sachin Kasera of Lucky Securities.

Sachin Kasera: If you could comment in terms of the outlook for the Sara Lee business especially on the coil side, how has it performed in the quarter and how do you see that going ahead?

Adi Godrej: Sara Lee business has done well; it will continue to do well. We have market leadership in several of our categories, it is a very strong business and I expect it to continue to do well.

Sachin Kasera: Especially on the coil side how is the competition and the profitability?

Adi Godrej: We do not talk of individual categories because that is competitive confidential information.

Sachin Kasera: If you could just share in terms of market share both in coil and liquid segment?

Adi Godrej: No, I do not like to do that.

Moderator: Our next question is from the line of Sagar Parekh from Enam Holdings.

Sagar Parekh: For liquid detergent category can you share the market share and the EBITDA margin because if you see the sales mix, liquid detergents have increased from FY09 figures, can throw some light on that?

Dalip Sehgal: Our share in the liquid detergent category is 82% in this quarter.

Sagar Parekh: What is the EBITDA margin?

Dalip Sehgal: I am sorry, we cannot share EBITDA margin by category.

Moderator: Our next question is from the line of Gaurav Bhatia of Deutsche Bank.

Gaurav Bhatia: Just two questions, one is on the excise duty rollback, your thoughts on those and second is state’s tendencies to go out and increase VAT just ahead of the GST itself, I am asking you this question in the context that typically FMCG products on the whole come within 4.5% to 12% sort of a tax zone and GST that is being spoken about is 7+8 or 8+7 or 7+5, 12% to 15% sort of a range, if you could just give us your perspective on that that will be very helpful?

Adi Godrej: Well, it is true that many states have increased the VAT rates ahead of the GST implementation. I presume it is trying to take a bargaining position in revenue neutrality with the central government as and when VAT is introduced. Obviously with

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the VAT rates increasing it would have a marginal effect on the FMCG sector. As far as the GST rates it is very difficult to tell, until the government makes proper announcement. I expect that once GST is announced there will be a general saving in taxes to those FMCG companies; however, we have to wait till the announcements come to be able to say anything on that. As far as the excise duty rollback I think the finance minister has mentioned that he is not in a great hurry to rollback the excise duty, but in our case a large part of our manufacturing in excise-free zone and even if there is an excise duty rollback it will have a very small effect on us.

Gaurav Bhatia: Overall, this excise exim zone policy continues even under the direct tax code, they did mention that it would continue till 2011, so clearly at what point in time do you see excise duty or then GST coming back to hurt the sector if at all?

Adi Godrej: No the excise duty exemptions will continue until those particular exemptions in each location for each factory are valid.

Moderator: Our next question is from the line of Shirish Pardeshi of Anand Rathi.

Shirish Pardeshi: Just a couple of questions. If you see the last quarter, you have done a new launch, there was a big offer from Lever, gold coin, and on top of it most of the industry players have upped the advertising spends. I am wondering, you just mentioned that the industry has grown about 5.5% and you have grown twice of that, this time winter was also not that severe, I was expecting higher growth because there was a new launch, which has happened from ITC also and there is one new launch that has happened from Emami, so most of the regional players also have been spending a lot, but the category growth is not that impressive, what could be the reason?

Dalip Sehgal: I think it is two or three things that we spoke about earlier, I think the one thing, which is obviously working against FMCG as a whole perhaps to some extent is the fact that there is food inflation at 18% to 20% and that is hurting the wallet for probably the lower middle income, so that has had an impact. Secondly, I think to a very large extent the price component of the growth is almost not there, so if you look at the first half of the year there was probably a 8% to 9% price increase and this quarter onwards there is no price increase, so if you look at the market growth at 5.5%, about 3.5% to 4% is volume, which is the long-term secular trend of volume growth in soap business, so the market has come back to the long-term secular trend as far as growth is concerned on volume. Now, overlaid ads with possible price increase you will get a sense of how the market could look in the future.

Shirish Pardeshi: This quarter is supposed to be the biggest quarter for Ezee and if you can share what kind of growth we have seen vis-à-vis last year?

Dalip Sehgal: We have had almost 20% growth in Ezee and we have got a share of 82% in this quarter.

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Shirish Pardeshi: Lastly, we have seen a drop in market share, we all do not believe AC Nielsen, it is an indicative number, but I want to know if there is any region where we have lost drastically our market leadership position maybe north or Rajasthan?

Dalip Sehgal: In soaps, no we have not lost, the fact is that again I think you know that in soaps the best way to look at share in winter is on a year-on-year basis and to just to give you the last year Q3 number it was 9.5 and we are now at 10.3. So, we have not actually lost any share quarter-on-quarter because in winter what happens is especially in the north and in the east it is fair bit of glycerin soaps that come in as, you know, so the structure of the market changes a bit, we have not and as far as leadership is concerned we continue to maintain leadership in the northern states as we spoke about.

Shirish Pardeshi: Very lastly to Mr. Godrej. You have just mentioned about the food inflation and we all know that there is lot of means and ways the government is working on. How long do you think this effect would be on the food inflation?

Adi Godrej: About two months because the Rabi crop is turning out to be strong, once the Rabi crop is in I expect the food inflation and the effect on consumers to come down, so the marginal effect on FMCG consumption should go away, but the other factor of price increase leading to value growth in FMCG will be lower than when prices were increased a lot during the previous year.

Moderator: Ladies and gentlemen, due to time constraints that was the last question and I hand the conference over to Mr. Ajay Thakur for closing comments.

Ajay Thakur: I would like to thank the management of Godrej Consumer for their time and I will also request them for a concluding remark.

Adi Godrej: Thank you for hosting the conference. I would like to once again reiterate that Godrej Consumer Products has done extremely well in the first nine months of this year and we expect to continue this trend in to the next few quarters.

Moderator: Thank you gentlemen of the management, thank you Mr. Thakur. Ladies and gentlemen, on behalf of Alchemy Share & Stock Brokers Private Limited that concludes this afternoon’s conference call. Thank you for joining us on the Chorus call conferencing service and you may now disconnect your lines.