Godrej Consumer Products Ltd

NSE:GODREJCP

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to the Godrej Consumer Products 3Q FY '22 Earnings Conference Call hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ashit Desai from Emkay Global Financial Services. Thank you, and over to you, sir.

[Ashit Desai, Research Analyst]

Yes. Thanks, Faizan. Good evening, everyone. It's a pleasure to host the management of Godrej Consumer Products for their Q3 earnings call. I'll hand over to Pratik for the initial introductions, post which we will go ahead with the management comments. Over to you, Pratik.

[Pratik Dantara]

Thank you, everyone. Good evening, and welcome to the conference call of GCPL. We hope that you are all staying safe and healthy. We will be covering this evening the results for the quarter and 9 months ended 31st December, '21. On the call with me from GCPL is Nisaba Godrej, Executive Chairperson; Sudhir Sitapati, Managing Director and CEO; and Sameer Shah, CFO. We'll start with Sudhir talking about our performance in the quarter. Over to you, Sudhir.

[Sudhir Sitapati, CEO & MD]

Thanks. Thanks, Pratik. Good evening, everyone. I hope you and your families are safe and healthy, and thank you so much for joining the call today.I'll first start with an update of our performance. We've had a mixed quarter in Q3 FY '22. While our overall sales grew by 8% and we remain on track to achieve double-digit sales growth for the year, it was driven entirely price-led growth and flat volume growth. On the other hand, while our overall EBITDA de-grew by 2% and PAT declined by 1%, the quality of our profits has improved. In Q3, we were down 210 bps on EBITDA similar to the drop in Q2. However, this was driven by sequential improvements of 70 bps in gross margin and 90 bps in increased A&P investments.Our performance, while different across geographies, was similar in being near flat in underlying volume growth. Home Care was 3%; Personal Care was 12%; India was 8%; Indonesia was minus 2%, but even here, volume was actually flat; and Africa was 12% with also flat volume. So the big story for the quarter is really flat and muted volume performance and our reading is the significant price increases we've had to take. In our experience, this level of inflation is unprecedented like we saw in 2008 last and it does affect volume growth in the short term, largely through pipeline reductions. It may also affect discretionary spending and add to downgradation and have an impact on real income. But given the relatively non-discretionary mass pricing of our portfolio and our good performance on market shares, we think that some kind of volume growth will come back in the next few quarters.We have 2 areas we'd like to call out, which require deeper assessment. One is Indonesia, the second is household insecticides in India. In Indonesia, during the first wave of COVID-19 in mid-2020, we launched Saniter, a disinfectant band. While the brand did very well during the COVID period, the larger macroeconomic situation and, frankly, perhaps too much focus on Saniter at the expense of our core portfolio meant that the overall results weren't great. Now with the pandemic impact weaning and increased investment in the core portfolio, our core volumes are starting to grow, but the Saniter base is pulling down overall results. Indonesia results will take a few quarters to improve. It may even get worse in the near term as the Saniter comparator becomes very large, but we are convinced we're on the right track here. Household insecticides in India was lower than our expectations this quarter. We have always mentioned in the past that HI is a category that shouldn't be seen on a quarter-to-quarter basis. We believe that there was an adverse seasonality in south and east of India, while season was quite good in the north of India. Overall, category has seen a pattern of high and low consumption over the past few years. There was, in the comparator, a high consumption driven by COVID, more people staying at home and increased consumption on health, and we do see low consumption driven by weaning COVID fear. However, with leaving these seasonalities and COVID impacts aside, we fundamentally believe that there is huge potential to grow in the HI category in India. Indonesia, with twice the GDP of India, has 2.5x the consumption of household insecticide and has successfully premiumized the category into aerosols. Our #1 priority in the medium term is to drive category development and scale up growth in household insecticides.On the margin front, we said that costs had peaked, and we should see strong improvements in gross margins and moderate EBITDA improvements. However, commodity market, especially the palm oil fractionate that we use, PFAD, continues to be choppy. But the biggest story of medium-term gross margin expansion and moderate margin expansion remains intact, with significant investments in A&P. We continue to have a healthy balance sheet, and our net debt-to-equity ratio continues to come down. We are on a journey to reduce inventory and wasted cost and to deploy this to drive profitable and sustainable volume growth across our portfolio through category development.On the people front, after 11 high-impact years, Sunil Kataria, CEO of our India and SAARC Business, has decided to pursue an external opportunity. I will directly run the India and SAARC business as CEO in addition to my responsibility as MD and Global CEO.As always, our values matter the most at this time. We were recently ranked #1 among the top 100 companies in India for sustainability and CSR initiatives in 2021. This ranking is based on a survey conducted by Futurescape and published by The CSR Journal. We remain committed to doing our best to truly live the Godrej way and serving our people and communities. Thank you.

[Operator]

This is the operator. Sir, should we start the floor for Q&A?

[Pratik Dantara]

Yes, we can.

[Operator]

[Operator Instructions] The first question is from the line of Abneesh from Edelweiss.

