Godrej Consumer Products Limited (NSE:GODREJCP) Q2 FY23 Earnings Concall dated Nov. 08, 2022
Corporate Participants:
Pratik Dantara — Associate Vice President, M&A and Investor Relations
Sudhir Sitapati — Managing Director and Chief Executive Officer
Sameer Shah — Chief Financial Officer
Nisaba Godrej — Executive Chairperson
Analysts:
Krishnan Sambamoorthy — Motilal Oswal Institutional Equities — Analyst
Abneesh Roy — Nuvama Institutional Equities — Analyst
Percy Panthaki — IIFL — Analyst
vi Mehta — Macquarie — Analyst
Vivek Maheshwari — Jefferies — Analyst
Arnab Mitra — Goldman Sachs — Analyst
Harit Kapoor — Investec Capital Services — Analyst
Manoj Menon — ICICI Securities — Analyst
Sheela Rathi — Morgan Stanley — Analyst
Richard Liu — JM Financial — Analyst
Abhijeet Kundu — Antique Stockbroking — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to GCPL Q2 and H1 FY ’23 Earnings Conference Call hosted by Motilal Oswal Institutional Equities. [Operator Instructions]
I now hand the conference over to Mr. Krishnan Sambamoorthy from Motilal Oswal Institutional Equities. Thank you, and over to you, sir.
Krishnan Sambamoorthy — Motilal Oswal Institutional Equities — Analyst
Thanks, gentlemen. On behalf of Motilal Oswal Institutional Equities, I welcome you all to the 2Q and 1H FY ’23 earnings conference call of Godrej Consumer Products.
Without further delay, let me hand over to the management for introduction and opening comments.
Pratik Dantara — Associate Vice President, M&A and Investor Relations
Hi. Good evening, everyone, and welcome to the call. On the call with me from GCPL are Ms. Nisaba Godrej, Executive Chairperson; Mr. Sudhir Sitapati, MD and CEO; and Mr. Sameer Shah, CFO. We’ll now have Sudhir share his thoughts on our performance, and then we can open up for Q&A.
Sudhir Sitapati — Managing Director and Chief Executive Officer
Thanks, Pratik. Good evening, everyone. I hope you and your families are doing well. Thanks so much for joining us on the call today. I wanted to first start with an organization change upfront. Pratik, who has been leading Investor Relations and M&A has decided to move on. Tapan, who has earlier led Investor Relations and many of you would have interacted with him will head Investor Relations alongside global SG&A. I wish both Pratik and Tapan all the best.
I will now start with the quarterly — as an update of our quarterly performance. Our results have been behind our expectations, though the quality of profits have been good. Our sales grew by 7%, three-year CAGR of 9%; volumes declined at 5%, three-year CAGR of plus 1%; and gross margins after four quarters of decline, grew by 3%. However, led largely by a nearly 50% increase in advertising spend to drive market development, our EBITDA declined by 15%. Our PAT declined by 25%, led largely by VAT under the scheme settlement and some currency volatility. Despite this, our operating cash flow doubled, driven by simplification initiatives largely on working capital.
In India, our sales grew at 8%, gross margins grew at 7%, and above the line grew at 52%, leading to an EBITDA decline of 5%. In Q2 FY ’23, our three-year CAGR in India was 1% versus 4% in Q1. This reduction was entirely led by a drop in our household insecticide business, which bases positive sales growth in this quarter seems probably like a seasonal impact. GUAM had a good operating quarter with 15% growth. Gross margins grew at 8%. ATL grew by 77%, and as a consequence, EBITDA declined by 12%. However, severe depreciation in currency has meant that our forex and interest costs were up.
Indonesia sales declined by 8%. Gross margins declined by 14%, while EBITDA declined by 41%. This was largely driven by an increase in media spend and inflation pressure. However, the good news is that the growth in Q2 ex-Saniter was 12%. As the Saniter base wears off, as it did in September, we should see positive growth in the second half of the year. So while headline Q2 FY ’23 results are below our external expectations — internal expectations, we think that the quality of profits within the results was good. This augurs — this along with side some green shoots in parts of our business, as seen in October augurs well for the rest of the year’s performance.
