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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to the Godrej Consumer Products Limited Q4 FY '18 Earnings Conference Call hosted by Motilal Oswal Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Krishnan Sambamoorthy from Motilal Oswal Securities. Thank you, and over to you, sir.
Hi, good evening everyone. On behalf of Motilal Oswal Securities, I would like to welcome you all to the Q4 FY '18 conference call of Godrej Consumer Products. We have with us the senior management team of GCPL. Over to the management for opening remarks which will be followed by the Q&A.
Thank you, Krishnan. Good everyone and a very warm welcome to all of you. Thank you for joining us today on the conference call to discuss our quarterly performance. We have with us Nisaba Godrej, Executive Chair Person; Vivek Gambhir, Managing Director and CEO; V. Srinivasan, CFO and Company Secretary; and Sameer Shah, Head Finance India, SAARC and Investor Relations.Like all the previous quarters we will start our presentation with Vivek sharing his thoughts on our performance and then we can open up for Q&A. Over to you, Vivek.
Good afternoon. Thank you, [indiscernible]. I am pleased to share with you the highlights of our performance. I'd like to use this opportunity to get your feedback. Overall, as we reflect at fiscal year '17-'18 our focused strategy and balanced portfolio enabled us to deliver competitive profitable growth despite tough operating conditions in a few of our categories and geographies.Our constant currency sales for the year increased by 9% on a comparative basis. EBITDA increased by 12% lead by robust gross margin expansion. EPS growth was at 25%. The board has declared an interim dividend of INR 7 per share, this along with the earlier interim dividend aggregate to INR 10 per share dividend for the year. This results in a payout ratio of around 50%.Beyond the quarterly financial performance that we will discuss we spent a lot of time last year in putting some significant building blocks across our operations. In Africa it was about putting strong talent in place, creating a device center, scaling up local manufacturing and launching our wet hair portfolio. In Indonesia, it was about reinvigorating our innovation engine and laying the groundwork for a significant transformation of our go-to-market approach. In India it was some very strong work in digital marketing, rearchitecting our distribution and strengthening our analytics capabilities.And across the board, there has been some tremendous work done in terms of our [indiscernible] pipeline. So while all of these works may not show up in one quarter's financials, these kinds of efforts we believe are making us more stronger, resilient and will enable us to step up our performance and trajectory. So we have really used the macroeconomic challenges over the last 12 months to learn and reintegrate our approach to becoming much more agile.Now turning towards the performance in the fourth quarter. If you look at Page 3, this quarter we had a mixed performance with [indiscernible] while sustaining robust EBITDA growth. Our India business delivered a competitive 7% comparable growth driven by volume growth of 6%, our secondary sales growth was higher at [indiscernible]. For the year India delivered a 10% comparable sales growth driven by 8% volume growth, EBITDA for the year increased by 21%.As we mentioned before, the performance of our international business was relatively softer due to the weakness in Indonesian and Africa. However, we expect to see a strong turnaround in growth rate in fiscal year 2019. Many of the geographies that we operate in are projected to have stronger economic growth, so that should give us stronger consumer demand.On slide 4 we lay out the exceptional items and on page 5 we show the bridge between reported to operating EBITDA. If you take a look at our balance sheet items on Page 6, our balance sheet keeps on getting stronger every year. Our net debt-equity ratio has come down to 0.41, our return on equity, return on capital employed are all heading in the right direction. And in terms of our other metrics as well such as working capital, our teams continue to make and show good progress.If you take a look at our India performance, as we mentioned, our India business delivered a sales growth of 7% on a comparable basis, this was based on a volume growth of 6%. The secondary sales growth of 10% was much higher and our primary growth led by initiative to increase that channel partners ROI. And what is encouraging here is that first of all for the year we have returned back to double-digit growth and we've delivered strong profit while making competitive investments in our brand. And so along with the 22% growth in EBITDA, our marketing investments also grew by 22%. So our gross margins have been increasing steadily. We are [indiscernible] a lot of that back into increasing marketing spend along with a certain amount flowing into EBITDA.And this point is quite important that consistently our profit growth has been delivered while investing in our brand and we believe that these investments are strengthening our brands and are also setting up well to accelerate growth in the quarters ahead. We believe that in India the platform is set well for us to get back to double-digit growth this year on the back of continued influence in the economic environment, particularly stronger rural demand. And even in quarter 4 rural demand was significantly higher [indiscernible] urban and given the focus of the government in rural development and assuming a normal monsoon we should see further improvements in rural growth.The other important thing to point out is that we have spent the last few months post-GST rearchitecting our distribution approach and so we had a much stronger go-to-market approach with expanding coverage, much more planning at the micro level, more effective use of technology, addressing coverage gaps, optimizing the ROI of our partners and strong and sharper visibility. All these building blocks certainly provides a strong advantage to deliver stronger growth this year.We are also very excited about our innovation calendar for this year. We have 10 launches that are being planned in India across categories and we are targeting about at least a couple of launches in every quarter. Over the last month in itself, we have launched a couple of really exciting new products on the insecticides space.If you take a look at our category performance on Slide 10, our household insecticides clearly had a subdued performance. Some of it was driven by an adverse season, particularly in January and February. However, what's encouraging is that average growth rates are back to double digit for March and for April. Our recent launch in Personal Repellents is scaling up well with a double-digit market share. We launched Goodknight PowerChip. Goodknight PowerChip is a new electrical solution, concentrated gel technology and at a lower price than liquid vaporizers. So this we are targeting to upgrade all users with a better solution.We believe that the opportunity to upgrade coil users is significant. This will also enable us to recruit new users. The PowerChip is a very affordable product with the price per night at 2/3 of a coil. It's more effective and more efficacious than coil with a unique gel solution. It's