[Abneesh Roy, Senior Vice President]

My first question is on hair color in India. So when I see the base, it was not very high. So on a 2-year basis, the base was around 10% growth. So we don't have the number this quarter specific, but you have called out that it's a soft quarter. So you have scaled up the 5-minute shampoo. If I see mobility for customer in Q3, it was broadly normal. So many companies called out that discretionary spend, sir, discretionary demand has been fairly good in Q3. So in that context, hair color, soft performance, how do you see that?

[Sudhir Sitapati, CEO & MD]

Yes. No, I think in hair color, there are 2 or 3 things going on in hair color. One is, we took a very sharp price increase on part of our portfolio, and that affects inventory. So even within the quarter, we saw that -- we took the price increase in September. And typically, what happens is the old stock gets stocked up and then the new price -- so there's a price transition. There was also, if I'm not mistaken, Sameer, a very strong comparator of shampoo hair color in the base. I think the good thing in our hair color business is we continue to gain share in India overall in hair color.

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

And just to add, Abneesh, I mean, on a 2-year CAGR basis, growth were close to high single digits. We're not too overly worried. I mean on the hair color's performance in the quarter, yes, I mean on the face of it optically it was a relatively soft performance. But on a previous CAGR basis, it was quite fine.

[Abneesh Roy, Senior Vice President]

Sir, my second and last question is on advertising spend. So in the December Analyst Meet, so there you had said that you'll be delinking the media spend from short-term goals. You had also said that you will cut down on the non-media and ETL. My question is, when I see your advertising spend this quarter on Y-o-Y basis, there is a saving. So it is Y-o-Y flat. So there's a 57 bps saving as a percentage of sales. Market leader in soaps, obviously, they don't give category-wise spends, but on an overall basis, HUL did cut down significantly on ad spends. So is that helping your overall ad spends also in terms of soaps and non-media ATL.

[Sudhir Sitapati, CEO & MD]

No. I think, Abneesh, while the overall media may be flat Y-on-Y and Y-on-Y has various things, if you look at it sequentially in absolute crores rupees, it has significantly gone up in Q3 versus Q2. So ultimately, media is a good thing to look at sequentially because -- and in rupees crores. And that is generally our strategy. Some of these media investments, Abneesh, they don't pay back immediately, but they pay back pretty soon. And we will continue to do that as we go along because our strategy remains committed to category development. There will be some volume bumps as all of us know in the next few quarters. But I think if we are razor sharp on category development, driven to increase brand investments, we'll come out of this quite well.

[Abneesh Roy, Senior Vice President]

Just one small follow-up. So reversal of impairment on BBLUNT in the India part, so INR 15 crores. Could you elaborate why that has happened?

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Yes. So Abneesh, we overall remeasured actually the fair value of our investment from BBLUNT. And just to refresh, we had impairment in [ flat ] end of FY '22, remeasured fair value is much higher than actually the book value and that results in impairment to us in the quarter.

[Operator]

The next question is from the line of Avi Mehta from Macquarie.

[Avi Mehta, Analyst]

First question is on the HI space. Now you are right that quarterly, there is seasonality. I just wanted to kind of understand for me. This is the second quarter of soft performance and that also on a 2-year basis. Would the reading or readthrough in your argument, would it be fair to say that market shares are not kind of -- are kind of remaining healthy or -- and it's an industry issue? If you could just kind of give us more clarity on why this is happening and how should -- what can drive a change so that we can understand that better?

[Sudhir Sitapati, CEO & MD]

Well, thanks, Avi. No, firstly, market share, like in hair color, we are gaining in household insecticide on a [ MAT ] and on an LTM basis -- and on an [ LM ] basis. So whichever way we look at it, we are gaining share in Household Insecticides. I think household insecticide had a very high -- and if you see it in the next few quarters as well, COVID -- it had a very strong COVID tailwind, and therefore, it's lapping now relatively tougher comparators. But I think the bigger issue that you said remains, which is we have to, over the next few quarters, find a market category development trigger for household insecticides in India and grow that category. And models are available for us in the rest of the world. It's just for us to adopt and invest and do it with discipline. But I would say it's an unsolved problem. I mean it is a fluctuating category, but the honest truth is that we've got to solve this problem, and I hope we'll do it in the next few quarters.

[Avi Mehta, Analyst]

But the deal with COVID, the impact was seen more -- and with COVID the impact was more in the third quarter and -- sorry, fourth quarter, right? I mean we saw third -- second quarter and third quarter was a supply side issue that you were facing. There was some impact because of that. So which is why I was confused from a 2-year CAGR also for the last 2 quarters, we have seen only, what, maybe mid-single digit or something of that sort kind of growth. So is it that the industry itself is taking some time to come off? Because I'm comparing on a 2-year basis.

[Sudhir Sitapati, CEO & MD]

No. See, I'll tell you, the thing is -- Avi, that's a valid point. I think we do feel like the south and east has had a relatively poor season in these few months and that sort of accounts for it. Yes, but over a slightly longer period, you will find very high COVID basis. I think in Q1 of...