Our strategy to achieve long-term consistent volume growth is based on three pillars, market development of our core portfolio, funded by simplifying our business, and finally, placing planet and people alongside profit. I’d now like to talk a little bit about our progress on all these three. Despite adverse costs, we have been committed to increasing our spends for market development in three areas: advertising, penetrative pricing and sampling. In Q2, while our ATL increased by 46%, our working media increased by 70%, an area where this is reaping rich dividend is in hair care and hair color, where we are seeing very high growths in key markets like India and Indonesia. An area where increased investments have not yet led to significant trajectory change with household insecticides in India.
While we were happy with Q1, Q2 results have been soft. We will see how H2 plays out before reviewing our strategy and regrouping our next steps on household insecticides. An area which we are focused in terms of simplification is in the area of SKU count. In India, we have reduced the number of SKUs by 25% in the last six months. In GUAM, we have reduced our SKUs by one-third in the last one year. These sharp cuts have led to a fall in inventory from 60 days in September ’21 to 51 days in September ’22. As a consequence, despite muted profits, our operating cash flows have nearly doubled. These along with several other moves means that our cost to serve, which is our total cost X cost of goods and working media despite high inflation is down 30 bps in Q2 FY ’22. As gross margins recovered to normative levels in H2, this augurs well for our operating profits.
Finally, on people and planet alongside profits. In order to effectively compete in the hypercompetitive talent market, we launched Project Neo targeted in managers with one to three years work experience who perhaps wanted to change functions of our industry. We received approximately 7,000 applicants, many of whom were extremely diverse and extremely high quality. We are in the process of finalizing candidates, but feel that this Neo [Phonetic] has the potential to be a game changer in terms of entry-level talent for us.
The operating environment for FY ’23 continues to be challenging at the consumer end. The demand environment remains taxing marked by unprecedented inflation, consequential impact and consumption, aggressive monetary tightening measures from central banks globally resulting in strengthening of the USD and all this resulted in GDP growth cuts across the board. Despite this, our prognosis for FY ’23 broadly remains unchanged on double-digit sales growth with low single-digit volume growth. We have been focused on fundamentals, both in terms of investments but also correcting some of the issues in our international business. The external environment remains tough, but we are cautiously optimistic about the quarters ahead this year. Thank you.
Operator
Sir, should we open the line for Q&A?
Sudhir Sitapati — Managing Director and Chief Executive Officer
Yes.
Questions and Answers:
Operator
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Abneesh Roy from Nuvama Institutional Equities. Please go ahead.
Abneesh Roy — Nuvama Institutional Equities — Analyst
Yeah, thanks. My first question is on — SI has been talked in Q2. So I understand Q2 there was extreme seasonal issues, very high summer and then very high rainfall, both are not conducive. So when you mentioned the performance was soft, was it also in reference to the industry performance because you did mention that in H2, you’ll evaluate if any changes are needed. So changes will be needed only if competition is being better. So I wanted to understand that base, plus global roaming is a reality. So in that context, do you think the optical presence, etc., that remains a key question mark in the coming quarters also?
Sudhir Sitapati — Managing Director and Chief Executive Officer
So Abneesh, I think I’ll answer this in two parts. Firstly, Q2 was indeed soft as respect to the entire market because of the seasonal impact that you spoke about, especially in the East of India, we had delayed monsoons. October, the monsoon seem to have sparing to — we had a late monsoon as well. So we definitely had — this is a seasonal category and probably not right to look at this category as one quarter. I would say that between Q2 and Q3, I hope anywhere things will even out. And no, I think mean you see we are broadly holding our shares in household insecticides. Our challenge in household insecticides, Abneesh is not to win share. Our primary challenge given the fact that we are a market leader is to premiumize the strategy and grow it faster. So we have a good Q1. We have two big interventions.
