Godrej Consumer Products Ltd

NSE:GODREJCP

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, good day and welcome to the Godrej Consumer Products Limited Q3 FY '18 Earnings Conference Call, hosted by IDFC Securities. [Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Harit Kapoor from IDFC Securities. Thank you, and over to you, sir.

[Harit Kapoor, Vice President of Research]

Yes. Thank you, Stanford. On behalf of IDFC Securities, we'd like to welcome everyone to the Q3 FY '18 Earnings Call of Godrej Consumer Products. We have with us the senior management of Godrej Consumer Products. I'd like to now transfer the call to Tapan for opening remarks. Yes, Tapan, over to you.

[Tapan Joshi]

Thank you, Harit. Thank you. Good evening, everyone, and thank you for joining us today on the conference call to discuss the performance of third quarter fiscal year 2018. We have with us Nisa Godrej, Executive Chairperson; Vivek Gambhir, Managing Director and CEO; V. Srinivasan, CFO and Company Secretary; and Sameer Shah, Head Finance, India and SAARC & Investor Relations.Like our previous quarter, we will start with a presentation with Vivek sharing his thoughts on our performance and then we can open up for Q&A. Over to you, Vivek.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

Thank you very much, Tapan. Thank you, Harit. It was a reasonably good quarter, where we delivered competitive and profitable growth while continuing to make healthy investments in our brands. The performance was led by India, which delivered an 18% volume growth. The number though needs to be viewed in the context of the low base in the corresponding quarter last year. However, even on a 2-year basis, the volume growth was quite healthy at 8%.Along with the strong volume growth in India, EBITDA grew at a very healthy 32%, driven by a better portfolio mix, some benefit of lower commodity costs and the benefits from our cost reduction programs. This profit growth was delivered while investing in our brands. Our marketing investments increased by 24% year-on-year. We believe that these investments are strengthening our brands and are also setting us up well to accelerate growth in the quarters ahead.Our team has been very agile in navigating the continuing transition to GST. We took price cuts of about 6% to 10% across relevant categories to pass on the benefit of the rate cuts that were announced in November to consumers. Overall, the environment is getting more stable now. The trade channels are largely back to normal, consumer demand is improving and we expect stronger demand in 2018-'19. We are intensifying our pace of new launches to build on the momentum that we are seeing.The recovery in rural has been stronger than urban. While urban did well, rural pick up was much better. Given the likely focus of the government on rural development, rural infrastructure and rural growth, we believe the rural demand will be one of the key themes in 2018-'19.Turning to our International business. Our International performance was below our expectations, largely due to some one-offs and some transient hiccups. In Indonesia, our business continues to show a gradual sales recovery in the midst of a continuing tough environment. We have however managed to deliver good profit growth in spite of the faced challenge. The outlook for Indonesia is more positive this year, and so we are hopeful of the recovery gaining more speed.In our Africa business, our hair extensions business continue to grow in double digits. The scale up of our wet portfolio has seen traction. However, we saw growth in Kenya slow down in the quarter due to the political and social turmoil in the country, because of 2 back-to-back presidential elections. The outlook for Kenya is better this year.Our U.S. business also got impacted due to an implementation of a new ERP system. The system is now largely stabilized. We are very confident of Africa and the U.S. delivering stronger growth in the quarters ahead. And we're continuing to make a lot of investments in people, brand building and factory infrastructure to strengthen the foundations of the business.Overall, we are very excited about the medium-term potential of our international portfolio. While there will inevitably be occasional hiccups, we remain very committed to making the right investments and ensuring that the portfolio delivers strong returns. I'm also very pleased to inform you that our Board of Directors today approved the nomination of Pippa Armerding as Director effective immediately. The Africa -- Pippa is based in Johannesburg and she is a lawyer and a business professional with 20 years of experience operating across Africa, Asia, Europe and the Americas. The Africa continent is extremely important to us from a growth perspective, and Pippa's deep knowledge and expertise of the continent will be a strategic advantage. We're also proud that GCPL will now have 5 women directors, the most in any Indian-listed company along with Godrej Agrovet.I'll just quickly walk you through the presentation and cover with you some of the highlights and then we can open it up to -- open up to questions.On Slide 3, we summarize our financial performance. On a consolidated basis, net sales grew at 11% on a constant currency comparable basis, EBITDA growth was 18% on a constant currency basis and net profit was 21% growth without exceptionals and one-off items.Slide 4 lays out the exceptional items in the quarter. Slide 5 shows the bridge between reported to operating EBITDA like we do every year. Next slide, we talk about the balance sheet data. Again, if we look at the balance sheet metrics, they are all trending in the right direction. So we continue to make very good progress in making our balance sheet much more robust.If you take a quick look at our India performance on Slide 8, as we had mentioned earlier, we saw 17% growth -- comparable growth, which is driven by a very healthy volume growth of 18%, the EBITDA growth was at 32% along with continuing to make very healthy brand investments. And Slide 9 lays out our volume growth, and the sales growth was led entirely by volume growth.On Slide 10, let's spend a little bit of time on this particular slide. Generally while our performance has been very healthy, we did see some softness in our insecticides business. This was driven by a bunch of different factors. Some of the factors were more seasonal in nature. The delayed onset of winter actually impacted this business a little bit, particularly in the north and the west. And so that saw an impact and we saw a lower incidence of mosquito-borne diseases this quarter as well. And we did not see the kind of growth bouncing back in HI as a category like we saw in some of our other categories. And this is also [indiscernible] by data from the external research houses and from the performance of the other players. The potential for growth is very significant in this category, as you know. Also to a certain degree, some of the other categories, which saw lot of growth did benefit from price cuts. This was one category where there wasn't any price cut in the quarter. But clearly, the potential for growth is very significant, and so we have begun significantly dialing up our efforts in innovation. And over the next few quarters, you will see several exciting launches from us that will help us get this category back to the kind of growth trajectory that we would like to see from this category.The other important point to mention is that we have been doing relatively well as far as the value-added formats are concern. And so in our value-added formats, we continue to gain share. But we have experienced some pressure in the more commodity formats like coils, but our innovation agenda will try and cover the entire portfolio, so you will see new launches from us across all the formats over the next 6 to 12 months that will help us drive significant growth going forward.On hair color, very strong growth driven by volume. Expert Creme did very well, and what was also very encouraging to see was the strong pickup in powder hair colors post the GST led price cut.Our growth momentum in soaps has been sustained. I think this is the third quarter where we have seen very good growth in soaps, both Godrej No. 1 and Cinthol have done very well on the back of some very strong marketing initiatives and good execution. This is the season where liquid detergents portfolio Ezee does well. It's a seasonal category, and we've seen some strong growth in Ezee as well. Across the board, I think, our new launches are doing well. But as I mentioned to you, we are intensifying our pace of new launches and so over the next 6 to 12 months, across all of our categories, you will see a very healthy mix of very differentiated new products. We've been working on these over the last couple of years and we're very excited to launch these over the quarters ahead.Turning to our International business. As I mentioned to you, the performance was mixed. We are laying the foundational elements for International to perform much better. But the performance in this quarter was below our expectations on both sales and on the profit lines. On Indonesia, the performance is recovering, and I think the macro environment in Indonesia is still quite difficult.For the sector as a whole, home and personal care growth is still negative. The outlook for 2018, however, is more positive, and so we are hopeful of environment improving. The encouraging news is that sequentially, if you look at our performance, our sales decline has narrowed down. The decline was 2% in quarter 3 versus a 7% decline in quarter 2 and a 11% in quarter 1. So the trend is heading in the right direction. And while sales growth has been a challenge, we have ensured strong delivery of bottom line.The strategy going forward is to focus far more on innovation. Here again, we have launched a couple of interesting products. There are more launches planned over the next 6 to 12 months to change the narrative from a very discounting led approach to a more innovation brand-led approach across the category. And we're also putting a lot of focus on transforming our go-to-market model to increase focus on general trade, where we have a relatively low channel salience. So we are hopeful of a continued recovery going forward.On Slide 21, we talk about Africa and our U.S. business. In this portfolio, we saw continued double-digit growth in hair extensions. The wet hair business is seeing good traction on the ground and we are very hopeful of seeing a positive contribution from this business over the next few quarters. The quarter did see a lot of turbulence in Kenya that went through 2 back-to-back presidential elections, which significantly impacted the trade environment. The macro outlook for the country is much more positive for 2018.In the U.S., we migrated to a new ERP system, and the implementation caused a lot of upheaval as far as servicing U.S. customers was concerned. The system is now getting far more stable. We are making lots of upfront investments in new talent, in brand building, in new factory infrastructure, and that has impacted near-term margins. However, we believe this is the right call to strengthen the foundations of the business.Across the board, there is great work happening on the ground in terms of new talent coming on board, brand building, new product launches, scale up of our wet portfolio and driving operational efficiencies. We believe that we are very well geared to deliver stronger growth in the quarters ahead and to capitalize on the tremendous potential that we see in the region.The performance in Latin America was soft this quarter, but we are hopeful of seeing the growth return back in quarter 4. Europe continues to see good momentum on both sales and earnings growth up in Slide 23. Slide 24 basically is a summary of our third quarter performance.And let me just pause here, and then turn it over for Q&A. Thank you.

