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Godrej Consumer Products Ltd
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Ladies and gentlemen, good day, and welcome to Godrej Consumer Products Q3 FY '19 Earnings Conference Call hosted by Kotak Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rohit Chordia from Kotak Securities. Thank you, and over to you, sir.
Hello, and good evening, everyone. On behalf of Kotak Institutional Equity, it is my pleasure to welcome you all to the Third Quarter Fiscal '19 Earnings Call of Godrej Consumer Products. I would like to thank the management team of Godrej Consumers to have given us this opportunity. And let me now hand over the call to [ Pratik ] from the Investor Relation team of GCPL. [ Pratik ], over to you.
Thank you, Rohit. Good evening, everyone, and thank you for joining us today to discuss the performance of Q3 FY 2019. We have with us Nisa Godrej, Executive Chairperson; Vivek Gambhir, Managing Director and CEO; V. Srinivasan, CFO and Company Secretary; and Sameer Shah, Head of Finance, India and SAARC and Investor Relations. We will now have Vivek share his thoughts on our performance and then we can open up for Q&A. Over to you, Vivek.
Thank you, [ Pratik ], and thank you, Rohit. I will share a brief commentary about the results, which is essentially captured in the performance update presentation that we had circulated earlier. And post this commentary, we will be very happy to answer any questions and take your feedback. For third quarter fiscal year 2019, our consolidated constant currency sales increased by 8%, within India business sales growth of 6% and in International business growth of 10% on a constant currency basis. The consolidated constant currency EBITDA increased by 2% and the net profit for the quarter was INR 418 crores with an EPS of INR 4.09. The board has declared an interim dividend of 200% or INR 2 per share. For the year, year-to-date, the comparable constant currency growth has been 9% while the reported net profit growth has been 38%. Overall, for the quarter, the performance was mixed. The India business delivered single-digit sales growth on a high base but continued to grow EBITDA ahead of sales. In our international business, Indonesia continued its growth momentum with improvement in the home insecticides business. Africa is showing signs of a gradual recovery with profitability improving sequentially. Latin America, however, recorded a weak performance due to adverse macroeconomic conditions. During the quarter, we continued our innovation momentum with the launch of mosquito repellent incense sticks in India. In Indonesia, we also cross-pollinated the HIT Anti Roach spray from India to expand our presence in the HI category. We've also launched a naturals range of wet hair care products in the U.S. We continue to make healthy brand investments for sustainable future growth. With the scale-up of our recent new launches, we expect to deliver much more improved profitable growth in the coming quarters. If you take a quick look at our India business, as I mentioned, the third quarter India sales increased by 6%. This sales growth has been on a high base of a 17% growth. On a 2-year CAGR basis, the sales value growth has been 11% and volume growth has been 10%. We believe that this is a more representative way to look at the business performance given some of the changes in GST rates that happened in the base quarter.For the quarter, the adjusted EBITDA increased by 11% with very healthy expansion in EBITDA margins and year-to-date sales have grown for the first 9 months by 10%, whereas EBITDA has grown by 19%. If we take a quick look at the categories, the Household Insecticides category delivered a soft quarter. Sales were flat, driven by an unfavorable season. Overall, the rainfall during the October-November period has been 44% below normal and as you know, this is a category that does fluctuate depending on some of the seasonal dynamics. The impact of the deficient Northeast monsoon has been particularly hard in the south of India. Deficits in the states of Karnataka, AP, Telangana and Tamil Nadu have been 47%, 57%, 65% and 22%, respectively. Over 30% of our HI business comes from the South. And our business in the East, which also has a high salience of insecticides, continued to be impacted by the growth of illegal incense sticks. Over the last few quarters, we have been taking several corrective actions that we believe will start showing results and reflecting in better growth in the quarters ahead. To deal with the prevalence of incense sticks, we launched Goodknight naturals herbal incense sticks in Andhra Pradesh and Telangana in December as a pilot. We will continue to monitor this launch carefully and then make effective brand and trade investments to scale up growth over the quarters ahead. Apart from that, we have launched the Goodknight PowerChip and an LV with 50% more power over the last few months. As these products give more traction over the coming months, this will help us drive better growth. Along with this, we are focusing a lot more attention on category development. We have launched a new campaign to educate consumers that dengue is caused by a daytime mosquito. And as we know, the penetration and consumption rates in this category still have tremendous headroom for growth. So we are focusing more attention on building more awareness and developing that category. Soaps sustained a double-digit growth of 13% on a 2-year CAGR basis, though sales growth in this quarter was low single digits of a high base. We've continued to gain market share. Our strong performance was led by very effective micromarketing initiatives focusing on some new states and strong on-the-ground execution. Hair Colours continues to deliver strong double-digit sales growth of 17% on a 2-year CAGR basis, though growth in this quarter was flat off a high base. Godrej Expert Rich Crème continues to consistently deliver robust growth and has achieved the highest ever market share on exit basis. We're focusing on activations, effective media campaigns and price-offs to recruit new consumers in the category. Godrej Nupur Herbal Based Powder Hair Colour continues to do well. With regards to other categories, Mr. Magic Powder Handwash has started off well. While it's very early days, the initial results and offtakes have been encouraging. Aer continues to perform very strongly. Turning to our international business. The business continued in Indonesia to sustain a good growth momentum and delivered a constant currency growth of 7%. For the year, for the 9 months, sales