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

The 9-month period, actually, I mean, we had a relatively high COVID base. And I think as Sudhir was saying, Avi, what's happening is because of these patterns of high consumption, low consumption, perhaps we are in very short term, in low consumption generally environment, right? As a result of which, our overall growth rates are relatively lower, but market shares are sort of moving up. And again, I mean, as we had called out in December Analyst Meet also what we just reiterated, we will see a couple of, hopefully, base key consumer bets and on-ground execution of it in coming quarters, which should kind of get us back to kind of desired growth rates.

[Avi Mehta, Analyst]

Okay. The second bit was on the margins. So while you have clearly called out a focus on driving double-digit sales growth, would it be fair to argue that because we have -- because there input cost pressure, because there is a mix change in Indonesia, in near term, FY '22 margins are likely to be under pressure at the EBITDA level? Or you would kind of work [indiscernible]. If you could kind of help us [ clear it up ] as well?

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Yes, Avi, I think the model remains the same, right, that how do we work on improving the quality of profit. And while, again, in Q3, the overall margins in terms of contraction are more of the same as we saw in Q2, but we are pretty pleased with the quality of profits in terms of sequential expansion in gross margins, reinvest that back for growth and growth will come, right, in coming quarters because there will be a lag between investments and the growth. My sense is that model should continue even in very short term. I mean we are relatively optimistic that this trend of sequentially improving gross margins, at least in India, should continue. We will also continue to see higher investment, and we will, perhaps, also start seeing kind of lower margin contraction or if all goes well, actually with margin expansion in India.I think Indonesia is going to be a little kind of other way around where in very short term, I mean, we will see, I mean, little bit of challenges in terms of things because of high Saniter base and also working on some of the [ core ] kind of key consumer bets, which will take a quarter or 2. And secondly, we had abnormally kind of high base, I think some 35 percentage EBITDA margin quarter, quarter 4. But sequentially, I mean, reaping the margins, I mean, could expand even in Indonesia, but on Y-o-Y, of course, they would be on the lower side. But on the whole, you will see, I mean, sequentially improving kind of quality of profits with higher gross margins, part of it getting reinvested back for growth. And as Sudhir said, I mean, the bigger story of moderate EBITDA margin expansion, medium gross margin expansion very much remains intact.

[Avi Mehta, Analyst]

Okay. Okay. If I may, bookkeeping, any guidance to the tax rate for FY '22 because we've seen a good reversal in this quarter. So that will be -- '22 and '23.

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Yes. No, I think this quarter has deferred tax reversal in Indonesia. It's because we had to remeasure our deferred tax assets because the tax rates actually moved up by 2 percentage over there. I think we can stick to 22% to 23% range, Avi, for next year.

[Avi Mehta, Analyst]

This is for FY '23, right, you're saying? For '22, it might be slightly lower given this reversal?

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Correct. Correct.

[Operator]

The next question is from the line of Manoj Menon from ICICI Securities.

[Manoj Menon, Research Analyst]

A couple of questions on the overall. So one, Indonesia, just one...

[Operator]

Sorry to interrupt you. The audio is breaking from your line, sir.

[Manoj Menon, Research Analyst]

I don't know, I'm actually talking very close to the mic. Is that okay?

[Sudhir Sitapati, CEO & MD]

It's now fine, Manoj. Thanks.

[Manoj Menon, Research Analyst]

Okay. On Indonesia, Sudhir, Sameer and team, just wanted your views on, let's say, how do you see the macros minus Saniter, et cetera? Because ultimately, in a discounted cash flow, the underlying does matter. So it's not really about year-on-year. What I'm trying to understand here is, after many years of let's say, macro headwinds, at least in my understanding that there is a general view that Indonesia as a country, as an economy, is, let's say, likely to see a cyclical upturn. I just wanted to just check how are you looking at it and why that matters is that your view whether it is -- you share my, let's say, optimism, if I can use that word, will depend on the plans you make. So that's the question #1. How do you see Indonesia macros over the next year, 18 months, et cetera, as it stands today?

[Sudhir Sitapati, CEO & MD]

I mean maybe I'll pass on the question on macros to Sameer, but I do feel that we are seeing green shoots in the revival of our core business volumes even in Q3, Manoj. So I'm quite optimistic that over the next quarters, while the overall numbers may not look great, the core part of our business may be back to growth, I think, after several quarters. So I think that also augurs well for the macros. I don't know if there's anything to add on that?

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

No. I think the headlines on macros, Manoj, whether you look at GDP, whether you look at even the overall parts within FMCG food-on-food are kind of gradually improving, right? Currency is also stable. So we do believe that macro will see -- or continue to see gradual recovery as we have seen at least over the past couple of quarters. In terms of why the performance is what it is, is, I would say, part because of sort of a base of hygiene Saniter. And also, again, what we had called out in December Meet that we overinvested perhaps on Saniter maybe marginally at the cost of core, which is what we are correcting at this point in time. So we remain very optimistic and we share your optimism, I should say, on macros, but more importantly, the potential of Indonesia business in medium to long term.