[Operator]

[Operator Instructions] We take the first question from the line of Abneesh Roy from Edelweiss.

[Abneesh Roy, Senior Vice President]

Sir, my first question is on the soaps business. So if you could talk about Cinthol. In the presentation, I don't find any mention of Cinthol. How is the performance of Patanjali? Earlier you have said in soaps, Patanjali has had limited impact. Is it now worse, or is it better? Could you talk about the micro-marketing initiatives and variant strategy, which is doing well for Godrej No.1? How much was the benefit from up stocking because of the rate cut? So these are the 4 sub questions.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

Abneesh, our secondary sales were higher than our primary sales, and so I think that's a good indicator in terms of how to think about any potential up stocking. And I think for multiple quarters now the discipline we've been maintaining is to try and always look at both secondary sales and our primary sales. In fact, our sales teams actually measure themselves on secondary sales, not on primary sales. Cinthol has done very well. Godrej No.1, we have multiple variants, all of them are doing very well. We've had a very strong focus in terms of targeting specific states and making sure that our portfolio applies to a broad set of consumers in the states. I cannot comment on the impact of any other competitor, but from our perspective, I think we've been pleased. Our shares have been inching up, as you know. And so we are pleased with the performance consistently over multiple quarters now.

[Abneesh Roy, Senior Vice President]

Sir, last 4 quarters impact has been good for soaps, that is on a base of softer 4 quarters prior to that. So now going ahead when base is no more favorable, do you still expect to grow faster than the industry? And will this be largely led by Godrej No.1? And who are you gaining share from?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

It is difficult to comment on exactly who are we gaining share from. But it would be several players in the market, but I think this is a category where clearly we do believe that our story is quite differentiated. We have the best quality soap and the grade one soap in No. 1. Cinthol also has a very unique proposition, and I think our marketing is working for us. Over time, the growth will stabilize. As you know, this is a very penetrated category. But through, I think, tapping into additional states that we'll focus on, probably expanding the portfolio with more adjacencies, intensifying our focus on things like hand wash and liquid washes, et cetera, we do see the potential for us to be able to grow faster than the industry. But this is an industry or a category, which does grow on a slower pace and so we know that the growth will stabilize over the medium term. But certainly from our perspective that we feel confident that given our innovations and our go-to-market execution, we should be able to outperform category growth.

[Abneesh Roy, Senior Vice President]

Sir, my second and last question is on the HI. So here if you see how much is the percentage of coils currently and how much is value add, you mentioned value add is doing much better. And sir, in coils, did you see in Q3 still impact of the wholesale? Why I'm asking this is, some of the companies who have a high wholesale component in some of their brands, they are still seeing a very tough Q3. So have you seen similar in Q3? And finally, if I see HI over the last many quarters, last 5 quarters, it has been flattish to a mid-single growth. You have pointed different reasons, some could be GST and some could be demon, some could be seasonal. But if I see prior many quarters, we never saw this kind of a lower growth in HI, so obviously there seems to be something more beyond the seasonal or the GST, et cetera. So if you could address that part?

[Sameer Shah]

So, Abneesh, I think just in terms of data point to begin with, the value-added portfolio would be more than 65% to 70% of our overall household insecticides and [indiscernible] would be the rest, which largely would comprise of coils as well as paper-based mosquito repellents.I think what we've seen to begin with in this category is, at least in this quarter again, to begin with is a little bit of seasonal impact. The issues in terms of wholesale impacting mass format is a little better in quarter three as compared to what it was in quarter two, it's still there though. So that also in its own way would have smaller impact although it's difficult to quantify.Yes, we have seen actually, last three, four quarters consistently or even more than that perhaps relatively softer growth. The point is, this category sits somewhere in between a staple to a classical discretionary space. So, to that extent, we have seen little bit of slower consumption at category level and we being market leader, are also seeing relatively softer growth.Having said that, as Vivek also mentioned in his opening remarks, we are working towards multiple initiatives, whether it would be stretching the consumption, driving penetration, and we will see couple of very interesting launches what we see from our end over next quarter to two, which we think should help us in terms of driving both the -- stretch --consumption as well as the higher penetration objective, and in turn should result in growth rates, which will be much better than what we have seen over the last five, six quarters.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

Yes. I think the big objective for us, and clearly, we are not happy with our performance over the last three or four quarters as you mentioned. The big objective for us is to grow the category. We've done very well in terms of share gain, and we continue to believe that our portfolio and our distribution allow us to incrementally gain share, but the big focus needs to be to grow the category. To grow the category requires a strong innovation. Because of the lead times required in launching new products, this can be both an advantage, but it does take time. And so a lot of the groundwork that we've been doing over the last two or three years, over the next one to two years, you will see very exciting launches, which have been worked on, that should allow us to be able to drive penetration. So the need of the hour is for us to be able to find ways to increase penetration. And I think once -- if we can do that, you will start seeing growth return back to the historical numbers that we have delivered.

[Abneesh Roy, Senior Vice President]

That's quite useful, sir. Thanks. All the best.

[Operator]

[Operaror Instructions] We take the next question from the line of Amit Sinha from Macquarie.

[Amit Sinha, Analyst]

My first question is on the HI business, again. as you mentioned that it is, I mean the category itself is a bit of discretionary in nature and that would have led to some softness in the demand in the last few quarters. So my question is that at the current level of pricing, especially in the liquid format, do you think affordability is a major issue and are some of the innovations, which you talked about will address this?