We’ve increased our media, as you can see in our results. And we have also repositioned in particular, good line. And we were very encouraged by the Q1 results. Now the Q2 results have been relatively poor. We are not able to make out given where we are today, how much of it is due to seasonality and how much is due to whether some of the interventions, whether they need to be cost corrected, bolster, etc. So that’s what I meant. And to answer your question really on global warming, etc., look, this is a category which is 70% penetrated in India. Volumes in the overall active in this category continues to grow. The issue in the category is that the premium formats of liquid vaporizer and aerosol should grow much faster than what they are growing. So this category needs to premiumize faster than it’s doing today. And our efforts are basically focused on that.
Abneesh Roy — Nuvama Institutional Equities — Analyst
But one follow-up there. I do see lot of price of promotions in the liquid. So your effort to premiumize could become difficult. Your key competitors are always on an undersetting mode, which could be because they are not seeing that volume growth. So it is linked…
Sudhir Sitapati — Managing Director and Chief Executive Officer
I think in tactical pricing is every quarter. If you take a step back, Abneesh, we are the market leaders. And our job is to get coil and intensive users to move to liquid air prices and aerosol. As I told you, our market shares are flat in household insecticides. So it is not — we don’t see this primary issue as winning share or losing share or undercutting and price cutting and so on. That trigger we have to get to it. We’ll get to it. I mean Q1 was encouraging. Q2 is less encouraging. We will see in Q3 and Q4, and we’ve got plans ahead, Abneesh. So as they get rolled out, we will also share with you, but just to acknowledge the fact that there’s been many green shoots in our business. But this particular one, which is one that we have to solve, we still have to say clearly that green shoots are visible.
Abneesh Roy — Nuvama Institutional Equities — Analyst
Sure, thanks. My second question is on the Indonesia business now with a new business at for the past few months and encouraging 12% kind of growth ex of sanitizer. Would you say that now high single-digit growth in Q3, Q4 is possible. Because if I see the data last eight quarters, only one quarter, there has been a decent 5% kind of a growth in the balance seven quarters, three quarters, last three quarters, it has been a negative. And the balance three quarters, it has been flattish. So it is not less to sanitize that issue. There are other issues in Indonesia, which you have always highlighted in terms of COVID restriction and the economy itself. So I wanted to understand this 12% excess height as a growth? Is that a growth we can look at in terms of the second half, the high single-digit kind of growth?
Sudhir Sitapati — Managing Director and Chief Executive Officer
Yes, in a way, the maths will slow a bit of Saniter base, etc., continues, and there are some more pleasing up that has to be done. I hope that Q3 will come to near flat in Indonesia and Q4 onwards, we should see very high growth.
Abneesh Roy — Nuvama Institutional Equities — Analyst
Sure. One last question that’s on the cleaning up of the SKUs, which you mentioned that the commendable effort want to understand in your key segments in India, the 25% correction, say, in the SKU. That kind of SKU does the market leader also have in each of your categories, some of the categories you are the number one. So saying so, lower SKU, how does it compare with the market leader. And in FMCG, choice and the fill rate and all those are also very important. So is there any loss of demand also does it happen because of the 25% curling off the same?
Sudhir Sitapati — Managing Director and Chief Executive Officer
I don’t think so, we’ve done a very rigorous analysis like all companies do, and you’ll find that there’s a very, very strong pareto in terms of SKUs, in terms of top line, but even more so in terms of margins. So calling these SKUs are not likely to impact top line. So we’ve been very careful. We use two, three criteria, knocked off anything which is less than a certain value, make sure that, that doesn’t have a substitutable SKU, and make sure that the gross margin of the knocked off SKU was low, so it doesn’t have any value depletion. So when we — so I don’t think it has.
When the benchmark ourselves versus peers in terms of number of, let’s say, SKUs per call that the sales will make versus the number of SKUs we have. So if you have on the numerator, the number of productive SKU sold in an outlet divided by the total number, we think those numbers were low. I think now they’re on benchmark, what we’ve now done in India by reducing 25% SKU. And the results are very visible, right? I mean, in a quarter like this where profits have been poor and we had to take one-offs, if we still manage in particular in India to grow cash flow, almost double cash flows, a lot of it is coming from removing capital locked in SKUs.
Operator
Thank you. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.
Percy Panthaki — IIFL — Analyst
Hi, good evening, team. My first question is on the Indonesia margins. They’re quite low at 17%. Am I audible now?
