Godrej Consumer Q3 Update: Pricing Drives Sales, Volumes Fall Amid Higher Prices

Godrej Consumer Products Ltd. expects to deliver close to “high single-digit” sales growth in the three months through December, largely driven by pricing.

Some of the short-term challenges that the newly-joined managing director and chief executive officer Sudhir Sitapati highlighted in a recent analyst meet have played out during the quarter, according to the company’s quarterly update filed with the exchanges on Thursday.

The consumer goods maker indicated inflationary pressures such as raw material and supply-chain costs would impact its margin during the quarter.

Performance of the Indonesia business also remains a worry, the company said. “In Indonesia, we expect a marginal decline in constant currency sales growth."

“We continue to put building blocks in place to drive category development and general trade distribution expansion, to ensure gradual recovery in the short term.” In Godrej Africa, USA and Middle East, growth momentum continued across most of the countries it operates in. "The company expects to deliver constant currency sales growth in the teens,” it said.

At a consolidated level, GCPL expects to deliver close to high single-digit sales growth. It expects profit to improve with gross margins expanding sequentially. However, margins are set to be lower on a year-over-year basis due to “unprecedented cost inflation”.

The company had sequentially upped marketing spends. “The net result would be a dilution in operating margins during the quarter, on a year-over-year basis,” it said.

Peer Marico Ltd. expressed similar concerns with high inflation and waning rural demand. The Parachute-oil maker posted double-digit revenue growth in the December quarter even as volumes remained muted.

Analysts expect revenue growth to be dominated by pricing actions while volume growth will be muted for staples companies.

“Companies have taken aggressive price hikes and grammage cuts—and that would impact volumes," Abneesh Roy, executive director of institutional equities at Edelweiss Securities, said. "Rural slowdown will be a key issue due to inflation hurting consumers’ pockets and an uneven monsoon and delay in winter."

Significant inflation across raw materials implies the pressure on gross margins will persist in the third quarter, he said. “Margin pressure would start easing off Q4 FY22 onwards.”

The brokerage expects Godrej Consumer to report revenue growth of 8.6% year-on-year in the third quarter, while Marico is expected to post 13.3% growth. It also expects revenues of Hindustan Unilever Ltd., ITC (cigarettes), Emami Ltd. and Dabur India Ltd to growth by 10%, 5.9%. 3.9% and 7%, respectively. Volumes of the four firms are expected to rise 2%, 8%, 0.1% and 4%, respectively.