have grown by 10% and EBITDA by 12%. The HI business continues to do well. We have extended the market share position in HI and are gaining market share consistently. During the quarter, we also cross-pollinated the HIT Gel spray from India to expand our presence in the HI category. We've clearly seen a leap forward in our various marketing campaigns and that is showing real positive results. Our savings project there, Project [indiscernible], is delivering good results and the team is also making good progress on its general trade consolation project, Project Rice. The trust in innovation continues, and the Indonesian team is planning to launch 4 new products in Quarter 4. We expect the growth rates to improve in Quarter 4 on the back of strong innovations and distribution initiatives. Our Africa-U.S. cluster had a mixed performance with the constant currency sales growth of 4%. Sales in the quarter was impacted by continued weakness in South Africa as the macroeconomic environment remains very challenging. Month over month, we have begun seeing some improvements in South Africa, driven by the actions that the team has taken. We have launched some new lower-priced rate styles to counter competition. In a few months, we will be relaunching the Darling brand there. So we are hoping for a better performance going forward and believe that the worst is over in South Africa. The West Africa and U.S. cluster continued to deliver strong growth. Kenya is showing early signs of recovery. Recently, we had relaunched the Darling brand in Nigeria and Kenya. This was a major relaunch with new communications, new packaging and new style introductions. The relaunch metrics from a brand awareness perspective have been very positive, and the new products that have been launched have received an initial encouraging response. As I mentioned, we will also be relaunching the brand in South Africa later this year. The scale-up of our Wet Hair business is progressing well. A lot of good work is happening on ramping up distribution, launching new products and demand generation. Operating margins for the cluster improved sequentially by over 500 basis points. So we are seeing the business head in the right direction. Over the last few quarters, we have put in a lot of effort to scale up the business, investing in talent, brand-building and go-to-market infrastructure. And this should start showing up in improved results from Quarter 4 onwards. So overall, while we had a mixed performance in Quarter 3, given the kind of investments that we have made and the kind of building blocks that we're putting in place, we are very confident that you should see a much stronger performance on both top line and bottom line in Quarter 4 and the quarters ahead. I'll be very happy for our team to answer any questions that you have and take your feedback. Thank you.
[Operator Instructions] First question is from the line of Abneesh Roy from Edelweiss.
Good to see strong growth on hair color even on 2-year basis. My question is, how is the gross margin here? Why I'm asking this is both you and Garnier have cut prices sharply, and now the price gap between you and Garnier is only INR 5, which was earlier INR 7 and in fact, at sometimes, it was even INR 10. So could you elaborate who cut the prices? What impact this can have on the entire profit pool of creme hair sachet?
Abneesh, this is Sameer here. So I think, first of all, this price-off, to begin with, is supposed to be a temporary price-off. However, we'll evaluate this as to how this kind of evolves over a period of time, both from our end as well as any other competition. This is also effective January '19. So as such in Quarter 3, this doesn't have any material impact on gross margins. Also, I mean, if you do a quick back-of-the-envelope math, creme, compared to our overall India business portfolio, is relatively small to kind of move the needle dramatically on gross margins front and, if any, we will kind of work even more harder on our cost-saving projects and initiatives to offset this.
I think as Sameer mentioned, this is a temporary promotion. We'll evaluate how well this does but the intent is to try and see if we can drive penetration in rural, where there's significant headroom for growth still.
How does this impact the consumer behavior? Because from INR 10 to INR 25 price point, you yourself have a lot of products and, of course, competition has even more. So is there a downgrading potential? Is there upgrading potential?
The idea would be is to, first of all, recruit new users to the category because penetration rates are quite low. Second of all, it provides a more affordable path to upgrade powder users. So this is more of a pilot to see whether a more affordable price point will enable more upgrades of powder users given the lower price point, Abneesh.
And one my follow-up here. How in Nurpur INR 10 new price point herbal-based powder done?
It's done very well.
We've launched it in a few states and in the states where we have launched it, the initial traction has been quite positive.
My last question is on the incense stick. So your product is promising 3-hours burning versus competition unorganized at 1 to 2 hours. But in the presentation, you've claimed 6x. So versus 1 or 2 hours, how is it 6x? Second is, is urban India also now availability of unorganized incense stick quite strong, quite easy?
Abneesh, on your first question, whatever -- I mean we have kind of sampled out most of the available, illegal, unorganized incense sticks. I think on an average, they kind of burn for close to around 30 minutes and that's where kind of 6x in terms of relative burning kind of time.
Yes. The thing is even in urban India in certain cities, incense sticks are available through largely word-of-mouth. If you ask some of the smaller stores, they might have them even in urban India as well. The other important point I want to mention is that the Industry Association has had some success over the last couple of months to be able to work with the government to launch raids in a few factories. And in some of these cases, criminal cases have been filed against factory owners as well as certain wholesalers who were carrying the product with some arrests that have actually also been made. And so I think the intent from an association point will be is to keep on educating the consumer and the government about the harmful effects of these illegal incense sticks and try and use the legal and regulatory machinery to try and also address this issue. So we are beginning to see some initial success from a regulatory and a government action perspective.