[Manoj Menon, Research Analyst]

The business plans that you make or you already made, let's say, for the next 12, 18 months is assuming a certain recovery, right? I mean can I interpret it that way?

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Absolutely.

[Sudhir Sitapati, CEO & MD]

I think it's assuming a certain recovery in our core business and the Saniter base is what it is. So then the rest becomes mathematical. And that we can't see growth honestly coming for the next 3, 4 quarters, given the way the numbers are stacked. But, yes.

[Manoj Menon, Research Analyst]

Sudhir, Sameer, look, I'll tell you, let's roll forward 3 months, 6 months, 9 months, 12 months. Look, I think if you could help us, let's say, a memo MIS number saying, look, ex-Saniter, this is the growth, that would be super helpful, given this one-off in somewhat -- which is there because I'm trying to look at the trajectory rather than the noise in the number.

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Well, to be honest, I mean, it's really -- to call out a specific number [ even cost ] [indiscernible]. No. I think, I mean our plans are looking robust is, again, where I can share up to your expertise to convert our English into your math. But ex-Saniter for sure, I mean, the plans are looking robust. But more importantly, beyond the financial plans is the kind of key consumer that's [ pluses ], which we are looking at executing over a period of time. As I said earlier, I mean, very short term, I mean kind of there will be subdued performance, but maybe from quarter 1 or quarter 2 of next financial year, overall as well as ex-Saniter, for sure, I mean the growth rate as well as the overall margins will probably be better off.

[Manoj Menon, Research Analyst]

Understood. Secondly, just quickly coming to India. Given the typical interplay of gross margins and the ability to invest in newer categories and newer launches, A&P basically, how do I think about the next 12 months, 18 months, where you are planning currently on NPD?

[Sudhir Sitapati, CEO & MD]

I think, Manoj, the -- firstly, the strategy is not at least for the next 12 months, as I said in the earlier quarter based on too many new things. It's based on category development on our core businesses, particularly household insecticides, but even the others, air and hair color. The gross margin, we hope to see medium recovery. Actually -- we believe we're actually in the middle of recovery of gross margins. And we hope to see that as things go, unless there's a major shock in commodity even further than what it is today, which one never knows. And some part of it, we will plow back into EBITDA and some part of that, we'll put into brand investments.

[Manoj Menon, Research Analyst]

Pretty clear. And last question, if I may, and I'll come back in the queue. Look, given the unprecedented input inflation, what we have seen, let's say, after 10-odd years, at least in my sense, talking 2 FMCG CEOs listed, unlisted, put together, the sense which I get is that there is a fair amount of trepidation to, let's say, implement further price increases if, god forbid, if there is a further inflation. Would you agree with this hypothesis?Because basically, there are CEOs who are worried that if, let's say, crude goes from $90 to $120, I'm just putting some numbers just from -- so that I'm conveying this correctly, that the ability to actually take a pass-through without really having significant adverse effects of price elasticity, I don't think that confidence just doesn't exist today. Would it be correct to make this statement?

[Sudhir Sitapati, CEO & MD]

Yes. I mean, look, if we -- yes, I mean it will not be very pleasant if -- for us if costs go up significantly further than what they are today. I mean, look, I feel in the -- again, the way to look at the Godrej portfolio is our business is pretty nondiscretionary. It is pretty mass. So in some sense, inflation benefits us in the medium term. But when you have hyperinflation, we have to keep consumer interest at heart. It's not that you can't price -- these categories are not structurally elastic, soaps or household insecticides, people need to use them. But we tend not to pass them on suddenly, which is why we have reasonable confidence that if commodities roughly where it is over the next, whatever, 9 to 12 months, this is a journey of margin, if there is a sudden rise in commodity, I guess, from our point of view, we keep consumer first, Manoj. We will do what's right for consumers first. And then we'll -- we're in this for the long game, and we'll sort of postpone the margin expansion.

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

And just to add, Manoj, for us the commodity basket is not just crude, right, [indiscernible] the impact comes in from palm oil prices. And they are at their lifetime historic sort of high again. I mean -- it's anyone's guess as to what will be the direction. I mean, in medium term, [ the net fee ], I mean, how that kind of shifts. So crude, I would say, I mean, we do get impacted, but the impact is not that big as compared to what it is from palm.

[Operator]

The next question is from the line of Percy Panthaki from IIFL.

[Percy Panthaki, Vice President]

My first question is on Indonesia. You called out the Saniter issue, which is -- I understand that, although I don't think on a 2-year CAGR basis, it should make a difference. But in any case, we will ignore that. But excluding Saniter, if you could just rank starting from best to worst the 3 categories that you have in Indonesia, without giving me any numbers or anything, on a 2-year CAGR basis, which has done the best, which has done moderately and which has done relatively not so good. That's my first question.