Operator
Yes.
Percy Panthaki — IIFL — Analyst
My first question is on Indonesia. On the margin front, you have done around 17% margins here. If you can just parse out the different impacts on the margin. One is the operating deleverage because the sales has declined. Second is the input cost inflation. And third is increase in advertising, if any?
Sameer Shah — Chief Financial Officer
Percy, this is Sameer here. So I think [Indecipherable] in Indonesia 150 million is driven by upfront investment. And as you can see the core business as [Indecipherable] in Q2. And we’ll continue to open investment. The second impact is because of the premium leverage, right? Although from the business we decline, I mean [Indecipherable] close to double digits. So that does have its impact on the overall operating performance. And then third is in Indonesia, we still continue with consumption of high-cost inventory. It’s difficult to quantify the impact that our gross margins while sequentially, were better, but still on a year-over-year where you’re lower. We expect that to ease out. I mean, this coming kind of quarter, because generally the equation is [Indecipherable], and we have also taken some price increases. So that the composition largely for…
Percy Panthaki — IIFL — Analyst
So the reason I asked is that the margins are down almost 1,000 basis points, 150 basis points is due to the increased investments, which is fine. I mean, I just wanted to understand, going ahead, let’s say, if I look forward into FY ’24 or maybe second half of FY ’24, if that gives you more comfort, what kind of stable state margins are we looking at in this geography?
Sameer Shah — Chief Financial Officer
The ambition for us was to kind of go to only margins in Indonesia. There is a fact that we will still continue to offer in marketing investments.
Percy Panthaki — IIFL — Analyst
Got it. And on Africa again, we have in the past also mentioned that we aim to increase margins here, but they still remain in single digits. So while the medium-term target is quite clear. Can you give us some sort of road map to that in terms of how and at what pace we would see the increase in margins happening in [Indecipherable]?
Sameer Shah — Chief Financial Officer
Couple of things. One is double-digits in last quarter, [Indecipherable] close to around 70-odd bit half and half. I think half is divestments and half is input cost as well as currency depreciation and currencies had appreciated sharply in some of the markets, which will kind of [Indecipherable] price increases or having actually mitigating it to price increases. So that’s one. I think in the target which we have set down [Indecipherable] earlier in terms of reaching to high teen volume is very much intact. So no changes on that front. I think the retail also, as what we have followed in the past [Indecipherable]. The second is some very serious continuing cost saving in a program. Also, we are evaluating some kind of changes in our operating model. And once we have — I mean, some of those in place, we’ll be very happy to share with the Street in terms of just the changes in operating models, but also the impact which it will have in over a period of time.
Percy Panthaki — IIFL — Analyst
Right. And my third and last question is on household insecticides. I know you probably won’t share the exact market share numbers. But I mean, from a longer-term perspective, if you remember what you had shared is that when you had taken over this business from Sara Lee in 2010, the market shares were around 32%, 33%. Then in a short span of about five to six years, they went up to the early 50s. Just wanted to understand in that context, where are we today? And I mean, is it that we are still gaining market share, and we have probably sort of progressed from that 50 to 55 brand into the next brand? Or are we about still approximately in that same market share brand as we were in 2016, ’17?
Sameer Shah — Chief Financial Officer
Yes. So I think without sharing any specific details, I think Sudhir also mentioned earlier that largely we have kind of capital market shares, and that is in the case of conviction because basket has not [Indecipherable] in real direction we lost the market share because of the movement of incentives, right, because the category was growing largely driven by incentives and around the organized peers have increased it from their portfolio. But the reason for the shortfall is I think, start of COVID, mid of COVID, our market share has been more of the same nothing much in the kind of market share until the other direction.
Operator
Thank you. The next question is from the line of Avi Mehta from Macquarie. Please go ahead.