Last follow-up. So in the previous con call, you had mentioned that the incense sticks, which you will launch, will be disruptive in efficacy. Is the product, which has been launched, is this enough? Or there are -- you need more in terms of efficacy to fight the unorganized?
So actually, we've tested these products really sensibly. And this is not a -- this is a formulation that we have been working on for a while. You will see also other natural products, not just incense sticks, coming from Goodknight. And you know the consumer is extremely delighted with this product. That being said, we are always looking at efficacy in HI, the name of the game is efficacy. But for now, we are extremely confident and excited about this product. And I will encourage anyone not to take our word and to try it themselves.
The next question is from the line of Sameer Gupta from IIFL.
This is Percy Panthaki here. Sir, my first question is again on household insecticides in India. So if I just take a simple average growth rate of your last 12 quarters, it's about 3.5% to 4%. Now the reason I have taken 12 quarters is that it removes any sort of anomalies in terms of pipeline going up or down et cetera. So assuming that you haven't lost any market shares, this would be a good representation of what the industry is growing at currently. So one -- the question is two-pronged. One is how much has, in your opinion, these new illegal incense sticks taken away from the industry growth in terms of basis points? And secondly, what do you think will sort of take the industry growth back to a sort of higher number that we are used to seeing in the past? What events need to happen? Or what sort of things need to play out for this to happen?
Yes. I think, Percy, our estimate is that about 4% to 5% growth of the category has been taken away by incense sticks. So if you were to add that, then you would almost come to high or 6% to 8% kind of growth for the category as a whole. And this is also on the back of, unfortunately, a couple of few quarters of very unfavorable season. But my point in saying that is that at the end of the day, fundamentally, there's nothing wrong with the category. There is still -- I think there have been some structural and format changes in the category. But I think the category in terms of growth dynamics still, I think, is a very attractive category. And then I think over the last 6 to 12 months, I think we've really focused a lot on trying to launch a series of different products, whether it's personal repellents, now incense sticks, Goodknight PowerChip and LV with 50% more power. There will be a naturals range, as Nisa was saying. There are some more products that are planned. So I think in this category also, products do take some time for consumers to start gaining some traction in. But I think our level of confidence still is very high to be able to get back to double-digit growth.
Since you mentioned PowerChip, it's been a few months now. So any kind of feedback you can share on us as to how it is doing, whether on a monthly run rate, is it close to breaching the INR 100 crores kind of mark? Or how do you judge whether it's sort of meeting up to your expectations or not?
No. It's tracking well. I wouldn't want to give any specific numbers at this stage. But we are seeing now a decent amount of repeat consumers buying PowerChip. So the intent was to try and upgrade coil consumers and -- because you can imagine, any kind of an upgrade like this will take some time. But now that we've been in the market for a few months now, the data that we are getting on repeats is looking quite encouraging. And I think, so the first 6 months, typically these launches go a little bit slow. But I think now that we're getting this data, we are very confident in terms of being able to see the next wave of growth there.
And how do you prevent downtrading from liquids into PowerChip?
At the end of the day, if it happens, we'll have to just evaluate that...
So I think the liquid sees the way it's used and the consumer scores is a little bit different also. You have to boost them more. We also released the higher-efficacy LV. And you will see most of from us next year in electric from the more sort of premium end. I think one of the resources we saw in terms of growth is that driving penetration of electric and upgrades of coils was a very important piece and you know price does become a factor there. So that's why this sort of a format. So the way we've positioned it, the way we are advertising, the way we're doing distribution is to drive that [indiscernible] coil upgrades.
Just to be very cautious, Percy, we haven't launched this in South and South happens to be one of our biggest kind of HI store and LV market.
And we've been a little bit -- I think, the first few months, because it's a new format, I think we've just been spending more time to drive awareness. And one anecdotal feedback we got from some users was that they were actually peeling off the PowerChip. And so I think we are now reworking the communication a little bit. So some of the advantage of actually going a little bit slow the first couple of quarters is that some of these communication issues can actually be fine-tuned. And so I think now that we have this data, we've been pleased with repeats. You also seen some of this feedback, which I think is very easily addressed. Now that we've gotten this feedback, the next I think scale-up will be at a much more aggressive level now.
Right, sir. My second question is on house -- the dry hair care in South Africa. There last time, you had said that there is an increased competitive intensity in South Africa. So just wanted to understand where we are on that particular issue. Is the player who had this higher competitive intensity, is he still continuing with the same intensity or has he ratcheted down? And if so, do you think it's sort of temporary issue? Or how do you look at it going ahead?
So Percy, there were a bunch of small local players, Chinese players who were in the market. It wasn't one particular prayer, which is quite good in some ways. So what we've had to do is basically is create and segment the market with a range of more lower-priced products as well. And just given our strengths in distribution and our relationships with wholesalers and retail, our belief is that because we've -- as soon as we create these products with these kind of price points, we will be able to garner more shelf space and be able to then hopefully over time displace these lower-priced competitors because ultimately our quality and our proposition will be stronger. And along with that, I think the next part of the strategy will be, as I was mentioning, is a much more integrated relaunch of the Darling brand. And the Darling relaunch will come with actually new products and new innovation that we launched at the more premium end of the market as well. So strategically, I think we will try and -- with these lower-priced rates try and protect the low end but also over a few months also have a higher-priced range of products so that they both will enable us to also get the profits of the business back on the right track.