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

I can give you direction inputs, again, Percy, not actually specifics. But yes, I mean what I can begin with is ex-hygiene portfolio, the growth rate, I mean, would be close to mid-single digits in rupee terms. So that's the big kind of base impact, which we were calling on. And unfortunately, it will remain at least for next quarter to 2. I think in terms of -- because it's seen largely, I think both HI and air fresheners, I mean, remain in positive zone on a Y-o-Y as well as on a 2-year CAGR basis, and baby wipes is where we continue to see challenges on a Y-o-Y as well as on a 2-year CAGR.

[Sudhir Sitapati, CEO & MD]

But Percy, I don't want you to take the impression that Indonesia is all about the Saniter base as both Sameer and I said in the past that during the COVID period, I think we should -- we would have done things differently in hindsight. And I think there's a lesson here for all of us, which is when there's a big shock like COVID, one tends to just change all one's plans and go behind something new. And as a consequence, sometimes one forgets the core, and I guess that's the lesson. Of course, this kind of period nobody has really faced before so it's not fair to blame anyone because it's a really volatile situation, but that's the lesson to learn, which is regardless of the volatility, one has to be focused on the core of one's business. And whatever is new, one has to invest in it only within proportion. I guess, that's the lesson we will learn as a business.

[Percy Panthaki, Vice President]

Understood. Secondly, I just wanted to understand as far as the India HI business is concerned. See, the overall top-down view is very well understood, lack of penetration, you have to grow sort of penetration, you have to grow usage, you have to upgrade people to new formats, et cetera. That's the top-down story that sort of any consultant or any even player in the market, if he analyzes this, he will come out with these steps that need to be taken. But if you can just sort of give a better idea or a little more detailing, of course, I'm sure not everything can be said due to competitive reasons, but whatever you can in terms of the actual steps that you're taking so as this top-down story actually plays out. Because, until now, it's always remained sort of opportunity, but that opportunity has not fructified fully. So what will you do to make it fructified?

[Sudhir Sitapati, CEO & MD]

No. I mean, Percy, it would be hard for me to say that. So maybe in the next quarterly meet or quarterly meet after that, once we've done what we have to do, we can talk about it because it's not correct for me to speak. But look, I mean, currently development has 3 or 4 general things that one has to do. One has to increase -- one has to firstly find a trigger for category development. Why should somebody use the category? That is question #1. Question #2, one has to invest significant amounts of A&P behind it. One has to get lots of trial, distribution and affordability. I mean these are like just first principles of category development. So how we play that in HI? I guess we'll tell you once we do it or once it's public, but this is how we have to think about it.

[Percy Panthaki, Vice President]

Understood. And one last quick question. How would you look at FY '23 as an overall sort of context for us analysts? Would you say that with FY '22 margins being under pressure, and here, I'm talking about at the EBITDA level, would you say that there's a fair degree of probability that FY '23 we'll see Y-o-Y margin expansion? And also in terms of the top line growth, given that FY '22 already has seen some amount of price increases on that high base, do you see FY '23 top line led more by volume or more by pricing on a Y-o-Y basis?

[Sudhir Sitapati, CEO & MD]

Yes. Percy, I think I had spoken about this in the last quarter and I think broadly, the view remains unchanged, which is if commodity costs are in the vicinity of where they are today, which is a big if, but let's start with that because these are very high prices, they could go either way, then I would expect that in do-nothing, it will be low volume growth, but I hope we can do better than that in terms of volume growth.Because I think it will come to -- I mean I hope if we do a good job, we'll go beyond low volume growth -- from no volume growth to low volume growth to somewhat reasonable volume growth. There will be high price. I think there will be good gross margin expansion, and there will be medium EBITDA expansion. This is how I would still say looking at the cost situation. This can change, of course. If there's a sudden inflation, as you said, if PFA goes to $1,600 or crude goes to $120, we'll have to come back with a different view. But given where we are, this is the view that I would have for -- you'll be able to then do the math in where you think we'll end up.

[Operator]

The next question is from the line of Vivek Maheshwari from Jefferies.

[Vivek Maheshwari, Equity Analyst]

Two things, Sudhir. One is on the -- again, on the India business. So I hear you on the category development and these things will take time, and you have articulated it well now as well as in December. But do you think there is a need to be a bit more aggressive on, let's say, distribution expansion? So I recall, I think about 7, 8 years back, Unilever, in a matter of 12 months, tripled it's direct distribution reach. Do you think something like that could be done? Or do you think -- or given the current portfolio, because I know the 2 companies' portfolios are very different, but what is your sense on let's say, targeting distribution first, which is more in your control as against as a category development, which takes its own course?

[Sudhir Sitapati, CEO & MD]

I mean, my answer is, outside India, I think there is a lot of scope for numeric distribution. I think our distribution is less than our demand. I think in India, there is scope in targeted ways for distribution increases. In some parts of the country, there is scope for distribution increases. But I think the broad story in India is that demand has to come first and distribution next, the other day, whereas perhaps outside India in our own business, it's the other way around with some exceptions. So it's not like there's no big distribution task, but that's my instinct on India.