quite convenient which is a simple plug and use and particularly given the government's efforts of rural electrification this should give us a tremendous growth boost. The other important point is that this is a registered design which we believe will make it difficult for competitors to copy the product.And towards the end of the quarter, we also launched a higher efficacy liquid vaporizer under the Goodknight brand.On the hair color side, on Slide 11, growth of 3%, this was followed by 33% growth in the third quarter driven by channel up-stocking post GST led MRP cut. So therefore I think a more appropriate way to look at this growth would be over a 6-month period where the growth stood at a healthy 18%. Godrej Expert Rich Crème continued the good penetration and gained market share. And again in this category also we have a couple of fairly exciting launches planned later this year.On soaps, the double-digit growth momentum continuous with a 19% growth. The growth was driven by very effective micro-marketing initiatives, rightsizing our products and strong on-the-ground execution. And both Godrej No. 1 and Cinthol did well and we continued to gain market share during the quarter.The focus on our innovation agenda continues. I think last year the pace of new launches had slowed down a little bit. But [indiscernible] the volatility of last year [indiscernible] figure out how to reinvigorate our innovation pipeline. And our expectation is that this year will probably be the most active [ NPD ] launch calendar ever in our history. So we are very excited about the kind of disruptive products that we are creating at different price points.In terms of air fresheners, we've continued to maintain a leadership position. In the overall book it remains [indiscernible].If you turn to international, clearly the performance in international business was softer due to the weakness in Indonesia and Africa. So certainly we are expecting a strong turnaround in growth rate in this year. To spend a couple of minutes on our Indonesia business and that's on page 19, the macro environment continues to be challenging. The good news is that we sustained our robust margin expansion. Our EBITDA margin increased by 70 basis points despite a 160 basis points increase in A&P. So we have definitely been investing in our brands and at the same time finding ways to improve gross margins and manage our [indiscernible] to deliver a strong margin.Earlier on in the year, as we had mentioned, we lost share in HI, our main category there. The good news is that we have regained back all the lost shares. The growth in this quarter was unfortunately impacted due to some of the modern retail partners reducing the inventory but the sellout rates have been much better and are the fact that the share gains are now showing up due to enough confidence that the worst is probably over and we should start seeing recovery happen in the quarters ahead. We have been getting much more strategic in our promotion spending, our [indiscernible]. Our expert platform under HI has been launched. [indiscernible] on our stellar air freshener brand and we are backing these new products at [indiscernible] India investment.There is lot of great [indiscernible] happening in terms of both innovations and the confirmation of our go-to-market approach, and we can start seeing the impact of this from quarter 1 onwards.On our Africa and U.S. and the Middle East business, on Page 20. This was a relatively quarter with constant currency sales growth of 7% in the quarter led entirely by volume. For the year as a whole sales stood at 14% on a constant currency basis. The sales were impacted by our continued sluggishness in Kenya. The business excluding Kenya grew in double digits in constant currency terms. The margins were impacted due to some upfront investments we are making in talent, in brand building and factory infrastructure to strengthen the foundations of the business.The scale-up of our wet hair portfolio is seeing good traction. I think it has fallen behind a little but we are now regaining back momentum in terms of local manufacturing scale-ups. We have launched a naturals range under Article 5 in the U.S. and we will bring that to Africa, the naturals range at some point soon. We are planning for a very exciting relaunch of the Darling brand this year. And there is significant investment going on in go-to-market along with salon engagement. There is a robust pipeline of NPDs that have been put into place. We set up test centers and consumer [indiscernible] capabilities in [indiscernible] in Africa.We have also launched very exciting online presence called the Black Hair Hub to drive consumer engagement and advocacy. The marketing challenge has been [indiscernible]. So we believe that given all the building blocks that we are putting in place the performance should be much better this year when going ahead. We remain very excited by the potential in Africa. On Latin American, we saw recovery performances of the 28% constant currency growth and in Europe as well as while the profits were a little bit on the lower side this quarter. For the year as a whole the European business has done very well. The remainder of the slides just provides a summary of our financial performance. We'd be now happy to take your questions. Thank you.
[Operator instruction] The first question is from the line of Amit Sinha from Macquarie.
My first question is on your HI business. So what is giving you the confidence apart from a good April month on the revival of the segment? Is it the industry growth coming back or your new launches have done exceeding well?
I think ultimately what gives us the level of confidence is that, see, in any case given the fact that we are over 50% of the market to a large degree I think category growth rates are driven by both the kind of actions that we take along with I think the environment. I think January, February just given the season mosquito infestation was the lower side and we can't do too much about that. But having said that I think what's in our control is to keep on finding ways through strong marketing and a very active NPD pipeline to keep on expanding [indiscernible]. I think what's giving us confidence is that we are not in the personal repellant business gain a certain scale and along with that we have at least 2 more launches that are in the market, there are 3 or 4 others that are in the pipeline for the remainder of this year. So as we do our initial consumer testing, as we look at the propositions and the kind of NPD challenges that we have I think the level of confidence again is high that for the things that are in our control I think we should be able to execute much better. Having said that, this is a seasonal category, so there could be some quarterly volatility, but suffice to say that we have learned a lot from the last 12 months in terms of kind of innovations that we can bring to the market.
My question was, well, basically earlier also before FY '16 we used to see quarterly volatility, but on the year -- on the entire annual basis the numbers used to be much higher than what we have seen in the last 2 years.
Yes.
My question is that you have given a broad indication of a double-digit kind of number next year, do you share the same confidence for this segment or this segment will be lower than the rest of the India volume number?