So those lower-priced products, are they under a separate brand or something?
These are all -- while they're all under the Darling brand, the sub-brand is quite different, yes.
Next question is from the line of Amit Sinha from Macquarie.
Sir, my first next question is again on the HI business and wanted to understand the -- basically, the new launch which you did in the liquids segment, Power Activ+ liquid, which you launched. How has been the acceptance amongst the consumer for that product? And is it fair to understand that liquid portfolio is also struggling in the last few quarters? And this -- if this clicks, then this will be a major growth driver?
So I think while the data is still very early to make a call, all I can say is, at least, if I look at our market share, our December share was the highest over the last 6 months in LVs, right? Again, it's anecdotal and very early to make a call but at least we are seeing improved traction as a result of 50% more power, higher efficacious LV machine. And as Nisa was mentioning, I think one is obviously making the current LV machine more efficacious. But over the next 12 months or so, there will certainly be more plans to create more premium, more efficacious machines as well. And so while we are also focusing much more on more affordable products like incense sticks and PowerChip, at the same time, there are opportunities to drive a more premium, a more naturals range as well. So I think that way, we'll be able to straddle almost every format, every single consumer occasion and every price point to be able to offer a very compelling portfolio for the consumer.
Sure, sir. And is it fair to assume that this liquid completely replaces the earlier version? Or...
Yes.
Okay. Okay. Secondly, sir, on the rest of the India business and basically on the soaps and the hair color, I mean you clearly mentioned that the right way to look is 2-years CAGR. So I'm just -- basically, for confirmation, I'm repeating the question again. So the underlying strength of the business is 2-years CAGR and that is how we should look at it, right?
Yes. Just because the base quarter had so much of noise in it, right, when the GST changes then I think it's a much better way -- the 2-years CAGR is a more representative view in terms of how the business progressed going forward.
And just to add to that, Amit, if you look at the trend over the last 2 or 3 quarters, first, second and third, I think on an average on a 2-year CAGR basis, the business has recorded 10%, 11% of sales growth. So I think in isolation, a particular quarter will stand out either in terms of lower growth or higher growth. But if we just look at the trend over the last 3 quarters, at least, the growth has been very consistent in the range of 10% to 11%.
And see, Amit, the -- ultimately the revenue growth is an outcome, right? Because then what gives us enough confidence about the future prospects and which is why we say look at a 2-year CAGR is we look at some of the underlying metrics like market share, numeric distribution, weighted distribution, share of handlers, consideration scores for the brand, awareness scores, all of those actually are trending very positively, so which is why I think when we look at those matrix, I think because of the base effect, the numbers should not be -- we shouldn't read too much into just the Quarter 3 reported numbers.
Sure. Sure. Lastly, if I may squeeze in one. The gross margin for both India business and the international business has come off this quarter. Is it fair to assume that because of the input costs also now softening, this -- the normal levels of first quarter level gross margin can come back?
Yes. I think sequentially, the margins will be much more healthier as compared to 3Q. That's because of the peak crude and rupee depreciation impact adversely kind of impacting gross margins across the board for us. So yes, Quarter 4 will see a much better gross margin profile compared to Quarter 3 but there will be some moving parts like mix and a few others. But directionally, it will be a much better gross margin quarter.
The next question is from the line of Kunal Vora from BNP Paribas.
First on soaps, you talked about market share gains. Over what period are you talking about? Considering your growth has been slow at 2%, has the industry grown lower than that?
So I think in terms of market share gains, we have been seeing it consistently now over the last 18 to 24 months, which means that we are going significantly ahead of overall category growth rate, not just for 1 quarter or 1 year but I think over the last 18 to 24 months now.
No, but the 2% year-on-year growth, would market share be still higher compared to last year or it would go down there?
See, market share normally will be a lag, I mean, will have a lag of I think around 2 to 3 months on an average, right? But the trends do not change just with 1 quarter under or over sort of performance. So even if you look at MAT, kind of December, we are gaining shares. Even if you look at just third quarter of FY '19, we are gaining share as compared to the biggest quarter as well as sequentially month over month.
Sure. Sure. Second one, is it fair to assume that last 1 year you got -- like in certain categories, like soaps and hair color, there was some benefit because of GST rate cut? And these going forward will be slightly more difficult to grow on?
Yes. I think we have seen kind of GST-led kind of price drop kind of growth coming in. But for soaps, I would say, it's here I think since last 7 to 8 quarters now. So it's not just a GST phenomenon. There is a lot which is happening in terms of micromarketing initiatives, picking up 1 stage at a time, spending time and scaling up the business and then moving to another state. So that strategy is working very well for us. Even in hair colors, we have seen trends continuing to fire on all cylinders, and we are seeing the relatively slower growth in powder through launch of herbal-based powder hair colors and there could be something more also coming, I mean, over a few months in terms of new product launch in this space. So I think it's a mixed bag of both. Yes, there is some benefit coming behind driving growth by passing on all the GST-related benefits but also a few coming in from internal growth strategies.