[Sameer Shah]

There are four drivers in insecticide, affordability, efficacy, safety and convenience. And I think as a market leader, we have to address all those consumer needs and have a full format of products that will address the needs. Some products will focus more on efficacy, some might be on affordability, some might try and do both, some will be focused on convenience and some -- and across the board we'll make sure that our products are very safe. So that's a part we need to play, it's just taken us some time to get the portfolio right. But as the market leader, we have to find a way to be able to -- find ways to [indiscernible] consumers, find ways to create more affordable products. So what you see from us over the next year and two years will be a fairly exciting set of new launches that address all the issues that you've, Amit outlined.

[Amit Sinha, Analyst]

But at the same time my question is that if you address this affordability issue, I mean, so liquid as we all know is a high margin product. Is there a risk of the new product or any of these innovations, which might be affordable might eat away into the margins of the segment?

[Unknown Executive]

You know, we don't believe -- and it's not that we don't [indiscernible] an affordable segment in any case, I mean if you look at Fast Card or coils, and actually the per night cost of LV is lower than actually the per night cost of coils, it's just because of the machine, electricity, the put down price of the bottle that gets higher. But like Vivek said, obviously, and I'm going to tell you exactly what we're going to launch, but we are sort of very, very confident of covering sort of all growth vectors in this market. And don't forget even something like personal repellents on our Fabric Roll-On and cream doing really well, that's a INR 75 price point. We also have a INR 20 personal repellent product. So, we will cover all price points and penetration is the name of the game for us. But I don't think I would call us necessarily just a premium player, we play across all price segments and we continue to do so with better and better products.

[Amit Sinha, Analyst]

Sure. So, my last question is on -- basically on the GST gains, which has been happening on both your soap segment and hair color. Now if I get into the sub-segments and clearly No. 1 and powder has gained significantly, and the growth rates, even if I look at two years CAGR basis, it is on -- I mean at this point of time, it is definitely super normal. So how should we look at going forward, is it a one-quarter phenomenon, or you believe that the powder and both No. 1 can continue to grow at least for the next two, three quarters, and your commentary on the market share gain from the unorganized segment, yes, that's my question.

[Sameer Shah]

So, Amit, I think just in terms of facts, it's not just powders, but cream, which has also grown extremely kind of strongly, and it continues to be the case, I mean over the last now of two, three years. Yes, the powder performance has been better compared to what we have seen in some of the earlier quarters and also on soaps, it's not just Godrej No. 1, but Cinthol, which is also growing, I mean continuously at very, very strong growth rate. So, the performance in Godrej No. 1 is tad better than Cinthols growth rate. Of course, I mean we need to read this numbers, baseline with what were the growth in the base quarter, but even if we look at two-year CAGR, I think they are kind of much stronger growth rates. Of course, I mean, optically this growth rates will normalize, but at which stage we remain very confident one of gaining market shares, so point which we have been kind of driving over the last three, four quarters both in soaps and hair color. And second also perhaps maintaining very close to sort of two years CAGR growth rates, which we have been clocking over the last year of kind of two, three quarters even going ahead.And again, just to put this in context, two-year CAGR in soaps was 9%, and two-year CAGR in hair colors was 15%, and so I think in that context, the growth rates going forward are to mirror this from the work that we are doing.To your other question around, the shift of unorganized to organized, frankly we haven't seen any clear trend there. I think the -- and the unorganized channel in some ways in India has been quite resilient, so I think over time as GST creates a more level playing field, some of the players who are not ethical may find it difficult to do business, but so far we have not seen any significant trend that we can call out, partly this might be the fact that we are still in the midst of the GST implementation and not every single piece has been put in place. So there is still room for non-compliance there to find a way to do business, over time it will get harder, if it gets harder, definitely you will see some shift towards the more organized players, but at this stage it's very difficult to extrapolate and draw trends on what you've seen in the market.

[Amit Sinha, Analyst]

Thanks a lot, sir. Very helpful.

[Operator]

We take the next question from the line of Vivek Maheshwari from CLSA.

[Vivek Maheshwari, Research Analyst]

My first question is on Indonesia. So, last quarter, if I recall correctly, you had a 1% decline adjusting for promotion spends and 7% on a reported basis. Is the trend broadly similar, and if so, does that mean that adjusting or netting off promotion spends you are actually in positive in this quarter?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

So, the trend in rural has been similar, Vivek. I mean there is not much to choose between percentage in either of the direction. And to kind of also answer your question, the quantum of [ this ] promotion has gone down as a percentage of groceries in this quarter compared to the previous quarter.

[Vivek Maheshwari, Research Analyst]

Yes, but given that the number is -- this time the decline is so small that if there -- even if there is promotion, which is a smaller one compared to second quarter, you may end up being flat. So is that a fair understanding?

[Tapan Joshi]

Yes. That's right, I mean.

[Vivek Maheshwari, Research Analyst]

And can you just, I mean, while Vivek did in the opening remarks, he did mention about Indonesia, but can you just, given that it was such a big pressure point for last few quarters, can you just elaborate on how the competitive landscape is specifically, please?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

Generally in insecticides, the level of promotional intensity still continues to be high. While it might be a tad bit lower than what we [indiscernible] a quarter or two ago, the intensity seems to be quite high on the insecticides front of it, not in the other part of the portfolio, which is the remaining two-thirds of the portfolio. And what we are trying to do is basically be far more -- we are also being competitive in our promotions, but there will be far more surgical and far more analytics in terms of the capability, in terms of where to best direct a promotion and having a much higher threshold in terms of measuring ROI of the kind of promotions we are launching in parallel with much more stronger focus on brand building and innovations. But the intensity still does remain in insecticides space of it.

[Vivek Maheshwari, Research Analyst]

And second one, a few years back you had or you have been mentioning it over the years that your aspiration is to grow your bottom line ahead of top line. Where we are in the commodity cycle right now, the crude being around or Brent being around $70? Do you think that that may play out or you would expect perhaps bottom line growing either in line or a tad shade lower than the top line? How do you see the next, let's say, a couple of years?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

See, clearly, our single most important objective is driving volume growth, strengthening our brands and also ensuring that we are continuing to have a broad portfolio of new launches. We start with that premise. I think our belief is that, at an overall level, and this is at a consolidated level, there is still opportunity for us to be able to drive profit growth ahead of sales growth. Now you may have a year or so where we start making some investments and that's conscious call we will take, but if I look at profit profile, the kind of cost reduction programs that we have, both in India and I think in Africa, we do see opportunities to be able to drive profit growth ahead of sales growth. Indonesia, we'll have to wait and watch given the competitive environment and profit margins, in Indonesia is at quite high. And I think also in Latin America, margins have been somewhat volatile, but there again there is opportunity to be able to better drive stronger profit growth through driving greater synergies between Argentina and Chile.With regards to the near term, I think you mentioned -- the two most important input costs that can affect some of our cost, one is palm oil. While it is very difficult to have a long-term view on palm, at least near term the feeling is that palm oil prices should remain somewhat stable. With regards to crude, that's an indirect variable and so you know any impact of crude typically will not be seen for one or two quarters. Now in one or two quarters what happens to crude oil prices depending on what U.S. shale manufacturers end up doing et cetera, very difficult to be able to really predict. But at this stage, we are still quite comfortable that barring any significant new launches that we decide to do for competitive reasons, our abilities to drive profit growth in line, if not ahead of sales growth, still is something that we stand by.