[Vivek Maheshwari, Equity Analyst]

So does that mean, Sudhir, when we look at your, let's say, rural salience as compared to some of the other companies, you are quite under indexed. So does that mean that this portfolio, particularly the HI is less relevant to rural, which is why you think that distribution side -- because I would have thought the distribution side upside could have been significant, at least from a rural salience perspective given that the starting point for you is far lower than for some of the other companies. Can you clarify that part?

[Sudhir Sitapati, CEO & MD]

Our soaps business is very well distributed in rural. So we have a pretty good rural salience in our soaps business. Our overall salience is low in HI. So it is not that we don't have a -- I mean I've traveled now to several parts of India with GCPL, including last week where I was in rural Tamil Nadu. I find our rural distribution very good for GCPL, especially in soaps. Now the question is in our household insecticide product. I think category development was driving rural demand for household insecticide. And if we do that, it will go on the back of our soap distribution system, which is really good, which is what I mean in India that, for some of these categories, hair color, HI and in hair care, we have the distribution network in India built on the back of soaps, but we have to build demand for this -- for these 3 categories and let them go to where they have to go and then perhaps you can ask the question on the next part distribution, Vivek.

[Vivek Maheshwari, Equity Analyst]

I see. Okay. Okay, sure. And second thing, somewhere -- I know, again, the context was different, but somewhere you mentioned that the input price inflation is similar to what you had seen probably in 2008. And that's a comment that a lot of companies have made. But either a GCPL-specific India business comment or industry side comment. But when we look at, let's say, 2008 or let's say '09, India margins for GCPL at EBITDA level were down about 500 basis points or so at the EBITDA level, I'm saying. This time around, the margins have been relatively tighter. So when you think about -- when you see that category development will need investments and trial and a whole host of things despite, would you expect that medium-term margins will still see -- EBITDA margins will still moderately go up. And this is despite the fact that the starting point is not as bad as it was in FY '09, at that point of time. Can you clarify, is there a possibility of margins first going down and then moving up?

[Sudhir Sitapati, CEO & MD]

It's always a possibility, but I would say, again, it depends a lot on costs. But I would still say, sitting where we are,, sitting on relatively low competitive gross contribution. That is step 1. Step 2 is we have a very, very aggressive cost-saving programs, which actually we've implemented this year as well. One of the reasons, despite the kind of gross contribution dilution, we've seen EBITDA margin dilution in India is there's been a terrific cost -- controllable cost program, which we will continue going into next year. And thirdly, one of the silver linings is we also expect to see leverage. Because our industry is affected by commodities which are inflating, we certainly expect our turnover growth to be significantly greater than general inflation, and therefore, we will get leverage. So these are the 3 sources of margins, Vivek, and I'm reasonably confident that we will -- with these 3 sources, be able to invest in the brand and show moderate -- but not huge, but moderate EBITDA improvement.

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Yes. I think just to add, Vivek, the point is not just gross margin expansion, but also the controllable cost drive and it kind of straddles across functions like supply chain cost takes, materials or even kind of your margins. I mean it's only from a sales system perspective. Nonworking media investments also in the overall marketing piece. And then, of course, what we call as HR kind of clusters, right? The overall overhead. So there is a very strong kind of plan on that front. And we, I mean, believe at this point in time that we should get, I mean, kind of good enough savings coming in from this controllable cost, which will be redeployed for investment, which, in turn, should drive growth. And a combination of that, plus gross margin recovery should result in moderate EBITDA margin expansion.

[Sudhir Sitapati, CEO & MD]

And, Vivek, just to answer your question on distribution, I think, once again, which is physical and mental reach are equally important. At all points in time, one has to look at where is the bottleneck. And I think a lot of the efforts in some of these categories is to first increase mental reach and then distribute -- our physical reach will follow. So physical reach is not the only thing that is in our hand. Mental reach is equally important and in our hands.

[Vivek Maheshwari, Equity Analyst]

That's very interesting. And just on the point of -- on margins, I think my only submission will be any growth, which is at the cost of margins is not that bad given that all the FMCG companies are sitting on like literally [ like high ] margin. So even if you invest behind NPD spends and get growth, I think market will view it much more positively than what probably you will fear.

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

[indiscernible] always are in the past so it's right, there is a very serious trade-off between growth and margins. It will be skewed towards growth and not margin. So that remains very much intact.

[Operator]

The next question is from the line of Alok from AMBIT Capital.

[Alok Shah, Research Analyst]

So I just wanted to check on the Indonesia business. So what could be the risk or threat to your hypothesis of growth resumption? And here again, I'm excluding the macros, I'm excluding the Saniter. So could that be category-led risk, distribution or any other risk that you can think while we talk about growth resumption?