Sure. And last one, last quarter you had mentioned that demand, like, it's not as good as 3, 4 months back. What are you seeing now? Have you seen some improvement? Or things have deteriorated further? Any comments on that?
No. I think gradually, we are seeing continued gradual recovery in consumer demand and a stronger pickup in rural versus urban. So our outlook, as far as demand is concerned, remains quite consistent with what we saw 3 months ago.
The reason why I'm saying is that last quarter you had mentioned that it deteriorated compared to 3, 4 months back. So that's why I was asking that. Like -- are things stable now?
Yes, Demand is stable. I think there is no significant concern on the demand situation.
The next question is from the line of Binoy Jariwala from Sunidhi Securities.
I have 3 quick questions. One is on the soap business in India. Could you help me understand what is the kind of distribution reach we have? And how much headroom do we have to grow our distribution -- soap distribution vis-à-vis the universe?
Binoy, this is Sameer. I think a great question but unfortunately, I think for competitive reasons, we'll shy away from sharing any data points in terms of our distribution reach. But as we have shared in the past, I think we are very strong sales with brand like Godrej No. 1 in 5, 6 states, right? The opportunity for us is to get into some of the other states, where we have a presence but not in a very meaningful way and where historically we haven't invested very strongly in these states. And that's what we are doing. Again, it's something which is taking time, at least 6 to 8 months in terms of spending time on ground, making a 360 kind of effort and then kind of scaling up. So there is still huge opportunity for Godrej No. 1 to penetrate into more states in a much more meaningful way from where we are even as of today.
I think another way to look at this is our market share is in the low double digits, right? So just think about the headroom for growth that is available from a distribution perspective.
Okay. Second question is on the HI business. What proportion of our HI portfolio would be coming from the non-mosquito part of the business? And how do we plan to scale this business -- scale this particular part of the business?
I think, our non-mosquito portfolio is close to around early -- I mean low double digits actually. So that's where we are. And if you look at what it was, say, 3 years back, this would have been kind of mid- to high single digits.
I think it's a question again here. One is obviously to try and come up with very innovative products. And I think we have some very exciting products that we've launched and they are in the pipeline. The second is a lot of effort is required in terms of consumer education and awareness building because a lot of times consumers are not fully aware of the harmful damages, say, what a roach can cause with regards to diseases. And so this does require a sustained effort in terms of brand awareness and brand building, which I think the journey has started. Clearly, there is a lot more work to be done but the headroom for growth is quite significant in terms of looking at best beyond mosquitoes. Having said that though, we still believe there is still tremendous headroom for growth within the mosquito prevention business as well to develop the category, drive penetration rates and come up with products that consumers can use both in home and out of home. So I think collectively, both the mosquito protection business along with other pests should be able to give us significant opportunities for future growth.
Any targets for where the non-mosquito part of the portfolio do we want to take? And secondly, so in -- just we had launched fabric roll-on a few quarters ago. If you could share some brief on how is it performing in the market, et cetera?
Without getting into the specifics, I think the consumer feedback on fabric roll-on has been very positive. The initial product was launched at INR 75. We've also launched a low unit pack recently last quarter for about INR 20, which is again a penetration pack. But because it's a new consumer habit in some ways, it will take some time to be able to develop the out-of-home market per se. But I think generally, we are quite pleased with the initial progress that this launch along with patches and the gel, it's a full portfolio that we are seeing.
Okay. And last question is on the Hair Care business. If you could share your thoughts on how is Godrej Professional and B:blunt doing in the market? And in terms of their distribution reach, how -- have we covered our targeted outlets?
I think both of them are -- see, B:blunt is focused on a few -- it's a more premium category, focused much more on e-commerce with premium general trade outlets. And this is a brand where we've also been investing selectively rather than a large-scale kind of an investment approach, more just to learn how to get the proposition right. Similar with Godrej Professional. It's been launched in a few cities. In the cities that it has been launched, we are seeing good traction, good repeats. But again, it's a new channel. And so I think it will take time but we are very committed to both the premium hair care range and the salon channel for Godrej Professional. But I think in the near term, this will not meaningfully impact the revenues but over the longer term, we do believe these are important growth vectors to invest in.
Okay. And if one last question I can squeeze in. The other part of the India business is growing very well and is quite large now. Anything to call out in terms of Aer or Ezee? Anything you'd like to share?
No. I think generally, we've been quite pleased with the growth rate that we've seen, particularly in Aer. Ezee also continues to do quite well. And some of the toiletries that are part of others also are doing well.
The next question is from the line of Latika Chopra from JPMorgan.
My first question was on Indonesia. Would it be possible to share some color on the sales performance of the portfolio ex-HHI?
Latika, I think, if you look at our overall growth, it's close to around 7% and I think Vivek did mention in the call earlier that we expect a very strong close to the year. So I think, to begin with, it's sort of phasing between 3Q and 4Q, which happens at times depending upon the purchases made by modern trade channel partners. I think ex-HHI, also the growth is relatively strong, though we'll not be able to share the exact kind of growth rate but it's quite strong. But yes, I think in this quarter, the growth rate has been led by household insecticides portfolio but the non-HI portfolio is also as, kind of, planned in terms of growth rates, market shares, launches and even distribution initiatives.