It is difficult to say this because the last couple of years given demonetization, given GST, given some drought conditions and unfavorable seasons there are far too many factors to be able to actually diagnose why category growth went down. From a market share perspective, I think we've been holding steady. But clearly, I think if we look at our NPD launches over the last 2 years, apart from personal repellants which is still in its early days we haven't had any significant launches over the last 2 years. And if you were to look at our performance at 3 or 4 or 5 years ago, a lot of, I think, our success was driven by some very strong launches. And this is a category where sometimes you need 2 or 3 years to get the launch, the launch calendar right given the registrations et cetera. So I think a lot of the work that we've been doing over the last 2 years will now hopefully start showing a lot more fruition. So I think I'm hopeful that you will see category growth rates improve, but, as I mentioned, lot of what we end up doing will influence category growth rates more than anything else.
My second question is, while your communication on the new product objective is very clear and the strategy is to recruit from the coil users but when I look at your TV commercial it seems to target again the urban consumers. Now my question is that in that case will this new product cannibalize a significant part of the liquid product sales? And if that happens then what happens to the margin profile of this product?
So I think the advertising [indiscernible] I don't know what you mean by targeting urban consumer. I think most [indiscernible] earlier rural products. I think because the way the films are made is to make them [indiscernible]. But that being said we've done [indiscernible] do quantitatively very significant research. And what we found in that research was this was a very attractive product to coil users both [indiscernible] price point we're seeing much more electrification in India than the past. So [indiscernible] definitely both at the concept and the product level are very high. For LV users, which has its own benefit, they do not react to this product in the same way. So obviously we took into account what would cannibalization be. Can I say that [indiscernible] probably not, but we didn't think it was? And in India if you look in any category [indiscernible] other products there is always a price [indiscernible] pay to the value. Also please do note that one of this other thing that we have [indiscernible] LV which has doubled the sort of power that our current LV does and we have not put that in as a higher-priced new product, we have just launched this recently as a [indiscernible]. So we are also at the same time giving every user a much more efficacious, powerful product. And there are others [indiscernible] I will make one comment that [indiscernible] LV is something like power boost where you can put the speed of LV up and get a much, much higher release. These are the options you have in something like a gel chip. So there is significant delta in terms of product value delivered for the price we demand, so hope that helps to answer the question.
The next question is from the line of Sameer Gupta from India Infoline.
This is Percy here. Sir, in [indiscernible] this quarter accounts there is an exceptional gain of INR 194 crores, could you explain what that is regarding to?
Percy, hi, this is Sameer here. So this basically is a refresh of the [indiscernible] U.S.-based [indiscernible] business at FY '17 we had certain profit estimates which were quite aggressive and this was done consciously to ensure [indiscernible] gain for the erstwhile promoters who are operationally driving this business alongside us. So we have [indiscernible] this profit estimate since it's more than 2 years of the business and that has resulted in overall financial liability which was booked in FY '17 coming down in balance sheet, and the corresponding impact of it flowing into the P&L which is shown as exceptional income of around INR 195 crores. And the refreshed [indiscernible] profit or the revised [indiscernible] profit are also quite healthy and they -- while it's difficult [indiscernible] business in U.S. but they are still in close to like high teen or in 20 percentage in terms of margins profile.
Right. So in FY '17, just refresh my memory, what is the provision which you had booked in the balance sheet, was it around INR 800 crores?
It was close to around -- it was close to aroud INR 1,000 crores --
INR 1,000 crores, so 1/5 of that is getting shaved off. So would it be fair to say that the profit estimates are also shaved off by 1/5?
In absolute terms, yes. [indiscernible] estimates at that point in time.
See, secondly Indonesia, and just correct me if I'm wrong on this, but I recall that in Q4 last year also you had said that there was a modern trade down-stocking, is that correct?
Partially, yes.
So there has been a further down-stocking on a low base also?
Yes. [indiscernible] in Indonesia is to track some of the other listed [ HPC ] player's performances as well as some of the retailers who are listed is to improve [indiscernible] pressure actually a lot of this in modern retailers to reduce down their stock level and that is what we are seeing. I think in our business over the last kind of 3 to 4 months [indiscernible] quantify this, this works out to just for the quarter a growth impact of around 7% to 8%. This will be 2 percentage on a full-year basis. So, yes, I mean that's what we have seen right now. I mean with some of this delivered kind of retailers in Indonesia that is quite widespread as what we understand also [indiscernible].
So 2% on a full-year basis. Even if I adjust there would still be a decline in Indonesia for the --
Yes --
-- for the full year FY '18, right? And given that you have increased market shares and yet seen a decline in sales adjusted for inventory levels that would mean that the industry size itself has materially shrinked maybe by around almost 10% kind of shrinkage in the industry side, is that understanding correct?
[Indiscernible] growth in Indonesia, it has been in negative zone since the last 3 quarters [indiscernible] FY '18 this was in positive zone, but in last 3 quarters the growth has been negative. Also what Vivek shared initially is that these are the [indiscernible] happening at healthy pace, so this is more of a lead designator that recovery in market share will results in a better of primary sales growth for us in the coming quarters. So that's the reason [indiscernible] share gain correlative to the primary sales which will have in the coming quarters so [indiscernible].
No, I understand the general principle, I'm just saying that the numbers are too starkly negative. There seems to be a disconnect between [indiscernible] recent data and what is the derived market growth looking at your market share and your sales growth. So just to sort of elaborate you have about 40%, 50% of sales from HI and the remaining is other products and those are actually growing right. So they are growing by maybe around 10%. So if you derive your HI sales for FY '18 and even adjusting for modern day destocking, et cetera, your HI sales might be double-digit negative and you have still grown market share. So I mean I'm just saying that this just -- there seems to be a disconnect either in the [indiscernible] data or in the fact that you've sort of grown market shares?