[Sudhir Sitapati, CEO & MD]

Yes. I mean, look, there is -- I can't say that -- you see, firstly, Indonesia has a salience of about 15% of our business. So where we look at it in that context when we're looking at risks going forward. Within that -- yes, I mean, look, there's a lot of scope in terms of -- in Indonesia, there's a lot of scope on physical distribution. I would say that is even more important than mental reach. So we've got to increase our physical distribution in Indonesia, which I guess is something we've got to execute and do. We've got to, again, invest behind our brands, which we probably need to do more of. And there's a macroeconomic risk. So I'm not saying that the -- but we factored this in when we are giving rough commentary on what's likely to happen in Indonesia, which is we don't see growth for the next few quarters. Can it go worse than that? Perhaps it could, but you'll have to see how much worse on 15% or 13% of the company is what it is today for us.

[Alok Shah, Research Analyst]

Got it. Got it. And my second and last question is on the statement. When you say about seeing new go-to-market initiatives in Africa and micro marketing initiative in personal care. So to the latter, I'm assuming still you're looking at distribution expansion or stake further reaching into newer territories within India. But in Africa, is it new geographies? Or is it new distribution platforms? What is exactly that you're doing?

[Sudhir Sitapati, CEO & MD]

No. I mean in Africa, I would say the #1 priority is physical distribution. I feel like we've got a great portfolio in Africa, increasingly of our FMCG products that are doing really well, both in hair and more recently, even in household insecticides. And our #1 priority is to drive physical presence in Africa.

[Alok Shah, Research Analyst]

And that would be largely in the general trade, I'm assuming? And would that be from most through wholesalers or distributor? How does that really...

[Sudhir Sitapati, CEO & MD]

Yes. I would say like our #1 focus country in Africa is Nigeria. I think general trade through retailing and building a good solid retail infrastructure in Nigeria over the next 12 months would be the big priority in Africa. And yes, and I feel like our FMCG business in Nigeria, in particular, Africa in general, is the tipping point.

[Operator]

The next question is from the line of Abhijeet Kundu from Antique Stockbrocking Ltd.

[Abhijeet Kundu, Vice President]

My question was related to media business, where you are saying that in HI as well as in hair colors category development will be the core [indiscernible] moving ahead. Now what we understand is -- who were challenged as well. There has been -- before the category development happened, GCPL has been focusing on discontinuing some of its nonmoving SKUs across categories. So would that -- and it would -- as you had said in December that you will also focus on bringing down the inventory levels [ of the whole because of it ]. So did that have any impact in the current quarter? Or it's not in the third quarter what we have some of the impact on sales in the coming quarters?

[Sudhir Sitapati, CEO & MD]

I mean, look, my general experience on inventory and SKU reduction has been like benefits pretty soon. And I anticipate that to happen. I feel like we will go behind inventory reduction. I think it will be a key KPI for us next year. And no, I don't expect inventory reduction to lead to a loss in volumes. We will not -- obviously, we will sensible when we cut inventory and not things which are strong consumer franchise. We will not obviously cut that.

[Abhijeet Kundu, Vice President]

Okay. And any other view on SKU reduction? I mean that will really be useful.

[Sudhir Sitapati, CEO & MD]

I mean, in general, both inventory and SKU reduction it usually takes up volumes because the pipelines are clogged. And when you clean the pipeline, what moves fast, tends to move faster. So it's generally a good thing to do. One obviously has to be sensible about both SKU and inventory. But given that premise, these are both good things to do.

[Operator]

[Operator Instructions] The next question is from the line of Shirish Pardeshi from Centrum Capital.

[Shirish Pardeshi, Senior Analyst]

I have 3 questions. The first question, I'm harping on what you tried to explain us from the distribution. Would you be able to share, are net distribution or better distribution for the categories like soaps and HI? And further, if you can break it up urban and rural, so that will give the confidence what is it that we are looking the development.

[Sudhir Sitapati, CEO & MD]

I don't think we can share our internal distribution numbers. These are relatively easily available on ACNielsen for the categories. So I'm sure you can pick that up from there. But I mean I can tell you that the distribution is very good. It's a strong suit in India. I mean, beyond that, I don't know, Sameer, whether we should be able to...

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

No, I'm sorry, Shirish. I mean you know we can't share this. I mean from a confidential perspective, it's within larger public domains, right? I mean the reach, direct, indirect as well as the rural, urban that...

[Shirish Pardeshi, Senior Analyst]

At least, Sameer, you will be able to share how -- what is the difference between in terms of the larger opportunity we are talking about. I mean I agree that the Nielsen numbers are not really available, and we don't have the access to that. So maybe if you can give some more color qualitatively?

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Yes. I think what Sudhir shared right earlier, I mean, it's not just physical reach, but also mental reach, right? And results we are well distributed in terms of reach. We just need to kind of leverage that source distribution reach for HI and hair colors. But before that, we need to kind of invest in terms of generating the demand, especially in rural or even kind of with urban poor consumers. So that's going to be the approach, right? I think the other piece is not just going to be increase in reach but also increase in productivity, in the outlet thing which we reach. So that's the other thing which we are going to work upon in terms of unique lines and so on so forth, Shirish.