Okay. So you know -- so you are looking at double-digit growth for FY '19, this is coming off a low base as well. How confident are you that this kind of a double-digit trend could continue in Indonesia? Looking at the consumption landscape there, looking at the competitive landscape there, any thoughts that you would share?
No. I think the confidence level is very high, Latika, basically on the back of innovations that we have launched this year. And as I mentioned, we have 4 innovations more that are planned for next quarter with an equally strong agenda of the coming year. And along with that, I think we are beginning to start seeing very positive results from Project Rice, which was a GT expansion initiative. And so our belief is that while obviously, the macroeconomic situation can have some impact, given what we can control is distribution and innovation in marketing. And the building blocks on these seem to be quite strong for us to deliver double-digit growth next year and FY '20 as well.
And just on Africa, this year we have largely seen 4% to 5% levels of constant currency growth, part of this is on account of external challenges. But as you plan for 2019, what kind of realistic growth expectations you envisage for this region considering the relaunch for Darling and scale up of the Wet Hair Care product portfolio? And also on margins, do you think 13%, 14% levels for Africa-U.S. piece is more sustainable range? Or do you think there's an upside risk with these numbers?
So Latika, I think directionally, again, we are planning internally behind multiple drivers for much better in FY '19 sales growth performance. And honestly, FY '19, these are levels of sales growth to baseline with also. So I think even optically, FY '20's growth on FY '19 will be much, much kind of better because of soft base to some extent. But otherwise, also driven by initiatives, I think Darling brand relaunch, scale up of Wet Hair Care and maybe HI launch in some selective markets somewhere during the course of next year, all of this would go in terms of driving particularly stronger growth. I think the other piece, which we have talked about in the past also, is driving profitable growth in Africa-U.S. cluster. And again, this year the margins, at least in first half, have been extremely weak. We did see some recovery in Quarter 3. As we had mentioned in the last call and perhaps again in this call, we will continue to see a profitable growth in Africa-U.S. cluster in coming quarters as well as FY '20.
The next question is from the line of Vivek Maheshwari from CLSA.
A few questions. First on the Indonesia margins, which is down both Q-o-Q, Y-o-Y. How much will be the quantum of upfront marketing and trade promotion in that 160 basis points decline? And till when do you think it continues?
So Vivek, again, I think in terms of deciphering the margins, my sense is close to around 2/3 of this drop will be driven by optimum marketing and trade marketing investments and it's because of the new product launches, which we have had over the last 3 to 4 months. As I mentioned earlier, I think we expect a very strong Quarter 4 and a strong Quarter 4 will just not be on sales growth but also a profitable sales growth. So we will see most likely margin expansion again in Quarter 4.
Okay. Sure. Second, when I look at your constant currency comparable growth in terms of revenues versus a comparable, there is a positive impact of around 1%, so 9% comparable, 10% constant currency comparable. When I look at on EBITDA, the impact is negative. So your EBITDA comparable is minus 9% whereas constant currency is minus 16%. So can you just explain what is the reason for this opposite movement in sales versus EBITDA?
Vivek, it's largely to do with the weightages of sales and EBITDA, which are very different coming in from each cluster. So directionally in Indonesia and in Africa-U.S. cluster, we have a positive foreign exchange translation benefit, but in Latin America, we have a negative kind of impact. And the direction is different actually for sales and EBITDA, purely driven by the weightages of sales of each of this cluster to the overall international or consolidated businesses.
Okay. Another one is more of a -- from an industry perspective, this incense stick phenomena which you mentioned and, let's say, it's illegally distributed, produced whatever. A few years back when GST was implemented, one of the things, the unorganized to organized story and we have seen certain segments seeing that conversion from unorganized to organized. In this case, is it just sheerly because of the nature of raw material and which is why there is a shift towards incense stick? What is the reason for that? Why is it different, let's say, from a paint or a detergent from that perspective?
No. I think, first of all, these are very efficacious products. They are illegal with potentially unsafe chemicals. But from a consumer need perspective, the products are working quite well. And second of all, this was a format that is quite familiar to Indian consumers. And third of all, it's an attractive price point, Vivek. So if you look at the dynamics in some ways, just given the consumer need and the price point and the efficacy, that's what really led to consumer acceptance, which then is -- which in turn then led to a lot more manufacturers finding ways to illegally manufacture these products.
They also position them as completely natural, Vivek. So there's for the consumer, that means they are getting something very natural. But these are completely -- and it's, even for someone like us with our kind of R&D labs, difficult to even keep track of because they're putting any sort of cocktails, pesticides, anything they want in these. And just to be -- the way the Indian regulations on insecticides work is that first, the molecule, Vivek, the active ingredient used like a TST or Etoc, anyone in this business would be familiar with these names, has to be registered by the chemical companies, Vivek, like whether [indiscernible], our own [indiscernible] company aspect, you have to register the molecule. Then after the molecule is registered, if we are using the active in a formulation, we have to register that in the formulation and you cannot change the amount of registered molecule used in the active. And obviously there are different regulations for home insecticides, there is a lot of toxicity report. It takes 3 years to just register a product and it takes much, much longer than that to register an active. So what these guys are doing is getting a lot of stuff from China or wherever and they just -- so there's no consistency in the products that they are using, actives that are not registered for home use and then obviously, putting it in any sort of dosage. I think our learning is actually is that the mosquito managed is quite big in India. So at least, from that category perspective, it's not something we necessarily need to worry about. And we need to just give consumers efficacious and safe product, which is very sort of important. And obviously, we don't -- we also -- given that we know this category, we know we also feel that we have a sort of responsibility to make sure that -- not just for our business but that we follow the law and stuff because these laws are created for all our health. But these products do drop down mosquitoes very quickly and very effectively because they are very highly -- they are too over-dosed frankly, you don't need that sort of a dosage. You asked about how our natural products, what is the efficacy sort of compared to the 2 ways -- sorry I'm going on for a bit, but 2 ways in mosquitoes. Either you drop them dead or you repel them. So natural products, we work more on repellency versus drop dead but we have created such an effective repellency proposal that when blind tested with consumers, we can't tell the difference between the product.