[Indiscernible] couple of things and we can take this offline. One is also the sales which get reported [indiscernible] across our businesses after the sale promotion [indiscernible] that could be one disconnect [indiscernible] which is a retail price [indiscernible] I mean to some extent [indiscernible] absolute numbers, but [indiscernible] category sales FY '18 in Indonesia in the double digits. And as I mentioned earlier share gain I mean what also happened [indiscernible] market share so this is compared to [indiscernible] market share [indiscernible] March '17 the [indiscernible] 5, 6 months there we have kind of regained back most of the lost market share. [indiscernible] we would want you all to read both the market share recovery as well as the overall sales growth of the past and perhaps in future also.
And last question, if I might, you said that this year you have huge amount of launches sort of lined up, so just wanted some kind of sort of understanding generally in the past you have been saying that this year profits will grow ahead of sales or in line with sales et cetera. So would you say that there is a possibility that for FY '19 your operating profit might grow slower than your top line?
So Percy, you are really right that this year FY '19 [indiscernible] very strong innovation-led growth in some of the [indiscernible] in which we operate in. Having said that, I mean at this point in time we remain very optimistic of a profitable growth. And the way we would define profitable growth is expanding margin. There are no vectors [indiscernible] cost saving programs, even media spend optimization we will talk about [indiscernible] more over like few days on this. The drivers are in place with which gives us lot of comfort to reinvest back our growth as well as to expand this historic high margins which we have had in FY '18.
The next question is from the line of Manoj Menon from Deutsche Bank.
Just couple of questions on margins before I jump into couple of others. The first, the short-term, could you help understand the margin bridge for the quarter, the question is that you have 29% EBITDA margins despite a lower contribution from the higher insecticides in India and a 20% growth in soaps?
Sure, so I think you are referring to the India margins, Manoj.
Yes.
Yes, I think some of the drivers has been largely gross margin because within gross margins it has been [indiscernible] which we have on palm oil we also have kind of activated a fast track strategic sourcing and strategic sourcing would be for the team leaders like say [indiscernible] which is the molecules in household insecticides or even [indiscernible] perfumes. So I think profitability [indiscernible] palm oil has kind of resulted in this meaningful gross margin expansion. Again part of it has got reversed back for the goods and part of it is kind of flowing through bottom line.
And is that thing which can repeat, I mean into FY '19 in terms covers, et cetera?
So I think at this stage at least there is couple of quarters we remain very optimistic of [indiscernible] gross margins [indiscernible] trajectory.
And just philosophical thought, I mean India margins at high 20s or it's actually even better than what Hindustan Lever reports on the personal care category, and what I understand for someone like a [indiscernible] like a 30% margin company. So how do I think about margins into the medium term, one the sustainability of it? Point number two, you actually want to [indiscernible] be here because we'll end up attracting more competition, just because of the profit pool.
Manoj, I wouldn't read too much into one quarter's margin. I think if I look at [indiscernible] our margins have been around 25%. Clearly, for us, the formula has to be higher margin expansion, some of it will come from revenue growth management, some of it will come better sourcing, more manufacturing and the premiumization. But ultimately I think we are comfortable with the level of India margins. Our focus is [indiscernible] consolidated margins. And we do believe that there is room in Latin America and Africa to drive up margins. So rather than not focusing only on India margins, I think our efforts will be to look at consolidated margins and try and ensure that we remain [indiscernible]. Having said that, again if we need to invest in brand building innovations that is the single most important priority, but [indiscernible] that there is still enough opportunity to be able to drive consolidated margins.
Just on the Indonesia part couple of questions here, one, sorry if I didn't hear earlier appropriately, is there anything other than the narrative of [indiscernible] et cetera which is seen as something which should rejuvenate the consumption there? Any bottom-up activities, if any, in the pipeline you could talk about? And point number two, looking back, if you could help us understand the drives of the market share gains?
On the macro front honestly, I think things are still looking more of the same. So we are not seeing any significant [indiscernible] for recovery. Having said that though, Indonesia does tend to be fairly commodity [indiscernible] and this commodity price will globally go up Indonesia should start seeing some benefit. And as we have mentioned typically when [indiscernible] this year and national elections next year there should some boost in the economy which should lead to better spend. We'll have to wait and watch. But a part of that we're not seeing any significant uptick in the economy. On the market share gain, a lot of it was driven by some of the innovation that we have launched. One of the main innovations that we have launched has been the Hit Expert range of more premium insecticides that has done quite well. And given the kind of momentum we have seen with that there are some more products that are being planned later on this year. So based on more export platform kind of a range, so that's one of the key reasons that led to the market share gains that we saw in the insecticides category there.
The next question is from the line of [ Vijay Gupta ] from Goldman Sachs.
Couple of questions. First on soaps, so you mentioned market share gains and this has happened for the last 2, 3 quarters now. Any [indiscernible] that is mostly in from your organized shares or are you [indiscernible] players also?
It's a combination of both [indiscernible] we see. I think we are seeing some players [indiscernible] shares, so some share gains that come from existing players. What is not fully quantifiable in the Nielson data is actually the [indiscernible] much higher than what Nielson would report. And that delta I think has also been driven by I think some of the challenges that some of the smaller players are facing in this category in certain geographies. This is more anecdotal but our hypothesis is that a certain amount of share gain is coming for us and some other players as well from a shift towards a slightly larger organized players as well.
Second is on the other brand, now this is fairly big, so can you give some more granularity on which brands are the top 3, 4 brands which I see getting clubbed over here and how have they been growing?