Avi Mehta — Macquarie — Analyst
Just wanted to understand one bit on the volume growth. Now you’ve clearly called out that the second half, you would be looking at a single-digit kind of volume growth coming in from the declines that we are witnessing. Is this is largely on the HI recovery that you were alluding in the earlier question? Or is that — is there any other segment that you…
Sudhir Sitapati — Managing Director and Chief Executive Officer
There are three reasons for the volume decline in the first half and three reasons where we feel that the volumes will be quite good in the second half. The first reason is the whole Indonesia sort of for lack of a better word, [Indecipherable] reduction in inventory, etc., etc., which should come back in second half. The second reason is that there is hyperinflation in soap. And what happens when there is hyperinflation in soap, when you been passed on anywhere close to the inflation, but that kind of inflation usually doesn’t lead to marginal drops in consumption with pretty large drops in pipeline. So now with the soap prices cooling and all of our sellers in terms of deal drop in prices, we are already seeing the volumes come back in the soap category and it will come back because consumption doesn’t go anywhere in soaps.
The third thing is household insecticides in second half. The first half of this year was with a very high competitor of first half of last year, which was COVID affected. And as we discussed during COVID, a lot of people software household insecticides at home. And had a particularly poor frankly, August and in September. So moving to software competitors and with the seasonality shift, which we hope to see in at least one or two months now, we think that the household insecticide volumes should go back to normative level. Now this is not necessarily the kind of aspiration that we have for volume growth, but it’s nowhere near the kind of declines we’re seeing now. So a combination of these three give us reasonable confidence that we will see at least for the next few quarters, good volume growth.
Avi Mehta — Macquarie — Analyst
And so would it be fair to say that the Indonesia of this one would be the longest because largest impact, but that would be seen in fourth quarter, right? Because the third quarter impact is more from the other two aspects, soaps and…
Sudhir Sitapati — Managing Director and Chief Executive Officer
I think so. I think in the third quarter, Indonesia also in other words kind of decline that we showed in Q2 and Q3. And Indonesia will take you there to kind of come to flattish and go to growth. I think both soaps and household insecticides and volumes will do better in Q2, Q3 and Q4.
Avi Mehta — Macquarie — Analyst
Got it, sir. Very clear. The second bit is essentially on the margin side. Now you did allude in the presentation as well that with Indonesia margins kind of coming back, gross margin is also improving. This is something that you expect. Do you see a similar risk of what we kind of panned out in second quarter could possibly play out even in the third quarter, given that Indonesia will probably be something that takes more of a fourth quarter because you’d shared a similar expectation going forward, this is something that will pan out, but obviously, high cost inventory, the growth in HI kind of weighed on this. So would love to hear your comments on that.
Sudhir Sitapati — Managing Director and Chief Executive Officer
Yes, I think one of the reasons why Indonesia is largest there, when they were in last quarter was for still we leverage high-cost inventory and media investment. Obviously, variables in media investments will continue and high cost commodity impact will start flattening because we are seeing overall kind of commodities kind of pulling off in terms of price. Still the leverage impact in the lighter will not completely go away. And hopefully, we will go away from quarter 4. So this is the way that the variables. And directionally, we do expect not getting into quarter 3, quarter 4, but at least in second half of the year and earlier what I was sharing to Percy’s question. I mean also for next year, we do expect increase in margins. But the margins are also not going to move dramatically because we will continue to be in investment mode and also keep an eye on the volumes which we get in that business estimate over a period of time.
Operator
Thank you. The next question is from the line of Vivek Maheshwari from Jefferies. Please go ahead.
Vivek Maheshwari — Jefferies — Analyst
My first question is, Sudhir, a big picture question. So there’s a — how should I put it, there is a feeling amongst investors that the business is taking a lot longer to turn around compared to what everybody expected and you took over almost about 12 months back or so. What is your sense now that you have completed 12 months? Is it tougher than what you thought? Or do you think market expectations were running high at that point of time?
Sudhir Sitapati — Managing Director and Chief Executive Officer
No, I mean, look, the short answer is no, it’s not tougher than I thought it was. I think we’ve been dealt with one card, which has been a big joker in the pack which is the Ukraine crisis and the oil impact on accounts of the Ukraine crisis. That has completely now it’s put all the plans to change it. I do think that Indonesia and Africa, when I came in Japan a little bit of cleaning up, and I think that’s happening. So the broad point is then you had a bit of a soap of bad luck, I guess in terms of HI in September month and August month. So I continue to be on many fundamentals. I’m really happy with the state of the business.