Okay. Okay. And last, a very small question, there is a sequential and a Y-o-Y increase in debt of between INR 150 crores to INR 200 crores. I would imagine you would have generated free cash. So what is the reason for debt -- for it to go up Y-o-Y and Q-o-Q? I'm talking about net debt.
Net debt, there is actually a reduction. There is of course in terms of dollar debt, it has gone down by about $50 million but due to rupee depreciation, the last stated amount did not equal to the reduction that was there in the base year's dollar amount.
Okay. So you're saying it is initially because of rupee depreciation?
Yes, translation.
The next question is from the line of Harit Kapoor from IDFC Securities.
So my question was on the international margins. If I heard you correctly, you said Indonesia margins are expected to improve from 3Q levels but this would be in spite of the fact that you are going to have these hosts of new product launches which are going to come through, you still expect a pickup in margins from these levels?
Yes. So I think the point earlier, which I had made at it, was that on a Y-o-Y basis, it's quite likely that in Quarter 4 we will see margin expansion in Indonesia. Honestly, I think sequentially, it's not the right way of comparing margins because of category mix and weightages, which each of the categories would have in overall business kind of performance.
So because even on a Y-o-Y basis, both quarter margins are quite high. So my question...
Yes. At this point in time, I mean, going in understanding is that we should see margin expansion.
And Harit, the reason also is -- one is I think so some of the work that has happened on media optimization, the team has done a very good job to be able to really get more bang for the buck with the existing media investments. And second, how typically Quarter 4 is when some of the cost reduction efforts start showing results. And so while there might be higher investments as far as A&P is concerned because of the kind of cost reduction efforts that the team believes will show results, the level of confidence is quite high to be able to deliver.
And we also execute a scale leverage in Q4 compared to Q3, Harit, I mean. So that also shows kind of lift of margins.
Very clever. Very clever. Second thing was on the Africa piece. Now if you could just give a sense about this movement in margin from 9% to 14%? You had said already in the Q2 call that there will be an improvement. Would this largely have been because the price increases, which came with a lag, have kind of flown through into the numbers? And that's why you are more confident that margins will sustain or even improve from these levels?
I think as we had mentioned, I mean, last time around we said that we expect profitable growth in Africa-U.S cluster, we did share that. Some of the upfront marketing investments, trade marketing investments are now in the base. So what we'll see is perhaps incremental one, the investments in talent is also more or less now in the base. So again, we are not going to see those block of spends coming in behind all those one-time investments. And these are the prime reasons what are driving margins again I think sequentially, the best way of looking at margin because as a bit of category mix impact. But the point is, we should see kind of stable, consistent margins in Africa-U.S. cluster even going ahead.
And Harit, a very important point is the impact of portfolio mix because, at least, if as Wet Hair scales up, the margins in Wet Hair tend to be -- the gross margins tend to be higher while it requires more A&P investment. But as the portfolio gets a little bit more balanced, one is, we are less susceptible to one category seeing a sudden decline. So it allows us to actually be a little bit more consistent in our growth, which we haven't been the last few quarters. And then second of all, hopefully, incrementally at least, it should allow us to deliver slightly better margins.
Last thing was on the Latin America piece. By when do we expect the full impact of the devaluation and -- to come through? And would it be another couple of quarters where we start to see a slightly better improved performance on a reported basis?
It looks like so, Harit. I mean, we have seen the performance, I mean, which has been actually a little soft even locally, leading company wiped out because of very sharp currency depreciation and in fact we have to adopt this hyperinflation accounting, which in itself is kind of knocking off a few basis points of margins even at international business levels. I think this continues at least for a couple of quarters, I don't see a very dramatic shift in the overall business performance. Internally, we are planning for a much better Quarter 4 as compared to Quarter 3. But then again, the impact of the sharp currency depreciation, how much it will sort of erase off those better performance, only coming times will tell. But yes, I think, maybe a couple of more quarters and hopefully, then it gets into the base.
The next question is from the line of Ravi Srivastava from Bay Capital.
Just wanted 2 questions. One on innovation side. So do you track or do you give numbers as to how much of the revenue is contributed by new products introduced in the last 2 to 3 years? And second question was on Project Pi. Can you just elaborate how the margins have expanded? And what are you doing on the cost-saving initiatives? What can we expect going forward?