Yes, so largely this would be categories like air fresheners [indiscernible] this could liquid detergents that we have [indiscernible]. And then there would be toiletries wherein we would have Cinthol deo sticks, Cinthol [indiscernible] so that's -- hand protect range of [indiscernible] handwash and hand sanitizers.
[Operator Instructions] The next question is from the line of [ Anwar Sahu ] from [ MCA Research ].
So once again a question on Indonesia, we understand what you are saying on the macro front for less market share gain thing so on the margin profile thing do you see that the 26%, 27% kind of margin profile can be seen for the near-term, for the current fiscal how do you see that?
I think our [indiscernible] better growth back on track and we have had [indiscernible] disappointing year in terms of Indonesia [indiscernible] performance and we were going to invest in go to market [indiscernible] as well as new product launches to get the growth back on track. I think if we get the growth to a respectable level then we will have a scale kind of leverage and hopefully we will be able to maintain margins. But I think the entire focus this fiscal year for Indonesia is going to be on driving sales growth, to begin with.
And, sir, can you also provide some guidance for raw material costs? How we pace right now, how is the palm oil price and other things going now? And are we willing to go for a price hike because largely we have seen a volume-led growth this quarter.
As we mentioned earlier we do have low cost palm oil [indiscernible] for two quarters. I think the impact of crude is an indirect one. We don't directly import crude. I mean there are materials most of the packaging ones which has adverse impact of crude, but normally it's a lag of 6 months. So we honestly have 6 months of time to react to any price changes. But [indiscernible] quarters I think we are quite kind of protected against any increase in input cost. And for the period beyond that we will evaluate calibrated price increases [indiscernible] initiative to continue profitable growth momentum.
And, sir, regarding this [indiscernible] price cut as per GST [indiscernible] so that process is done in our side I mean --
Yes, yes, it has done. I mean we did pass on the [indiscernible] of GST rate cuts in the first round in soaps and in mid number we did pass on the benefits in hair colors, air fresheners, toiletries as well as liquid detergents. And that's the reason why over last 3 to 4 quarters in our India business we have seen a relatively higher volume growth and in lower value growth because of the price [indiscernible] growth which is nothing but the GST cut benefit which are going to pass on to the consumers in form of lower maximum retail price.
Sir, one more strategy question regarding the B:Blunt, how it is now integrated into the system, how do we position it right now?
You know, I think B:Blunt for us is a very exciting horizon to brands. We are still experimenting testing and learning in terms of some of the proposition that we are creating and a lot of the business is now being presented to become more digital-only brand. So still very early days, but in terms of the kind of plans that we have for B:Blunt it is on plan and we're very excited but [indiscernible] be a meaningful contributor to revenues for the next 2 or 3 years, so there is a huge amount of learnings that we are getting [indiscernible] rest of the portfolio. So it's on track, but I think it's more of a horizon [Indiscernible] as oppose a current investment growth opportunity.
We take the next question from the line of Sameer Gupta from India Infoline.
Percy here again. Sir, on soaps just really wanted to understand the story because it's a hypercompetitive activity, I mean category and it always has been like that, and in the past sometimes we have seen when the growth for 2 or 3 quarters is very high then next 2 or 3 quarters sort of it averages out, so just wanted some kind of reassurance that this growth rate, I know it will not stay at this level, but for any reason whatsoever do you envisage that next 2, 3 quarters could actually be below average and then over a longer period of time this actually averages out?
You know, we're not seeing any significant concern to the point that growth will significantly slide down. Having said that, this is a mature category and so we do know that the actual category rates and even the lower side. Clearly, some of work that you have done on pricing, revenue growth management, marketing activations, micro planning, strong marketing at a [indiscernible] level seems to be working quite well for us because we are gaining a certain amount of share. From our planning point of view this is a low double-digit growth category and as you look at our plans for the next 12 to 24 months, we are not counting on this kind of growth to be sustained. If it happens that's fantastic, so we continue trying for it, but from a planning point of view, this is a low double-digit category.
And if I could just go ahead into a little more detail here, couple of sub-questions. One is what is -- you did mention a sort of several things that you are doing, but what exactly is driving this market share gain? Or if I have to put it the other way, if I'm your competitor, then what am I doing wrong or what am I missing out because as a competitor I don't want to lose market share, what do I need to really do which sort of can stem this market share loss. And secondly is it --
The answer that we'll be telling [indiscernible].
[Indiscernible] growth performance I think over the last 4 or 5 quarters it's been a sustained level of growth while clearly there is GST and demonetization and all the kind of things, I don't want that to be [indiscernible].
Or if I just [indiscernible] do you think the main reason is because the relative pricing has changed or is it something else?
So I think it's less about pricing here. Obviously, it's far more about execution and sometimes for some companies [indiscernible] better than others in the past when thing have worked for us [indiscernible] we haven't executed it quite well. I don't think there is any secret formula here beyond [indiscernible] good marketing, good execution and good focus. Lot of things have come together and we feel confident that we will keep on sustaining it. Having said that, now as we clearly mentioned I don't think we can count on this level of performance to be sustained, so we have to [indiscernible] factors as well because this is [indiscernible] category.
And is this market share growth coming from a few states or is it across the country?
It's a few states because our focus has been on a few states and the states that we are focused on that where we're seeing these advantages.
Okay, are you at liberty to name them?
