"The FMCG sector has performed reasonably well in the last several years, even in the years when the GDP growth has been slow. We expect strong growth in the next three-five years too, he told CNBC-TV18 in an interview.
Continuing his upbeat tone, Godrej said that the economic slowdown story is now behind us and one has started seeing a turnaround in urban India. The company's domestic business in the second quarter of FY14 grew at 17 percent, year-on-year (Y-o-Y). Globally, it clocked a consolidated sales growth of 23 percent.
Further, he doesn't see company's margins coming under pressure going ahead, due to heavy investments it has made in advertisements. Meanwhile, the company has recently increased stake in 'B:Blunt' to understand salon business better.
Godrej Consumer aims to grow 10 times in the next 10 years.
Godrej Consumer has been one of the top 10 significant wealth creating stock for equity investors according to Motilal Oswal's Wealth Creator (2008-2013) study. The stock price has jumped from Rs 40 in March 2004 to currently Rs 812.
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Below is the edited transcript of Adi Godrej's interview with CNBC-TV18
Q: We are trying to put a list of companies that have been significant wealth creators for investors in the equity markets and Godrej Consumer Products is one of them but in the last couple of weeks as we have all seen, there has been a slowdown in urban demand. What is your sense of how, not just for the very near term but for the next couple of years, do you think the growth rate that urban India has been seeing will significantly slowdown for consumer products?
A: I do not think so. The fast moving consumer goods (FMCG) sector will continue to do well. There has been a slightly slowdown over the last couple of months. However, the strong agricultural season leading to strong rural gross domestic product (GDP) growth will lead to growth in demand very soon.
Urban demand will also start picking up because we have seen the worst in the economy and things should improve now. FMCG has performed reasonably well over the last several years even in years when the GDP growth has been slow. So, we are confident of strong growth in the next three-five years too.
Q: The positive urban and rural growth, the turned around in urban and improvement in rural growth you are talking about is it a matter of hope or are you seeing signs on the ground, are you stockiest and sales guys telling you that things have picked up?
A: Even in the last quarter we posted strong growth. Our Indian business grew at about 17 percent; globally our consolidated sales grew 23 percent. So, we have been growing well and I expect to continue to do so.
Q: Are things turning around in urban India?
A: It has turned around from this month onwards. We are seeing agricultural prices come down except for vegetables and fruits, almost all other prices have started coming down and that indicates strong agricultural production.
Q: For the next year or couple of years what could or how much could the margin profile of the company expand because give and take all the fluctuations that we have seen in input prices, the margins for Godrej Consumer have held around 14-15 percent level. Is there potential for the margins to expand considerably in the next couple of years?
A: It depends on how you look at margins. Internally, we look at margins before advertising cost because advertising to us is an investment into the future. Generally, all FMCG companies have realised that when they advertise heavily for future growth, it helps especially in times when growth rates are relatively low. So, we have been investing tremendously into advertising especially behind our very successful new launches. If you look at the profit margins before advertising our profit margins have grown in every quarter over the last several quarters.
Q: Do you think that in your total margin profile the international margins could keep the overall margin picture slightly under stress?
A: No. Our international margins are in very good shape, they continue to do well. Of course, we are facing problems in certain areas especially when countries go into election like Indonesia; in Nigeria there have been wage hikes but wage is a small proportion of our total cost, for example in Indonesia, where the wage hikes were quite substantial, wages account for only 5 percent of our total cost so we tend to pass them on.
Q: The trend in the last three quarters has been that you have been doing very well on gross margins largely because raw material costs have been coming down and you have invested that into your ad campaigns, into your advertising investments, does that trend continue in the Q4 and the next quarter?
A: I expect that margins will continue to be reasonably good. It depends on competitive intensity but even when raw material costs do go up, we tend to absorb them through better efficiency in manufacturing in sales and we pass on some cost increases, of course the ability to pass on the cost depends on competitive intensity, but I expect that will continue.
I expect the margins will remain good and because we have invested tremendously into advertising over the last three-four quarters I expect our future growth will remain good. Our internal plan is what we call 10 by 10; we expect to grow 10 times in ten years which is a CAGR of about 26 percent and we are very much on track for that plan.
Q: You have taken 30 percent stake in a salon B:blunt, will you take more stake and how is it improving your bottomline or even your sales?
A: The purpose of taking this stake was to learn the salon business better to be able to apply ourselves to the salon business better. We are not interested in taking stakes in companies and run them; we do not want to invest into services, but we do feel that this investment will help us learn how best to service our salon customers and since hair colour is a big business for us, not only in India but across the world, this will add a lot of value and it is a very small price we had to pay for this stake.
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