[Vivek Maheshwari, Research Analyst]

Just a small follow-up. Have you taken up any product price changes other than the GST cuts, particularly in the context of, let's say, where palm and crude is -- to get us some visibility from a year-end perspective?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

No, Vivek, not yet. And we do not intend to in the near term also change any prices.

[Operator]

We take the next question from the line of Prakash Kapadia from Anived Portfolio Managers.

[Prakash Kapadia]

Congrats on a good set of numbers. On the India business, I wanted to get some more flavor about the quality of growth. You mentioned about market share gains, you mentioned about low base. So what has worked, is it lesser wholesale channel dependence, is it price-sensitive kind of products which we operate, which have grown faster in our portfolio as compared to premium products? If you could give us some more sense of growth and how sustainable the growth looks on, because in the opening remark, you did mention about rural growth going forward looks strong. So what kind of products are we focusing on in near term, specifically for rural India?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

See, at the end of the day, there is no silver bullet answer that I can offer to you. It typically tends to be a function of four different things. One is very good products. At the end of the day, if you create good products, I think consumers will buy. And I think we have some of the best and the highest-quality products in the market and this continue to focus on our product story.The second is, the products are backed by, #2, very compelling marketing and the marketing activations on the ground, sampling, activation programs, all seems to be -- have worked well for us at least over this quarter.The third is distribution, which is getting far more analytic and both direct distribution, how we engage the distribution partners, how we engage our wholesaler partners, how we work with them, how our sales force executes on the ground is the third piece of what drives quality of growth.And finally, the secret sauce does tend to be the agility and the passion of any team and there again, I think our team has been extremely agile and entrepreneurial. So honestly, there is no one single answer I can give you. When all of these four things work together, then you see good quality of growth, and our intent is to keep on learning and driving these four levers to be able to sustain this growth going forward.

[Prakash Kapadia]

How much would be wholesale for us for the India part of the business, if you can give us some idea?

[Sameer Shah]

It's around half and half. I mean, half of our general trade would be wholesale driven.

[Prakash Kapadia]

And one more thing on Aer. Godrej Aer has done well for us. If you could give us some sense on size, reach, in terms of outlets, levers of growth from here on, because we've done wonderfully well there also.

[Nisaba Adi Godrej, Executive Chairperson]

Unfortunately, we can't share those category information. We believe that we are #1 in the category of car and home now and the brand continues to look sort of grow very, very fast. So we are both very excited about the potential about the air freshener category and the growth potential and getting in new products. And we are the market leaders in Indonesia in air fresheners also. You will see a lot of good things from us at all sorts of price points and different uses. I think it's a very -- I think we're talking about a very nascent category because penetration is only 6% or 7%.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

So I think that's why there is plenty of growth for any company that brings in very innovative products to market because the benefit of it as Nisa said that you have room for growth.

[Prakash Kapadia]

And even on the rural pie of bit, we see growth coming across through a set of products for us, say, in the next 12 months given the state of elections and government focus spendings or some specific products you think will grow faster, some could average out. So which are 1 or 2 key products which you think which will grow much faster than others?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

See the good thing for us is, across our portfolio -- obviously, air fresheners will not grow as quickly in rural, so we are seeing some growth there, but soap, hair colors, insecticides, these are all products, some of them are stable, some of them are a little bit less, little bit more discretionary. But across the board, I think once we've seen a pick up in rural demand, it should start providing a meaningful uptick to most of the portfolio, apart from air fresheners and perhaps liquid detergents. But there again, we do sell a fair amount in sachets, so there is opportunity also on the detergent side of the business.

[Operator]

We take the next question from the line of Manoj Menon from Deutsche Bank.

[Manoj Menon, Research Analyst]

Congratulations on a best-in-class performance on India. The first question is actually on the International business. One, the first sub-question that is on the Africa piece. If you could just take us through the milestones broadly what you had on the wet hair portfolio and where are we in that journey? So this -- I'm asking this for a couple of reasons, one that you are investing, which you can see in the margins; secondly that the template for wet hair, which is organic, it is slightly different from possibly what dry hair, which was a relatively stabler business if you could ramp up. So the first question is on that. Second is on Latam. Given the generally high inflationary environment, which those countries having, is this constant currency growth -- are you happy with that? Third, on Indonesia, I know that it's been discussed in detail, but when I see the trajectory -- while the trajectory has improved significantly, if you remove the fact that, let's say, the significant competitive activity levels, et cetera, has come off, I'm not sure that we have actually improved the trajectory. Is that the right way to interpret Indonesia?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

So let me start with Africa. On Africa, the potential for wet hair as we've discussed before, Manoj, is huge, and a lot of our work over the last couple of quarters has been to localize manufacturing. That probably has taken us a little bit longer time to stabilize, but a lot of the manufacturing is local and we have spent time in trying to crop the right proposition for the consumers across all the major markets. The products have gone into market. Our initial feedback is positive, but I think the real test will be over the next 12 months or so. The teams are very excited, but the scale up now will start accelerating quite a bit. You will see some impact -- improvements in quarter 4, but next year should be the year where you will see a meaningful contribution from the wet hair portfolio across sub-Saharan Africa. So we remain very excited, but the focus really has been a lot more to try and get the manufacturing scale up done the right manner across various countries in Africa and that's now largely over.

[Sameer Shah]

I think Latam to begin with, Manoj, as also Vivek shared earlier, we think it's more of one-off. There were some kind of on ground issues more so in terms of macro in Argentina, which led to the kind of growth, which is much below compared to even our internal expectations. But I think the teams and also we remain extremely optimistic that come quarter 4, again, we should see extremely strong overall financial performance, primarily driven by sales growth. So I think netted on a full year basis, Latam should be fine in terms of overall business performance, and not just financially but also gaining market share across key categories. So I think this is more of just a one-quarter kind of phenomenon. By end of the year, I think it should be kind of doing quite well on multiple kinds of matrix. Manoj, we just lost you a little bit in terms of your Indonesia question, so if you can just kind of repeat that for us, please?

[Manoj Menon, Research Analyst]

The question was while I do see the trajectory improvement part, which you have mentioned in the presentation also, and as Vivek Maheshwari asked little earlier, I understand that part, but considering the fact that there was some bit of irrational competition earlier, which is probably not there anymore, is that the real underlying trends largely being stable rather than actually? So is it stable or should I still believe that it's actually improving?

[Sameer Shah]

So I think maybe -- I mean, just to kind of circle back on this, what Vivek did mention to one of the previous kind of [ rewards ] is that competitive intensity is more or less much of the same. I mean, it has marginally diluted [ down ], Manoj, but it hasn't changed dramatically. What we have done essentially is from where we were in first quarter in terms of our quantum of spends, nature of spends, on trade promotions, we have kind of made it much more crispier with respect to few SKUs in few specific channels. That quantum has reduced down and continues to reduce down for -- starting with first quarter and then second quarter, now in third quarter. To add to that, we have also launched couple of interesting innovation. Early days, but those are also kind of contributing to this gradual recovery. Finally, we think this is going to be gradual. I mean, it's not going to be a re-shaped kind of recovery. But as we have maintained our stand since last 2, 3 quarters, we will continue to see gradual recovery in Indonesia sales. And then I think rest, most of the profits will be a fall out of how the sales performance is going to shape up. But, yes, we remain very confident that there will be continuation of gradual recovery in Indonesia with every passing quarter.