No, I prefer not to --
And sir, second question on household Insecticides, if I look at your growth on an average over the last 8 quarters in household insecticides is around 2%. And if I look at your soaps or hair colors, it's about 7% to 8%. And traditionally, I mean if I dial back traditionally we have seen household insecticides as a fast-growing industry and within that we're gaining market share. So we have actually grown faster. Now it seems that the industry growth itself has sort of come down and market share if at all are happening are happening at a much slower pace. So what is the future of [indiscernible] I know the broad story under-penetration and all that things, over a long period of time those definitely play out, but over a 2-, 3-year view why do you think household insecticides in the next 2 years will behave differently from the last 2 years right number?
Yes, you know I think [Indiscernible] if you were to dissect the HI opportunity, right, there is clearly an opportunity which is in the form of penetration driven. There is an opportunity which is consumption-driven. The consumption opportunity [indiscernible] a little bit more on the urban side of things and given the economic volatility with demonetization and the economic environment and [indiscernible] ratio of the category there is a certain loss of seasonality. Consumption [indiscernible] over the last 2 quarters. We try to [indiscernible] the consumption issue, but [indiscernible] personal repellents, still [Indiscernible] potential to drive consumption through things like personal repellents, that story I think will play out in a stronger fashion [indiscernible] category of the format gains traction. The challenge we had for the last 2 quarters, last 2 years has been the penetration has slowed down and we have not been successful in terms of attracting new users to the category. But 4 or 5 years ago we saw tremendous opportunity with Fast Card driving [indiscernible] penetration. So just to give you a context about 5 or 6 years ago penetration for rural was [indiscernible] about 30% or so. That penetration level went up by a meaningful number once Fast Card was executed. The Fast Card has been a very strong top-up format but because of the duration and longevity of the Fast Card proposition there is only a certain amount to which Fast Card could drive penetration. And strategically I think we have taken a call to deprioritize coils because of [indiscernible] in a lower margin category. But we never really had a substitute and coils in the past have been a fairly good recruitment driver for people into the category. Because over the last couple of years as the market leader we did not have an effective substitute or an upgrade solution or a recruitment solution for new users I think across the board penetration of new users in this category has been [indiscernible] and that is what has driven some of the challenges in the category along with, you know, a certain amount that comes through seasons. And the combination of those is what really led to the kind of situation which [Indiscernible] over the last 3 quarters as we mentioned where our growth has not been [indiscernible] PowerChip [Indiscernible] because our belief is that with PowerChip now as Nisa was mentioning, we have a product that is 2/3 the price of coil, it is affordable, it is extremely efficacious, it's easy to use and now given some of the efforts that [indiscernible] rural electrification we believe that is the next recruitment vehicle and the next vehicle to upgrade coil users will be PowerChip. If that plays out along with the other formats and products that we are creating, that's giving us the confidence that while last 2 years has not been [indiscernible] at least the growth factors that we are putting in place, if we execute them well should allow us to get close [indiscernible] in a positive territory regardless of seasonal impact. So it will have an impact. I think if we can create these growth factors across major formats, it will allow us to drive penetration back to where it should be.
[Operator Instructions] The next question is from the line [ Risha Patla ] from [ ACK Capital Management Private Limited ].
So my question is regarding the debt to equity ratio. So we have seen that debt had declined around 12.6% which is a good thing, so do you expect the same thing happening over this year as well?
Hi, this is Sameer here. Actually what we have seen is as of March 2018 our net debt to equity has been 0.41 and this seems to be around 0.68 as of March of 2017. The answer [indiscernible] whether we are going to have any inorganic growth in FY '19 or not because at this point in time if you assume a scenario that [indiscernible] we are not going to have any inorganic growth in FY '19 and [indiscernible] with the fact that we are in those categories which are not very capital intensive. My sense is with the free cash flow [indiscernible] business, our net debt to equity should come down further from this point forward [indiscernible] during the course of FY '19 also.
So next thing is regarding the rural, urban sales [indiscernible] to what amount is rural brand, what amount is urban.
So I think in terms of [indiscernible] rural is close to 30% of our relative sales in India and 70% is urban. [indiscernible] is 90 percentage [indiscernible] 10%, 11% sales. If we decompose the overall sales growth, around [indiscernible] of the growth has come from urban. Rural [indiscernible] 7% to 8% growth for us [indiscernible] FY '18.
And for the year [indiscernible].
Yes, yes.
For the year I think urban -- rural growth is about 1.2 to 1.3x or urban.
The next question from [ Amit Kumar ] from Investec Capital.
Sir, just one question in mind. On the palm oil side [indiscernible] which has been -- which has come through I think in March. So about a 14% increase both on the crude palm oil side and the refined palm oil side. Two parts to the question, one is that does this sort of guide you to look at domestic sourcing and if not then what kind of impact would it have to [indiscernible] increased duty [indiscernible]?
[indiscernible] not on the crude palm oil, it's more on the refined palm oil [indiscernible]. In parallel what we always do [indiscernible] driven by when the duty rate changes [indiscernible] generally also is evaluate buy locally versus importing. So whenever we see cost benefit we kind of press a lever in terms of making our buy decision.
And in terms of the covers that you take, the duty on that essentially, that is your or that comes [indiscernible] as a supply liability --
No, that is our liability only, but as I mentioned, the change in duty is actually on crude palm oil. So to that extent I mean there is an impact as such to any of the kind of palm oil kind of consuming companies in India.
The next question is from the line of Binoy Jariwala from Sunidhi Securities.
My question is on the increase in business. So I just wanted to understand what kind of headroom do we have to grow in the HI category in Indonesia. I believe you've got presence in about 50% of the overall HI market. So are we looking at entering the remaining 50%?
[indiscernible] remaining of 50% of the [indiscernible] and also we will enter the coil category, but certainly there are opportunities to upgrade coil users like the way we are doing in India.
Yes, so I think if you look at [indiscernible] and stuff again are options that we have there. So we definitely will enter that market [indiscernible] to solve the consumer need, but we don't do [indiscernible].
