Godrej Economic.docx

Economic Overview through the years

As Godrej announced its ambitious goal to expand revenue ten time over the next ten years to become an INR 85,000 crore conglomerate by 2020, the economies were still trying to recover from the effects of 2008 recession. In order to achieve such significant growth consistently over a long period of ten years, it would require it to grow at an CAGR of 26%. During FY 2010-11, the Indian Economy, on the other hand was showing notable resilience to the effects of the global economic recession, outpacing other economies with an estimated growth rate of 8.5%. The outperformance was primarily led by the services sector and supported by a rebound in agriculture and in the manufacturing sectors. The savings and investments of the consumers increased, which caused an increase in the private consumption. This increase in domestic demand was one of the main components contributing to the growth of Indian GDP. However, higher interest rates and the alarmingly high levels of inflation at the beginning of 2011 threatened to severely hamper the GDP growth. The company quickly realised that simply focusing on the domestic market would not help it to reach the CAGR of 26% year on year. For such a substantial increase it planned to diversify into new business segments both in the domestic markets as well as international markets. During 2010-11, GCPL which was the major constituent of the group, acquired more than eight business in India and overseas. The Company has seen its brand reach grow through the employment of new initiatives focused on development, particularly in the rural space. In addition, the Company continues to advance outward, expanding its global reach to diverse regions around the world, and its international business had performed significantly well despite of the tough economic conditions within which it was operating. FMCG Companies continued to venture out into the rural markets, which was among the fastest growing segments as the purchasing power of the population was increasing rapidly due to an increase in the nominal income. With more than 140 million households in the rural areas which was more than thrice the urban households, the company was banking on its growth at the bottom of the pyramid to help achieve its ambitious goal of growing ten times by 2020.

The company followed the 3X3 approach with the main focus of the strategy to enhance its domestic and international presence and create a multinational business driven by growth in three categories Hair Care, Home Care, and Personal Wash across three regions of Africa, Latin America and Asia. All these factors helped GCPL have an outstanding year with its revenues increasing from INR 1268 crores in FY 2009-10 to INR 2395 crores in FY 2010-11, with a significant growth of 89%.

FY 2011-12 began on a bad note with the debt crisis in the Eurozone, as a result the developed economies continued to struggle. It became increasingly clear and evident to the group that it had to target emerging economies to achieve its significant growth. The emerging economies were pegged to grow at 6.2% contributing significantly to the global economic growth of 3.2%. However, India continued to be plagued by its own internal problems. The Central Governments revenues collection was much lower than anticipated, inflation levels were high leading to high interest rates. Supply chain bottlenecks, relatively weak manufacturing activities, ever increasing costs lead to a lower GDP growth rate of 6.5% as compared to previous years. In spite of all the challenges, GCPL’s business in India, Bangladesh and Sri Lanka kept on growing. Revenues grew from INR 2476 crores to INR 2998 crores, showing an increase of 21%. Things were looking very positive on the International business side, GCPL’s abilities and strong understanding of the dynamics of these businesses helped it leverage its distribution and supply chain efficiencies as well as its strengths in terms of brand management, technology and manufacturing to create immense value. The revenues grew an astounding 54% from INR 1207 crores in FY 2010-11 to INR 1864 crores in FY 2011-12.

FY 2012-13 was a rough year for the Indian economy, as compared to the solid growth it had seen in the previous years. The ongoing global ambiguity did impact growth in India, a number of other challenges were plaguing the domestic operations. Low growth in manufacturing sector, slow reforms, increasing current account and fiscal deficits and a high inflation rate. Further, the weak monsoon

aggravated the situation by adversely impacting the agricultural sector. At 5%, the GDP growth rate for FY 2012-13 is the lowest in a decade. Due to a strong growth in revenues from rural India, which was now accounting for about one third of the total revenues of the FMCG sector, it kept on growing at 18%. GCPL did slightly better than the industry by growing by about 20% domestically. Overall, considering the international businesses, GCPL’s consolidated sales grew by 32% to reach around INR 6391 crores. Profits grew by 10% to INR 796 crore as the input costs pressures eased as compared to the preceding year. Material Costs as a percentage of sales declined to 46.2% as compared to 47.7% of previous year.

During FY 2013-14, economic conditions of India worsened, slow economic growth coupled with political logjams, high inflation, a falling currency and fluctuating equity markets. Growth rates halved when compared to previous years. Capital investment and growth in manufacturing and services became sluggish due interest rates hikes. it was however fortunate to have a good monsoon that helped agricultural output. Devaluation of the rupee was also been kept a check on by intervening measures by RBI. GCPL, however kept on growing, outpacing the growth of FMCG sector of 15% by growing at a rate of 20%. Consolidated Net Sales grew to INR 7583 crores, EBITDA grew by 16% to INR 1177 crores.

Fiscal Year 2015 saw a revival of the Indian economy. GDP growth increased to 7.4% from 6.9% in the previous year. Inflation dropped to 6% from 9.5%. The ease of lending rates and structural reforms such as the implementation of the Goods & Services Tax and enactment of the land acquisition bill were the key drivers of demand. Depreciating currencies and weakening growth businesses, globally. GCPL however, navigated with a sharp focus on costs and constant innovation.

Consequent to the turbulent macroeconomic scenario, the FMCG sector registered a sluggish growth. Consumer demand in the second half of the year, however, started to show early signs of a recovery. GCPL yet again outperformed the overall growth of FMCG sector by growing round 9%. Consolidated sales grew to INR 8242 crores with EBITDA of INR 1369 crores.

From 2016 to 2018, two major economic reforms took place: Demonetization and GST. Demonetisation led to a significant push towards digital financial transactions, as well as improving the tax net. But, as the retailers were stocking lesser goods than ever before due to cash and supply constraints and consumers were spending more cautiously, the sales of FMCG sector took a beating. One study revealed that one out of every housewife reduced their spending by 50%, Purchase of personal care items such as toilet soaps, toothpaste and shampoo has seen the steepest decline by retailers. while rural India has managed to stay flat at 0.4% mainly due to smaller packs and smaller currency transactions. Some of the macroeconomic indicators dropped, like a decline in the GDP growth to 7.1 per cent in the fiscal year 2017, from 7.6 per cent in the fiscal year 2016. Inflation was largely under control. Though growth rates in the FMCG sector were below historical averages and long-term potential, yet GCPL outperformed the markets in its core categories. There were signs of recovery in consumer demand in the FMCG industry. The fundamentals of the industry remained strong and there was still significant growth potential, given the low penetration and consumption rates for many FMCG categories.