[Manoj Menon, Research Analyst]

Understood, understood. And just quickly on the Africa, of the constant currency revenue, a vast proportion would be broadly ballpark volume?

[Sameer Shah]

Manoj, sorry again, we're not able to hear you very clearly. I think in Africa business, I think close to around 3/4 of our growth is kind of price led and the rest is kind of volumes led.

[Manoj Menon, Research Analyst]

So that's about [ 5.75 ] volumes and mix and 4 would be price?

[Sameer Shah]

Yes, that's right.

[Manoj Menon, Research Analyst]

Okay. And lastly on -- just on the gross margins at a company level and also standalone, despite actually an adverse mix, which is HI growing at 5% and -- I know that hair color also has grown, but soap is growing so well, how do I interpret the gross -- what will be the top 2 or 3 reasons for the gross margin expansion?

[Sameer Shah]

So Manoj, I think just to get the numbers right, I mean if we look at comparable sales growth and [ versus ] comparable sales growth, if we look at gross margin expansion, that comes to, say for standalone business, close to around 220 basis points, 230 basis points, so that's one data point to kind of keep at the back of our mind. There are multiple reasons, specific to this quarter, while HI growth has been lower but hair colors growth has been extremely strong and so has been the growth also for air fresheners. Now both hair colors and air fresheners are the categories which get maximum gross margins in our portfolio, much higher than what household insecticides get, as well as much higher than what soap kind of gets for us. So there is definitely a favorable category mix in this quarter. The other is we continue to still enjoy the benefits of low-cost palm oil, which has resulted in meaningful expansion in soap's gross margins and in terms of overall kind of businesses' gross margin. There's always a cost-saving program, which we have been running since last 3, 4 years and that keeps on adding again in a very meaningful way to our gross margin expansion. So I think these are the 3, 4 drivers, which have resulted in close to 200 bps gross margin expansion, something which we also saw, I think, in some of the previous quarters. So I think it's more a continuation of the same, barring the impact category mix in this quarter.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

I think, again, also within HI, you've had some formats which have done better, and the formats that have done better for us are higher gross margin formats. So even in that, while HI performance as a whole was challenging from a profitability perspective, I think, we did see some of the higher margin formats do better.

[Operator]

We take the next question from the line of Kunal Vora from BNP Paribas.

[Kunal Vora, Analyst]

Couple of questions. How has Strength of Nature done after the acquisition? How has the revenue trajectory been post acquisition and whether it's delivering in line with what you were expecting from it? That's question number one. And second is, if I look at the quarter, how has been the growth before and after the GST rate cut was announced in November? Did you see a strong volume growth because of the 6% to 10% lowering of prices in certain categories? That's it.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

See, on Strength of Nature, the investment thesis -- the U.S. market is far more mature and penetrated and so the investment thesis was to maintain steady growth in the U.S., but leverage the portfolio and bring the portfolio to our countries in Africa, where the headroom for growth is extremely significant in the category. So in terms of how the investment thesis is playing out, I think it's playing out the way we had expected. We have localized manufacturing of the Strength of Nature portfolio. A few brands have already been manufactured locally, a few more will be added over time, but the story will play out in terms of localizing manufacturing and using the portfolio to drive growth and provide a set of great products for our consumers based in Africa. Within, I think, the Strength of Nature portfolio, if I look at a 9-month basis, year-to-date, for our U.S. consumers also, the growth is in line with our expectations. However, in quarter 3, the growth was below our expectations, because, as I mentioned, we went through a fairly complex implementation of a new ERP system that resulted in sales slowing down in October and November. And while the sales picked up in December, we could not make up for the shortfall in October and November. But beyond this temporary hiccup that we saw in the business, largely from an investment thesis perspective, things have been in line with the way that we wanted the Strength of Nature acquisition to play out. Sameer, do you want to talk a little bit on the volume growth?

[Sameer Shah]

I think on your second question, Kunal, we have seen that. And now I would say for the second time, I mean post GST and more importantly the rate cut and also in terms of price kind of deduction, we have seen pickup in volume. We did see that for hair colors as well as air fresheners post mid-November, and we also had similar experience post June kind of MRP dropped primarily driven by GST rate cut.

[Kunal Vora, Analyst]

Sure. So there is a fairly high degree of elasticity in that case. I think it's not really a large cut, right, 6% to 10%, and just seeing an improvement in the volume growth specifically. Okay. Just one last question, if I can. In general, are you getting more positive on the macro situation in the international markets, with rising commodity prices and growth outlook? Are you more confident about the macro situation in your International operations?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

I think it depends country-by-country. So clearly if you look at some of our larger countries, the macro outlook in the U.S. is very positive for next year. For Indonesia as well the outlook is actually quite positive, and Indonesia is projected to be amongst the higher growth emerging geographies next year. The outlook for Kenya also is more positive. The outlook for Nigeria is also quite stable to positive. There are worries on South Africa in terms of how the reform agenda will play out. So South Africa has been macroeconomically an area of concern, but again in some of these geographies, I think, there is plenty of opportunity for growth. But as I look in our entire portfolio, across most of our geographies, the sense of the outlook is much more positive next year than it was the following year -- last year, sorry.

[Operator]

We take the next question from the line of Nillai Shah from Morgan Stanley.

[Nillai Shah, Equity Analyst]

My first question is actually on Indonesia, just focusing on that little bit, have you lost market share in that market for HI?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

Yes, Nillai, we have lost our market share, but not at the same level at which we've reduced price discounts.

[Nillai Shah, Equity Analyst]

Okay. Then, could you help me understand this better in terms of the fact that there was a issue with increased competition out there and that competition was either directly or indirectly to do with pricing, we've lost market share and yet our margins have been rising pretty rapidly over the last few quarters. I understand that cost-saving programs, et cetera, et cetera, which are underway, but why would the margins be expanding like this in a market where primarily there's a cost led issue and you are losing market share?

[Sameer Shah]

So, Nillai, I think to begin with, the high competitive intensity was more driven by the consumer offers and not actually the price cut. So that is one...

[Nillai Shah, Equity Analyst]

That's indirect pricing, right?

[Sameer Shah]

Altogether kind of buy aerosol can and get 2 liters of cooking oil kind of free. Now, this in isolation doesn't mean any which ways affect market share, right. I mean -- so that's, I mean the first part of it. To answer your second part, which is more of despite this high competitive intensity and higher kind of consumer offers or kind of trade offers, in this case why the margins are kind of moving up. So, there are three drivers to it. One is, we have cross-pollinated cost-saving program [ right ] from India to Indonesia, which got cross-pollinated at the beginning of the year, fag end of last year and that is kind of repaying rich dividend. Second, there is a kind of a skew from media investment through kind of sales promotion or trade promotion, because the nature of market or most of the nature of category is such that right now everyone is little bit more skewed towards trade offers and consumer offers at least in HI [ as compared to ] media investments. That is also at low levels, resulting in lower advertisement and sales pre-promotion spend on a Y-o-Y kind of basis. I would say, these are the 2 primary reasons why despite not having the sales kind of leverage, we are seeing kind of margin expansion in Indonesia at this stage.