If you want to look at fundamentally the business, we promised to invest categories, we are seeing in categories like hair color and hair care. And even Indonesia actually had significant growth. We are seeing significant reduction in SKUs, reduction in inventory, increase in cash flows, reduction in controllable costs. So I feel like the fundamentals are in good shape, and a lot of this is — I mean, I feel you will see pretty good quarters ahead.
Vivek Maheshwari — Jefferies — Analyst
Got it. And a related point, your advertising spends have gone up quite a bit. And yes, it’s great to see that number. The fact that you are investing. But the fact that you are investing more behind growth, does that mean that a lot of work which had to happen has happened. And whatever cleanup, whatever fundamental changes that you wanted to make are pretty much done. And from here on the focus here on, focus will be much more geared towards growth?
Sudhir Sitapati — Managing Director and Chief Executive Officer
No, no. I think, Vivek, it’s a continuous improvement process. It’s not like something is done. Certainly, some of the volatility in the market has moved out. Some of the things we wanted to do in Indonesia and GUAM we have done. Some of the debts that we invested in like hair care or hair care are paying off. Some of them like HI that I already spoke about, we have to be more circumspect things don’t happen immediately. So I think we have to constantly see progress every quarter, and it’s far from — I mean on the household insecticides category, even accounting for seasonal variations, we have to premiumize it faster. So that’s, for example, the challenge that remains. Forex management in Africa as a challenge that remains for us. So there are plenty of challenges that we’ve got ahead. I would just say that if I look at a year in terms of the inputs and what we have done we’ve certainly made a lot of progress, and I hope the result come soon.
Vivek Maheshwari — Jefferies — Analyst
Got it. A couple of small questions. So on the SKU side, I understand on the cash flow side and its impact on simplification. But what — can you just quantify because these are large numbers from an SKU standpoint, but what would these SKUs contributed to overall revenues?
Sudhir Sitapati — Managing Director and Chief Executive Officer
Which ones, the ones that we rationalized? Typically, they’ll be less than 1% or 2%. But there will be much more in terms of inventory. So typically, what happens is that these are less than 2% in terms of sales, less than half. I mean, this is typical, I’m not giving you exact numbers. Because I’m giving you a typical flow. It will be less a small — very small proportion of profits, a small proportion of sales, relatively large proportion of cash employed.
Vivek Maheshwari — Jefferies — Analyst
Got it. And last question on soaps. We have seen fairly, let’s say, aggressive stance by the market leader on the promotion side following the palm price correction, what is the market context right now, specifically in soaps, what is the level of competition or competitive pressures or intensity that you are seeing, both from market leaders and other players in the market?
Sudhir Sitapati — Managing Director and Chief Executive Officer
Vivek, when prices went up, we did not pass on the full inflation to consumers because we knew that prices would come down. When prices came down as they did in Q2, and I think some of you have written about it, we pass it on quickly because our underlying principle and this is to be on the side of consumers. So one of the other reasons, for example, gross margins could have been higher in India than they were, but they aren’t because even though we’re sitting on high-priced inventory. We price for what was the replacement, because we said that is what consumers should get, we should be quick. And we have reached — we pretty rich give it both in terms of growth and in terms of market shares and soaps. So we remain focused actually in soaps. We are catering to the value consumer. We remain focused on doing what is right and you can — yes. So that’s really been our strategy in soaps.
Operator
Thank you. The next question is from the line of Arnab Mitra from Goldman Sachs. Please go ahead.
Arnab Mitra — Goldman Sachs — Analyst
My first question was on ad spend. So this increase that you’ve seen, is it setting like a new normal of ad spend that this business will now have from here on? Or is it a few quarters sale that you will be investing heavily to kickstart the growth and then you will be coming somewhere in between where you were and where you are now? And also, if you could just explain the difference between working maybe on ad spend, how you kind of calculate the two different…
Sudhir Sitapati — Managing Director and Chief Executive Officer
So I think, Arnab, I think exact numbers are really hard to get, because there’s always talking, they’re investing, then we will just return on media investor. We may cut back and we go ahead, etc. But broadly, it’s fair to say that as a company over the next two, five years, we should see increases in advertising spend even from where we are. I mean, obviously, calibrated and obviously looking at what is giving us in terms of growth. But this is certainly not something we’re going to do for a few quarters. It’s certainly more philosophical in terms of what our portfolio deserves than what we should do for it.