So that means essentially personal repellents only, right?
No, it is not personal repellants, it's -- there is a big market for coils and there is a big market in the personal repellent market [indiscernible] than in India [indiscernible] in India.
Second is on the hair care, which is in overall about $200 million category in Indonesia. And in the FY '17, you entered hair color which is a subsegment of the overall category. So again my question is over a period of 2 to 3 years do we look ourselves as playing in each of the areas? How should I go about thinking on this?
So [indiscernible] we started with hair colors. We do have other products in the pipeline that are [indiscernible] focuses on hair colors and building our market share success there. So -- and you know the brand has been doing quite well, it's been very well-received. So we do have other products in the pipeline but our first goal is to [indiscernible] significant market share in hair color before we start investing in any other product.
And distribution presence wise is it placed in the entire of our distribution universe which is about -- I mean is it available across 250,000, 300,000 outlets in Indonesia?
Our reach is about over 500,000 and our direct [indiscernible] is about low 100,000, but I think clearly over the next 3 years or so our intent would be to double our direct reach as well. And some of these products like hair color, some of the lower price points that we have in insecticides [indiscernible] et cetera, there are a bouquet of products [indiscernible] for us to start driving [indiscernible] much more aggressively and that's a big growth opportunity for us over the next 3 years in Indonesia because we are [indiscernible] modern trade partner of the market.
Sorry, I couldn't get the overall region, so you said direct it is low 100,000 outlets?
[indiscernible] 120,000 is our direct reach and products [indiscernible] 120,000 outlets.
So 310 --
500-plus.
500-plus, okay. On the project buy if you could help me with what kind of savings have we cultivated in FY '18 for India and Indonesia because I think these were the 2 main geographies where it is running, right?
Yes, I think [indiscernible] anywhere between 150 to 200 basis points to gross margin expansion. In Indonesia [indiscernible] during the second half of fiscal year [indiscernible] so I think the big impact of [indiscernible] Indonesia will be in FY '19 [indiscernible] one of the big growth pillars to kind of support the growth market initiatives, new product launches and also perhaps maintain [indiscernible] historical margin.
The next question is from the line of Kunal Vora from BNP Paribas Mutual Fund.
First question, how does [indiscernible] impact your business, the key impact, maybe raw material price pickup in commodity-driven international market, you need to take price increases. Can you share your thoughts on how [indiscernible] it remains elevated, it will impact your business in the next few quarters. And second is -- if you can answer the first one [indiscernible].
Kunal, hi. It's Sameer here. [indiscernible] definitely there is an impact across the board whether it be India business, Africa [indiscernible] even Indonesia business [indiscernible]. In India business impact is relatively lower, that's because close to, say, 40% on an average of our [indiscernible] basket and palm oil and rest is nonpalm of which crude would be a meaningful kind of component. In Indonesia business as well as in Africa business we do see impact of crude prices, but as I mentioned earlier right now we have couple of quarters of comfort either through kind of locked in volumes, prices with our suppliers. And once we kind of see the impact, the gradual impact to begin with [indiscernible] in terms of [indiscernible] we will either work more hard in terms of cost saving initiatives or we will evaluate [indiscernible] price increases at that point in time. So to be honest this is not too worrisome, crude being at 70 or 70-plus at this point in time because we do have the comfort of continuing this growth gross margin kind of momentum at least for next couple of quarters and [indiscernible] we kind of plan out as to what will be our action if any starting say kind of mid FY '19 across our clusters.
[indiscernible] see some benefits of higher [indiscernible] maybe in some markets which are commodity driven, do you think the [indiscernible] market could improve?
Yes, in markets like in Nigeria for instance certainly there is expectation of stronger economic growth that could be driven by higher crude prices. In some, yes, we do see some economic growth businesses.
And what should we expect for pricing, that you mentioned 10%, 12% volume growth and there are some marginal [indiscernible] some impact on [indiscernible] so would you take some [indiscernible]?
Our focus is honestly on trying to drive volume growth. And I think we will take, of course, a little bit of pricing depends on the competitive environment and how the overall economic environment is shaping up. And so typically our first -- whenever input cost go up, our first [indiscernible] is to try and reduce cost, to try and see if we can make up for the increase. And if we can't do it then we try and find ways to increased price. There is some pricing increase [indiscernible] and new product innovation [indiscernible] consumers willing to pay for that, but our model is focused far more on driving volume growth given the penetration rates that we have in emerging market I think the volume growth focus is more important. Through revenue growth management [indiscernible] if we can get some pricing growth, that's nice. And historically if you look at the last [indiscernible] of our performance it's largely [indiscernible] India about 70%, 75% volume growth story and a 25% price control story. That can happen over time but [indiscernible] driving volume growth.
The next question is from the line of [ Aditya Sek ] from Investor Capital.
First, in other brands which category are of aer pocket protect, et cetera, will be the biggest [indiscernible] contributor for us…
[indiscernible] air fresheners will be the biggest category [indiscernible].
And my second question would be on -- can you share some -- the hand wash market size and our shared in that category, anything in the hand wash market?
We don't talk about the market share.
So in other brands aer would be the first one and what will be the second one?
Liquidators, Ezee would be the second one, liquidators.
The next question is from the line of Prakash Kapadia from Anived Portfolio Managers.
Most of the questions are answered. Could you give us some -- send some feedback from channel partners in terms of [indiscernible] doing business [indiscernible] and what are we doing to ensure to avoid disruption if any at our end. And secondly on [indiscernible] sales promotion, what kind of a percentage you have in mind [indiscernible] what works given the state of [indiscernible] which we are having this particular financial year would be more sales promotion will be more [indiscernible].