[Nillai Shah, Equity Analyst]

No, I'll take it offline with you Sameer, because I still don't understand this trade off. But yes, I'll take it offline. But just extending this question to the India business, you obviously are seeing a massive elasticity at least in the hair color business with lower pricing, would you -- and given that you are one of the market leader, or you are the market leader and you want to grow the category obviously with innovation, you think we have been too aggressive with pricing in the past and is this a lesson to that effect?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

[ I say, it's ] always 2020, right?

[Nisaba Adi Godrej, Executive Chairperson]

We've had the same competitors, sometimes people want to play the market in a certain way and we are making a certain amount of choices, correct. Discounting also is not a very sustainable long-term business model.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

And I think the important thing is to look at 2-year CAGR, because if you compare things to an abnormally low base, it does inflate the numbers, but as we look at it on a 2-year CAGR basis, it was an 8% hair colors, yes, which is again, in the past, hair colors has delivered low double-digit 12% to 13%, 14%...

[Nillai Shah, Equity Analyst]

It's been extremely volatile. It's been extremely volatile this category, and there have been different reasons for it. I totally appreciate that. Given this big spike that you are seeing at this point in time and you are putting it down largely amongst other factors, but largely down to a cut in the product pricing; and given your strategy that you really want to accelerate the category growth itself, it appears that we may have missed a trick in terms of at least the margins, but again we can discuss this in detail offline. And the last question is just to understand why has there been this overall volatility in the hair business? What is the underlying growth driver for hair colors apart from pricing that we've seen this quarter? What really drives the category growth, because it's been all over the place, some quarters negative, some quarters very strong?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

I think if I look at -- separate the portfolio and look at back over the last 3 or 4 years, what has consistently done very well for us has been the journey towards premiumization. And as we have tried to upgrade consumers from powder to cream, our cream has been a very consistently strong story for us for almost 4 years now. The volatility has been caused a little bit by the challenges of trying to retain some of our powder consumers. And so...

[Nisaba Adi Godrej, Executive Chairperson]

So, [ was not appearing ] to our cream.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

Yes. And so the powder segment is the one where we've seen volatility and there again, I think, we are now looking at various ways to drive some more innovation to be able to drive growth in powders, but that's really been, I think, the strategic challenge which creates some choppiness in terms of the powder segment. Long term, again, I think if we continue and persist on the creme story, this should continue playing out for a long time in terms of better growth, but I think for us, the challenge has been how to stem the erosion on the powder side.

[Nillai Shah, Equity Analyst]

And what's the application ratio that we have for powder versus cream, in terms of number of applications, because I really can't look at this in volume terms nor can I look at this in value terms? So per application...

[Nisaba Adi Godrej, Executive Chairperson]

I don't understand your question.

[Nillai Shah, Equity Analyst]

I can't look at the...

[Nisaba Adi Godrej, Executive Chairperson]

Yes, you can use it as a per unit -- look at it as a per unit...

[Nillai Shah, Equity Analyst]

Yes, per application...

[Nisaba Adi Godrej, Executive Chairperson]

Per application. Some people use it -- mostly use it once, some people use even creme and powder twice.

[Nillai Shah, Equity Analyst]

So would we say that now it's 50:50 in terms of the number of applications of powder hair dye versus creme?

[Nisaba Adi Godrej, Executive Chairperson]

Powder volume is...

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

Just keep this offline. We don't have this data readily available, but I think if we just take this offline, we'll try and [Audio Gap] for you.

[Operator]

Thank you. We'll take the next question from the line of Prasad Deshmukh from Bank of America.

[Prasad G. Deshmukh, Equity Research Analyst]

Yes, two questions. Firstly, the growth narrative, Vivek, that you mentioned distribution, penetration, new launches and so on, that remains the same as it was like in the last three years when the raw material prices were coming off. Now that the prices are moving up and assuming that the trend continues, will you -- will the new launches be still margin accretive at the gross margin level? And second, what gives you confidence that the PAT growth in that context will still be in sync with revenue growth?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

From our perspective, Prasad, generally as a guiding rule, every new innovation that we launch, ideally should be higher than the gross margin of the category unless it's for very strong defensive reasons, but from an innovation perspective, the team works on trying to make sure, and so over time, that gives us enough confidence that we will start to see the gross margin of the overall portfolio continuing to improve over time, largely led through innovation. At the same time, the team continues to do a very good job of trying to reduce costs, whether it's through manufacturing efficiencies, better sourcing, more scale advantages to be able to also try and ensure that the core also gets better from a gross margin perspective as well. So I think if I look at our gross margin performance, and you can see that over the last many years, I think consistently we've managed to improve gross margin, that's the direction that we continue to be able to push the business to us. Now if you start looking at the other parts of the P&L, generally our marketing, advertising, and promotion spend does tend to be somewhere between 10% to 12% of sales, and we believe that that's a good range for us to be in, there could be some changes quarter-on-quarter. There again through things like market mix modeling and other tools, we can try and do more for the same amount of money. It's not about cutting expense, but how do we extract much more ROI from the kind of spends we are making. And then there is always opportunities for us to be more efficient, whether it's an overhead and our G&A and that's [indiscernible] but ultimately, if we can continue driving gross margin, I think the team feels quite confident that we should be able to grow profits in line if not ahead of its growth.

[Tapan Joshi]

Just to add to what Vivek shared, so I think [indiscernible] also has relatively lower cost for palm oil, and also for other raw materials as well as packaging materials, which are linked to crude. We do have medium-term committed contract from a lot of our vendors, so that is also something which will ensure at least for next couple of quarters gross margins will be quite focused.

[Prasad G. Deshmukh, Equity Research Analyst]

Okay. And second question, could you give a quick update on your rural one and also expansion in BBLUNT?

[Tapan Joshi]

No. I think rural one is shifting of internal [indiscernible] and internal expectations and if I have to kind of just give a smaller example, I mean honestly, what we are doing in terms of the micromarketing initiatives in Godrej No. 1 as we talked about it, in soaps is actually in a way a fallout of some of our rural one of initiatives. So I think this is keeping up quite well, though there were channel disruptions whether it be demon or whether it be GST, but those were temporary pauses, but it is up there whether it be the kind of investments and also kind of on-ground activations, move feet on ground and so and so forth. So, that I think is shaping up quite well, and hopefully, we will raise much more richer dividends once we see a little bit of [ marginal ] recovery even on rural trend over the next of few quarters.

[Prasad G. Deshmukh, Equity Research Analyst]

And BBLUNT?

[Tapan Joshi]

BBLUNT is also shaping up quite well. I mean, the salon business is doing quite well, I think [indiscernible] maybe little better than our internal expectation.

[Prasad G. Deshmukh, Equity Research Analyst]

So is it now like present across India in the modern retail format at least or is there some time for it?

[Tapan Joshi]

It was present mostly in the premium general trade outlets because that's the go-to-market strategy for BBLUNT and modern trade. So I mean these are the two channels which we are tapping into BBLUNT. I think in terms of reach as well as in terms of business size ahead of our expectation, but the growth is humongous for BBLUNT in terms of getting into much more number of outlets as well as gripping of its presence in modern retail.