In terms of the difference between working media and above the line, working media is what consumers see, which is the money that you spend on a TV channel or on a billboard. Total ATM includes other things like production costs, agency fees, some amount of visibility in modern trade, etc. So this is the really what consumers see is working, which is relevant, right because the amount of money you spend in production or spend on agencies consumers don’t see it.
Arnab Mitra — Goldman Sachs — Analyst
Okay. Understood. And the second question was on gross margin. So actually your gross margins in the standalone business are nearly 1,000 bps lower than what they were at eight, nine quarters back. So now that the palm oil prices have corrected and you have also passed on some of the pricing. How do you see the overall gross margin recovery? Does it exist and soaps and those categories go back to what it used to be? Or those margins are going to be tough to achieve given the overall context and the competitive intensity?
Sudhir Sitapati — Managing Director and Chief Executive Officer
So in fourth quarter our gross margins will go back to the normative gross margins which we had in FY ’20, ’21, maybe in and around over those levels. Directionally also I think the overall gross margins will go up in coming quarters sequentially as well as on a Y-o-Y basis. Difficult to kind of put a number to it, further it will go back to those plus 800 bps, 900 bps, which most of eight, nine quarters back, but they will kind of directionally go up, going high.
Arnab Mitra — Goldman Sachs — Analyst
Understood. And just lastly, on Sameer’s comment that ad spends, this is not like a onetime step up — onetime quarter effect. So fundamentally, do India’s margins then become a little lower than in the past, given that your gross margins will address go back to where they were and your ad spends are going to be high or there or are there enough efficiencies you’ll see that you could manage to get back to your normal margins at an EBITDA level once the commodity deflation has kind of played off and the growths are back?
Sudhir Sitapati — Managing Director and Chief Executive Officer
Yes. Arnab, I think the gross margins, as Sameer said, will go back in and around the [Indecipherable] maybe a little less than broadly there. The working media will go up, but we hope to get both through growth and through cost-cutting exercise saving in the rest of the cost, which is apart from cost of goods sold in working media, everything else you want to continuously cut. So in the first half, for example, if you remember these two costs, our costs are down by about 150 bps, right? So this is the savings that we have got from our business. So I don’t know exactly where EBITDA will end up, but I do believe that there is potential in our cost to serve, which is pretty significant. It may or may not compensate entirely for the advertising. But it’s certainly not going to be gross margin minus additional media costs. There will be sales and they are coming through.
Operator
Thank you. Our next question is from the line of Krishnan Sambamoorthy from Motilal Oswal. Please go ahead.
Krishnan Sambamoorthy — Motilal Oswal Institutional Equities — Analyst
Yes. Sudhir, is the change in strategy resulting in focusing on fewer and more disruptive innovations. Could you highlight with a couple of examples on the products launched more recently, how we are able to back them better compared to the past?
Sudhir Sitapati — Managing Director and Chief Executive Officer
Yes. No, I mean, look, I think it’s better for me to talk about the innovations that we didn’t launch and the product that we supported and also give you a few examples of innovations that we did launch on fewer. So for example, let’s talk about ASEAN, right, which is a pretty large category, not top of mind for a lot of analysts, etc. But that category has seen explosive growth, and that has come by investing in one SKU, which is aer matic [Phonetic]. Now aer matic was an SKU that was present in India and selling reasonably well and growing reasonably well. But in Indonesia, it was a far larger SKU.