[Shirish Pardeshi, Senior Analyst]

Okay. My second question is on the price. Will you be able to share how much price increase has gone into in 9 months this year and the overall weighted inflation which we are having at this point of time?

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Yes. I mean if you look at the latest price increases, there [ is now below ] [indiscernible] around kind of earnings percentage. On a full year basis, I think our price increase would be, I think mid-single digit thereabouts.

[Shirish Pardeshi, Senior Analyst]

And the inflation, what is weighted today?

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Well, I think it's very choppy, right? And you have to kind of bake in, not just here and on replacement rate, but also what's going to be kind of expected commodity prices over a period of time. It's very dynamic, right? We have called this out that we will be competitive in terms of taking price increase, but we also would kind of keep an eye on what's happening on the volumes front. I think, at this point in time, [ setting the variable ], we do believe that our price increases, which we've already taken some of the price increases, which will continue in coming months and quarters, should result in overall sequentially improving gross margin. So I think that kind of guidance strategy, at least in medium term continues until unless there is a big kind of Ethiopian inflation especially in palm even from current level.

[Shirish Pardeshi, Senior Analyst]

Okay. Last question to Sameer. We have seen the senior management changes in this quarter? And maybe Sudhir can add, is there any further senior management changes are required to drive the strategy and the distribution expansion? Or is that already implemented? Or there is no more departure which will happen?

[Nisaba Adi Godrej, Executive Chairperson]

This is Nisa. I think we do have changes that have happened even before the risk comes. So I don't think there's any guarantee about no changes happening. But I think, for the year, and some of these are obviously even related losses, people leaving that we don't retain them, but I think Sudhir is very focused on making sure that we have the best team possible in place, and he's quite -- stated quite publicly also that his preference is to give opportunities to people within GCPL. So I think you might see the one-off people leaving, but there has been -- which I think Sudhir touched on the sort of global category team that's been created always people internally, which is already doing some really sort of good work, especially preparing for the next year. So I think, to your answer, we will always keep looking to have the best possible team together, and our preference will be for internal leadership.

[Operator]

The next question is from the line of Ashit Desai from Emkay Global Financial Services.

[Ashit Desai, Research Analyst]

Yes. So Sameer, Sudhir, if I look at the domestic staff cost, the 9-month run rate is somewhat similar to what it was in 2018. Any changes or thoughts on how and what the sales incentive structure is? And also from an accounting perspective, the variability we have in staff cost is very different from what most other FMCGs have.

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Yes. So Ashit, we have called this out in the past, right, because we this variable -- performance-linked variable remuneration, which in turn is driven by business performance. And the reason why in current quarter as well as, I mean, on a 9-month basis, employee costs are lower, that's purely because of -- especially in India because of relatively lower kind of performances. And we also moved the metric couple of years ago what was only EVA to EVA plus kind of sales and maybe at the right time, we'll also share with you all as to what the kind of metric kind of going ahead. So yes, I think the variability is there, but it's largely driven by the performance-linked variable remuneration, which, in turn, is driven by business performance.

[Ashit Desai, Research Analyst]

And any thoughts on the sales incentive structure? Any changes to that?

[Sudhir Sitapati, CEO & MD]

What do you mean by sales incentive structure? Do you mean the below the line -- or do you mean the incentives we pay to our sales teams?

[Ashit Desai, Research Analyst]

Incentives to sales teams, sir.

[Sudhir Sitapati, CEO & MD]

No, I don't think there's any change in thinking there.

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

Yes, there's no change. I mean there's no change over there, Ashit. And that's also, in terms of quantum, it's too small to really deliver this.

[Sudhir Sitapati, CEO & MD]

I mean, certainly, look, I mean, strategically, going back to one of the earlier questions, our intention is to get more value from our [ FOH ]. And I presented the last time as well that we are getting people to do bigger jobs and more jobs and so on and so forth. So strategically, this is an area that we will continue -- especially in a time of inflation like this, one of the ways in which we will hopefully deliver both EBITDA and A&P is to squeeze out any nonconsumer-facing costs and that's very much part of the strategy.

[Ashit Desai, Research Analyst]

So would you say, I mean, the staff costs have been flat. The reason is more to do with lower performance-linked incentives or these are larger changes within the organization?

[Sudhir Sitapati, CEO & MD]

No. No.

[Sameer Shah, CFO, CFO of India & SAARC and Head of IR]

This is largely, I mean, lower kind of variable remuneration because of business performance. As we called out, I mean, the overall continuable cost in which, I mean, employee cost is a subset is something which will kind of kick start from next financial year, Ashit.

[Operator]

Thank you. Ladies and gentlemen, we will take that as the last question. I now hand the conference over to Mr. Pratik Dantara for closing comments. Thank you, and over to you, sir.

[Pratik Dantara]

Thank you, everyone, for joining. Stay safe, stay healthy. Thank you.

[Sudhir Sitapati, CEO & MD]

Thank you.

[Operator]

Thank you. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.