[Prasad G. Deshmukh, Equity Research Analyst]

Okay. Sorry?

[Tapan Joshi]

And e-commerce also.

[Prasad G. Deshmukh, Equity Research Analyst]

Okay. Just one last question, rather clarification, the change in U.S. dollar-denominated debt, that is directly adjusted to the balance sheet, right?There is no pass through in the P&L?

[Tapan Joshi]

Yes. That's right.

[Operator]

Thank you. [Operator Instructions] We take the next question from the line of Amit Sachdeva from HSBC.

[Amit Sachdeva, Analyst, Consumer and Retail]

Okay. Sameer, just I had a small question on Indonesia. So I see Vivek making a comment about changing in a bit of go-to-market strategy as well from predominantly modern trade driven to general trade driven. Can you give us a little bit more color on what is your current reach, and I think this has been touched upon a while back as well on Indonesia whether you wanted to I think, I don't recall, but I think that time coverage was 200,000 outlets, and they are potentially 700,000, 800,000 outlets, so where we are on that journey now? And say what is the target for each one year or two year from now?

[Sameer Shah]

So Amit, I don't have the numbers in front of me on the outlets, but just let's take it offline and we can give this information to you. Just overall broad construct level, overall the market is 60% general trade, 40% modern trade, and [indiscernible] is the opposite. And so that's why I think -- and now that we have hair colors in the portfolio and we have more affordable product, we do have the basket to be able to now push much more harder on the go-to-market model as well, but I think just let's take it offline and we can share with you the exact number of outlets we cover and how much that journey has [indiscernible].

[Amit Sachdeva, Analyst, Consumer and Retail]

Sure. That's very helpful. And Vivek, can you share some numbers around like how the HI portfolio has actually done and non-HI has done, and what was the pricing versus volume in Indonesia, some color on that?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

Yes. So I think the HI portfolio continues to be the laggard, I mean when we reach 2 percentage decline, I mean HI has kind of decline much much higher than the 2 percentage overall decline. The non-HI portfolio has been in positive zone.

[Amit Sachdeva, Analyst, Consumer and Retail]

Sure. So in terms of pricing, what sort of price discounting [indiscernible] but pricing pressure is sort of -- is reflecting on this growth? Why I'm asking this is that basically from HI point of view, just to defend the volume, how much discounting has -- you have been doing and how it is tapering off, just want to make a sense of it, that's the reason for asking this question.

[Tapan Joshi]

Yes. So again directionally, I think as we also shared earlier, the competitor intensity is more of the same, maybe it's marginally diluted down over the last two quarters, three quarters. For us, though the percentage of kind of trade stroke, consumer offers or sales promotion spend has come down, but it's more driven by our efforts in terms of making the spend much more crisper, analytically driving lot of this investments, tracking the ROIs and seeing that what is working really very well for us in terms of the eventual offtake.

[Amit Sachdeva, Analyst, Consumer and Retail]

Sure. And [indiscernible] was also cut, right, this quarter or rationalized, how the journey would look like in FY19, are you willing to step up that spend, or would this be much more promotional-led and how this 2 trade-offs are happening?

[Sameer Shah]

I think It is going to be eventually a fine balance, but more so we won't shy away from investment, if we see recovery in [indiscernible] which we think gradually would be the case to begin with as well as some of our new product launches, this needs some apparent marketing investment. So I think we will see kind of uptick in advertisement spend and hopefully by then we will see perhaps also gradual withdrawal of this high competitive intensity and hence toward sales promotion.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

And we do believe that there are opportunities to be able to reduce some of our overheads cost there. And money will get redirected towards higher advertising spend. So clearly, I think as we've launched the innovations, we do want to invest more in advertising and A&P, but the team is quite confident that through operational efficiencies and cost reduction projects, we will find money to be able to deliver acceptable profit growth, but invest in our brands as well next year.

[Amit Sachdeva, Analyst, Consumer and Retail]

Vivek, just to get us some sense of -- when you look at Indonesia next year, would you say that given that discounting will sort of wean off and some new product launches will happen? Are you sort of looking at a year where revenue growth could -- given the outlook of macro is also at least better and you will go to more general trade as well? Is it like -- can you envision a year where you have like a high single-digit revenue growth, that's the target or are you looking at double-digit sort of view, or it would be very gradual mid-single and low-single and then eventually build up? How that trajectory you're envisioning?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

I think clearly -- I think the intent is going to be to get to double-digit growth. But a lot will depend again on how well the innovations play out and the macro environment. Indonesia's provincial elections next year, presidential elections a year after, typically the economies do quite well during election years because there will be pressure I think on minimum wage increases or to increase consumer spend, so a lot of those factors honestly should help the business, but I think we'll have to, at this stage just ensure even a transition to general trade or trying to push [indiscernible] doesn't happen overnight, right, it takes time. So, I think all the building blocks have been put into place, but frankly a lot will depend on the consumer spend environment and how our innovations play out, but the team is definitely quite optimistic that next year should be much better than what this year was.

[Operator]

We take the next question from Harit Kapoor from IDFC Securities.

[Harit Kapoor, Vice President of Research]

I just had two questions. Firstly, just wanted to understand on the personal repellent space, what portion -- what proportion of the overall HI piece would it now be? And on that also, what's the kind of growth trajectory there vis-a-vis the at home HI space? That's my first question.

[Nisaba Adi Godrej, Executive Chairperson]

So, I think in-home HI space is about INR 5,000 crores. The out of home space would be about INR 115 crores. Obviously, the outer home space is now growing much-much faster than the in-home space given this order size. What we are seeing with this -- with our fabric roll-on is extremely encouraging. So, if you give consumer the product which is very easy to use, it's natural, they just apply it on their clothes and they can go. We are ahead of our plans. So we are sort of really excited. And if you look at other countries also, if you look at the U.S., Indonesia, as a percentage of the in-home markets, the outer home markets are much, much bigger. I think what's happened in India is we're not bringing the right set of products for the Indian consumers, there has been very-very little investments in habit creation. And I think now you see that growing, so we see this as an extremely strong vector for us.

[Harit Kapoor, Vice President of Research]

Second question was on the working capital part. On your presentation, there seems to be a reduction in terms of days, which is reasonably sharp from September to December. I just wanted to understand whether this is more seasoned -- it's more seasonal in nature or there is something sustainable in this that you've done and if you have then in which market is this reflecting?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

I think it's quite broad-based, largely originating from India and Africa. I think there are few drivers, one is lower inventory levels [indiscernible] in September and there has been also higher payables also driven from our African business. And in India, we also got close to around INR 40 crores of excise refund from tax authorities, which also helped in improving the working capital. To answer your question, I think this happens to be one of our key [indiscernible] to the overall ROC improvement alongside driving profitable growth. So we will continue to see meaningful improvement in working capital levels from here on.

[Operator]

We take the next question from the line of Naveen Kulkarni from PhillipCapital.