Ravi, this is Sameer here. So I think we share normally our innovation rate normally once a year or when we have the annual analysts/investors meet and hence we would shy away from sharing at least mid-quarter or midyear as to how those kind of rates are evolving. But directionally, they are kind of heading northwards is what I can share with you for clusters like India as well as for Indonesia. In terms of Pi, we have shared this that this is like the fifth year of Pi in India. On an average, it has added close to 200 basis points in terms of bank saving, which primarily used to come in from materials cost basket. But this year, we have also worked upon optimization of media spends, which is also now meaningfully kind of getting added to the overall pool, part of which is getting reinvested back for growth and part of which is actually flowing to the overall operating margins expansion.
The next question is from the line of Arnab Mitra from Crédit Suisse.
On the revenue growth in India, you have 6% revenue and 1% volume. So this nearly 5% realization growth, could you help us understand what segments it's coming from? Because in general, I see companies are struggling to get pricing growth this year. So what is driving this growth? And is it something which is likely to continue in the next few quarters?
So I think -- Arnab, this is Sameer here. So I think it's very dynamic to be honest because we are seeing kind of price-off consumer offers as we share also, say, for example, in hair colors in one of the earlier conversations, which we were having on the call. But my sense is this quantum of price-led growth, which we are seeing in Quarter 3, will come down in, at least, Quarter 4 and even maybe kind of going ahead. Now it's difficult because I mean every category will have its own kind of dynamics and not just for the quarter but also for the base quarter, which did have GST-led kind of price changes. I think one of the reasons why we are seeing a price-led growth in this quarter, Arnab, is because in the base quarter, because of GST, rate changes across many categories, like hair color, [indiscernible], toiletries, air freshener portfolio, we immediately took the price cuts to sort of pass on the benefits to end consumer. But yes, as I mentioned earlier, we will see this quantum of price-led growth coming down in coming quarters.
[Operator Instructions] The next question is from the line of Binoy Jariwala from Sunidhi Securities.
So a question on GAUM cluster. While we are building our Wet Hair distribution business, are we also continuing with the HI registrations, which we had started earlier? Or has it been put on hold as of now?
No. I think the HI registrations are well underway, the propositions are being tested. You will see a couple of pilot launches in some geographies over the next 12 months. So we will actually launch the products in a couple of more markets. The products in some markets is already available, like Tanzania. So clearly, I think while the focus has been far more from an investment and focus point of view on scaling up the Wet Hair portfolio, we still remain quite committed to HI as an opportunity, which is sequencing it but in parallel, all the work on propositions and consumer testing and registrations is continuing.
And the HI products will be manufactured locally, right? Or would they be...
We haven't decided that yet. I think it will a little bit depend on what products we launch and what the manufacturability is. I don't think we've made that call yet.
So which means that we have not made any manufacturing investments for African HI as of now?
We have not made any manufacturing investments. You're right.
The next question is on the Latam business. We did about a 40% constant currency growth. However, we reported EBITDA loss. Now my understanding was that these products are locally manufactured. There is no import component within these products. Is there any -- could you guide my understanding whether it is right, wrong? And where is the differential? Was there a pricing lag, which led to a EBITDA loss?
So I think, it's a mix bag of both. There is definitely a little bit of gap between increase in kind of input costs even locally driven by kind of currency depreciation and the price increases, which we have taken. Also, there is a scale deleverage, while it sounds 45% but the increase in kind of fixed door is manpower costs, other G&A expenses is much, much higher than increase in sales growth. So that is resulting in the kind of performance, which we have seen on the operating profits over there.
Any guidance that you can share with regards to coming back on track with the 16%, 18% kind of EBITDA margins that we had early on?
As I shared, I think, it is -- again, someone earlier on the call, internally it seems like Quarter 4 should be locally much better than some of the previous quarters. But honestly, how much of it gets erased through this new sharp currency depreciation, we don't know at this point in time. It's quite choppy as you've seen it over last 2, 3 quarters but the hope is that over the next couple of quarters, it sort of settles down.
Okay. That's helpful. And just to confirm, there was nothing of an FX impact within the -- between the revenue growth and EBITDA loss? There was no FX-related impact, right, because of imports?
No.
Okay. Last one on deleveraging the balance sheet. If you could just share your plan with regards to deleveraging the balance sheet.
So Binoy, as you can see, when we divested our U.K. business, the entire [indiscernible] focus has been channeled towards prepayment of some of our overseas borrowings. So the efforts in deleveraging continues. We are focusing on reducing the net working capital, generating more cash in the international geographies and using the surplus cash generated for repayment of debt. So that continues.
And I think balance sheet is in much healthy position. I mean, if you look at some of the matrix, like working capital days sequentially as well on a year-over-year basis, they have come down. The returns have improved both in terms of returns on equity and returns on capital employed. And that's the trend which we would want the balance sheet to sort of progress on.
Right. Any yearly repayments that we need to do for debt that we have marked out?
We actually have our own prepayment -- I mean repayment schedule but we also have flexibility of kind of preponing or postponing some of our quarterly payouts.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for their closing comments. Thank you, and over to you.
Thank you very much for your feedback and questions. As a team, we remain very charged up to build on some of the progress we've made over this quarter and the previous quarters to deliver stronger top line and more profitable growth in the quarters ahead. Thanks a lot.
Thank you very much. Ladies and gentlemen, on behalf of Kotak Securities Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.