[indiscernible] if you look at our secondary versus primary growth. Our secondary growth was 10%, our primary growth was 7%, so this delta in some ways has been driving the optimization we are doing to ensure that our channel partners are getting the right kind of [indiscernible] return on investment. And we are very [indiscernible] a win-win partnership with the channels our partners are concerned. On the second question with regards to the mix of ATL and BTL, I think that's quite dynamic [indiscernible] category. The primary focus does tend to be a lot more ATL-driven strategies. But to the extent that we meet promotional expenses we do that. The ratio typically tends to be 60%, 65% ATL-led, 30%, 35% BTL-led though the number can verify category like [indiscernible] for instance it would be a higher BTL. But roughly rule of thumb that we use is somewhere around 60:40 between ATL and BTL.
The next question is from the line of Bhavesh Shah from CLSA.
My question is on Africa region. If I recall, our margins used to trend somewhere around 15%, 16% during FY '16-'17 and today they are down somewhere close to 13% and it is after adding [indiscernible] portfolio which are at relatively higher margins of 18% to 20%. So my question is, sir, what really happened to Darling portfolio margins over the last couple of years and how do you see this trending going forward?
The good news is that we trend upwards right?
Sure.
Clearly [indiscernible] below expectation and there are [indiscernible] reasons for it, one is obviously [indiscernible] growth rate from 114 constant currency growth rate [indiscernible] for the year. So the implication of this is that some of the raw materials that we end up buying tends to be dollar-denominated and we've taken a conscious call to not pass down all these costs to consumer [indiscernible] that led to a certain deterioration as far as margins is concerned. The second is [indiscernible] challenge ahead of the market. Some of the challenge is coming in the form of a new center that we have in Dubai. We've also supplemented the challenge on the ground as far as marketing is concerned. In some operations like [indiscernible] we have upgraded IP system like SAP which are management systems et cetera [indiscernible] significantly a very low increase the marketing spend particularly for our wet hair launch. All of these costs I think are very front-loaded. Having said that, I think the team is embarking on projects to drive operational efficiently. The scale-up of wet hair was probably slower than what we were expecting. It took us some time to get the local manufacturing right. Now we are feeling [indiscernible] comfortable while we've seen some of the margins improvement getting a little bit delayed. So assuming that currencies remain stable or if they can work in the right direction, that is [indiscernible] as the wet hair scales up and we start seeing better scale average from the overheads that we've invested I think next year ought to be a much better year. It may take some quarters. Still I think -- but overall I think for the whole year we feel very confident and you will see significant margin improvement from our Africa business.
And sir my second question is on gap between constant currency and reported growth numbers. Do you see this gap sinking going forward as [indiscernible] supportive and even the way Indian currency is moving, so do you expect this gap to narrow a bit assuming exchange rates remain where they are today?
[indiscernible] So it looks like, I mean if you look at the translation effect over last couple of months it has been actually in positive zone for Africa cluster. So that in a way should result in hardly any meaningful or material impact at the overall consolidated level. But to be honest [indiscernible] the rest of the year, but at least for the last couple of months the trend is reversing [indiscernible].
Bhavesh, the other thing is that rupee also appreciated [indiscernible] came up to 64, now it is returning back to 66, 67 level. So I think that also will [indiscernible].
See, honestly I think given what happened, what U.S. decide to do in terms of some of it's [indiscernible] situation, Indonesia, South Africa, Nigeria, India [indiscernible] election phase over the next 12 to 18 months. So I think our operating assumption is that it should improve, but I think from our point of view I think ensuring that we can manage the business well on a constant currency basis and mitigate the ForEx [indiscernible] we know. I think we're getting far better at that today than what we were 5 years ago.
I mean, if translation doesn't [indiscernible] this is basically everybody from one local currency to Indian rupees.
The next question is from the line of Binoy Jariwala from Sunidhi Securities.
On the -- in the Africa cluster point I read so as I understand -- is it correct to understand that the entire wet hair manufacturing has been localized now?
Not the entire wet hair manufacturing, we have a clear branding strategy. So for some of the Phase 1 [indiscernible] focus areas. Those have been localized. There are still a few smaller brands [indiscernible] exported from the U.S. Over time as [indiscernible] localize it, but for first two or three brands that we have prioritized it, those have been localized manufacturing in Kenya, in Nigeria and in South Africa.
And with regards to the launches, so is wet hair launch already done in Nigeria and South Africa as well?
Yes, so I think the wet hair launch is already underway in Nigeria and then in South Africa, yes.
And last was on the HI registrations and the plans with the launch of HI in Africa if you could share something on that?
[indiscernible] in terms of registrations et cetera is underway. In terms of the sequencing, I think the focus for us in the immediate term is to [indiscernible]. I think once we have those under control my expectation is that the next year we lay the groundwork -- this year we lay the groundwork, next year onwards we will start seeing some traction on the HI brand. But again from a focus point of view, we do want to ensure that the this dry hair [indiscernible] the Darling brand and the wet hair [indiscernible] focus area this year.
So next year means FY '20 for HI right?
FY '20 [indiscernible] the current consumption, yes.
Ladies and gentlemen that's the last question. I now hand the conference over to the management for the closing comments.
Thank you very much for your time. I think clearly on an overall basis for the year [indiscernible] and profitable [indiscernible] as a result [indiscernible] we do believe that we are putting in [indiscernible] stronger performance than FY '17. Thank you for your time.
Thank you. Ladies and gentlemen, on behalf of Motilal Oswal Securities that concludes today's conference. Thank you for joining us and you may now disconnect your lines. Thank you.