[Naveen Kulkarni, Co]

Congratulations for a good set of numbers and thanks for taking my question. I have a couple of questions on the margins. So if we look at the domestic margins, this quarter the margins were 28%, so that I would believe that are reasonably high level of margins. So one is the sustainability going ahead and the second part are these margins very close to the management's aspirational levels? That's one. Second is, how do you see this opportunity in terms of the high level of profitability that we are seeing? Is this an opportunity to launch more new products or do more inorganic acquisitions in India? So how are you viewing this strategically on a long-term basis? What is the opportunity here? And third aspect is, on the international business, while there are a couple of countries, which were not doing so well in terms of margins, but overall the margins are fairly reasonable. So how do you see that panning out going ahead, especially for countries like Indonesia, where the margins are at 25% are reasonably at height levels?

[Tapan Joshi]

See from a margins perspective we focus on consolidated margins and the effort is to drive consolidated margins ahead of sales growth or in line with sales growth. And so we do not actually try and optimize margins at the individual geography level because competitive dynamics, innovation, strategic reasons dictate what the margin profile of the businesses at that level would be. And then again the choice of inorganic actions is not determined by margins. At the end of the day, what drives acquisitions is fit with strategy. How attractive the asset is and are we the rightful owner for the asset and can we buy it in a value-accretive manner? Are we actually being accretive in terms of right valuation? Those are the right reasons, so, I think you know why the margins in India had been very good? The margins in Africa have not been very good in this quarter. As you play portfolio there could be some quarters where India margins might fall down because of new launches, but then we will try and make sure -- at an aggregate level, a profit growth is in line if not ahead of sales growth.

[Nisaba Adi Godrej, Executive Chairperson]

For any one on this margin in new product and investment in it, I think one -- we've been really focused in product design, whether India or Africa, and we're building this up, even more, is making sure that we get to anything positive even in year one on some of our products. Because as the way the products design -- so it really means that you look at cost pricing very carefully, but you also make sure that you're very innovative and sort of disruptive, so you're not going in with me too, because you're advertising money just goes much, much further if you stand out in the market. So, that's become a -- we've seen [indiscernible] whether it's Expert Creme, Aer Pocket, fabric roll-on, the kind of results we get with that. So I think one thing you will definitely see with GCPL is a really strong focus on that.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

I think the other important thing from a philosophy perspective is that we don't manage the business on margin. That's an outcome. I think we'll look at the underlying drivers in terms of gross margin and marketing spend, are we gaining share, are we creating the right exciting products. I think if you do that, margins will be an outcome more than anything else, but we are very careful not to try and over-manage the business from a margin perspective. And to some degree, absolute profit growth is probably a more important indicator than necessarily quarter-over-quarter margins.

[Naveen Kulkarni, Co]

Okay. So what I was trying to ask also is that absolute profit growth will be reasonably high if the margins are at these levels. So how do you see the sales growth based on the kind of margins that we are at this juncture? So is there is more opportunity to drive sales growth at a much higher pace from here? Are you seeing that as a big opportunity now?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

See, at the end of the day, the biggest way to drive margin is to do better sales growth, because the operating leverage you get from higher sales growth really is the best way to be able to ensure acceptable profit growth. I think our intent and aspiration is to drive sales growth much higher than where we are today, in the categories that we are in and the adjacencies that we are pursuing. If you look at both penetration rates and consumption rates across the board, whether it's India, Indonesia or Africa, there is tremendous headroom for growth. Having said that though, we do get constrained by the overall economic environment; and if the economic environment improves, that actually means higher disposable income in the hand of consumers, which allows them to spend money on branded, affordable products that we provide. And so we keep on trying to get innovation so we -- lot of our growth were from innovations. Ultimately, I think, the aspiration is to drive sales growth much higher but it will be a function of the overall economic and consumer spend growth as well.

[Operator]

We take the next question from the line of Binoy Jariwala from Sunidhi Securities & Finance.

[Binoy Jariwala]

Could you share some thoughts on where are we in terms of cross-pollinating various products, because when I look at certain geographies, for instance Indonesia or Africa or Europe, we are just about present in 1 or 2 of our 3 broad categories? So could I have your thoughts on these, please?

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

See, companies look at cross-pollination in different ways. One form of cross-pollination is taking products and brands from one country to other country. While we do that on a selective basis, behind the scenes, a lot of our cross-pollination tends to happen from a technology sharing perspective. And so whether it's air freshener development in Indonesia and India, it may not be visible to the external community, but...

[Nisaba Adi Godrej, Executive Chairperson]

But we've had like in Indonesia, the latest 2 launches have been Stella pocket, this is non-HI Stella pocket, which is basically aer pocket; and new hair color cream which is similar -- very much similar to -- it's between Expert and BBLUNT somewhat. So what we do have is, we do have a global product [Audio Gap]. What we don't have is that we don't bring them under the same brand, but there is a lot of product sharing that's going on. A very interesting thing that we will see within a year or 6 quarters is some of our domain on African hair and straightening products there, things like that which we will bring to other markets, because [indiscernible] exist in Africa. So you will see a lot of our [indiscernible] but you won't see that same brands.

[Binoy Jariwala]

Sure. That I understand, but is it practical and is it possible to build each of this geographies with presence across all the 3 categories maybe over a time frame of 5 years or 7 years?

[Nisaba Adi Godrej, Executive Chairperson]

We are. I didn't understand your question. I mean, we're doing HI and air fresheners in India and in Indonesia. The product portfolios are very similar in both the markets. We are doing HI in Africa. Plans are to ramp that up quite -- I didn't understand your question.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

So I think the question is on soaps. I don't think we intend to necessarily get into the soap category in Indonesia or Africa. I mean, do we have [indiscernible] soaps more opportunistic, but hair colors, air fresheners, insecticides, I think are categories that, we do believe we have a clear right to win across multiple geographies.

[Binoy Jariwala]

That's very helpful. Second is what would be our -- the sales mix between urban India and rural India?

[Sameer Shah]

Around 26%, 27% of our sales would be from rural and rest would be urban, general trade channel sales in India.

[Binoy Jariwala]

Sorry, I didn't get it.

[Sameer Shah]

Around 26%, 27% of the sales would be from rural and the rest would be from urban in general trade business in India.

[Binoy Jariwala]

Sure, understand. And in terms of gross margin across the categories, what is the -- if you could just help me understand the pecking order, which categories have the highest gross margins, which have the...

[Sameer Shah]

So in terms of a sequel, I think it's hair color followed by air fresheners followed by household insecticides and then soaps.

[Binoy Jariwala]

Okay. And our cost savings program that we run on an annual basis, what would be the quantum for FY '18 and '19 that we are targeting?

[Sameer Shah]

For FY '18, I think in India, cost-saving programs have been contributing close to around 1% to 1.5% on revenues, and I think that trajectory and momentum should continue for us even in FY '19.

[Binoy Jariwala]

And the international geographies?

[Sameer Shah]

The international geographies, this has just kicked off. I mean, in Indonesia there is a cross-pollinated Project PI, so I think it's in very early stage at this point in time. So I think it should scale up, but again I think we should see similar benefits as what we have seen in India even in Indonesia and perhaps few other markets.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Harit Kapoor from IDFC Securities for closing comments.

[Harit Kapoor, Vice President of Research]

Yes. Thank you. On behalf of IDFC, we would like to thank all the participants as well as the management of Godrej Consumer Products for taking time out for this call. We can now close the call.

[Vivek Gambhir, MD, CEO, BR Head & Executive Director]

Thank you.

[Operator]

Thank you very much, sir. Ladies and gentlemen, on behalf of IDFC Securities, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.