So when we set a category structure, the team saw that there’s an SKU Indonesia, which is so many expand the size of the SKU in India, and it’s got — and in India that’s got some kind of momentum. So we started advertising aer matic. When we start advertising aer matic, we’ve seen explosive growth. I think many of you now I got a lot of households and I see this is a aer matic there. And that’s an example of an innovation, because it is an innovative product, but innovation done a few years ago, which has got focus support now. So is it an innovation? Is it existing? I don’t know. But that’s really good, and that’s made a material difference by the way to our business in the first half, which is aer matic. So that’s a good example of an old innovation that we have supported and got exponential results.
The other innovation that I want to give is to Magic body wash. So we launched Magic body wash three to four months ago, and this is a habit-changing innovation. And it takes a lot of time. But we have continued to persist on this, even though it’s a slow burn, even though the few consumers who are buying it likely, but it’s a big habit-change to move from soap to body wash to move from a liquid to a super concentrate. But this is again, an example of a new innovation, but not keeping the petal whatever the financials and their innovations are, we are committed to kind of keeping it going. So these are two examples of kind of focus on the core at slightly different ends in the spectrum in terms of what we’re doing.
Krishnan Sambamoorthy — Motilal Oswal Institutional Equities — Analyst
Yes. Very useful, Sudhir. Also, just my second question is regarding the breakdown between digital and what deters working media. So how much was digital versus conventional media say two years ago? How much is it now? And what’s the intent going forward?
Sudhir Sitapati — Managing Director and Chief Executive Officer
I think firstly, we don’t look at — that’s not the way we look at the metric. We just look at lowest cost to reach consumers and whatever media is the lowest cost to reach consumers than it is. I think when we do the numbers and we look at it and we benchmark it across FMCG competition, we are roughly roundabout where competition is in terms of total digital to be conventional spend.
Operator
Thank you. Our next question is from the line of Harit Kapoor from Investec Capital Services. Please go ahead.
Harit Kapoor — Investec Capital Services — Analyst
The first question was on A&P spend again. So in the context, the demand environment for India as well as looking little bit volatile. And you are obviously supporting some of your new initiatives. Is the share was significantly higher for you in terms of the spend that you’re doing? And in an environment where demand is weak, are you still able to get ROIs in line with what you expect given that consumer is not as probably responsible as he actually was about one year, 1.5 years back?
Sudhir Sitapati — Managing Director and Chief Executive Officer
So we have increased our working media by 70% in the last quarter despite the gross margin pressure. And you guys know better what FMCG companies and peers are doing, but I suspect that’s a lot more than better. But that’s a pretty large investment in the context of gross margin. I think the media investment firstly iterate one invest, one finds out what’s happening then one takes the call again. But ultimately media is an investment for the long term. It is for developing and building categories, right? See, for example, on hair care we have increased our media by 5 or 6x. It’s building for the future. So it is — I mean whether the demand environment will weaken on a separate question, but that is not the relevant variable here. The relevant variable is, what are the categories of the future that we have to develop and what is the kind of media investment required to take it there. And that’s how we have done our media investments in Q2, and what we’ll do in the next few quarters as well.
Harit Kapoor — Investec Capital Services — Analyst
Got it. And the second question was on — you mentioned talking about October optimism. So if you could just kind of talk a little bit about were there any change you see it in the market environment for your categories?
Sudhir Sitapati — Managing Director and Chief Executive Officer
Bulk of our categories are dependent on market development and low penetration. So consumer demand while there are, I think I broadly agree with what most people have been saying, which is there has been a softening of demand in the eastern parts of India, the rest of the world, India are relatively stable and doing well economically. Many other parts of the world in Africa, Latin America, countries are going through a tough time. So it is a tough operating environment. No, I do feel like the October and November, the season — it’s a seasonal shift in household insecticides. So I would say that Q2 for us has been similar to Q1 with the exception of household insecticides. And that, I’m not sure account sales for certain, but seems to me sitting here now in mid-November a seasonal impact of Q2.
Harit Kapoor — Investec Capital Services — Analyst
Okay. And my last question is on your predominant lease on streamlining of some overseas subsidiaries. So any comment you’d like to make on that?
Sameer Shah — Chief Financial Officer
Yes, it’s part of the overall restructuring in which we are rolling out. I mean, one of the biggest objective is also to sort of simplify, right? We have heard this now as a theme for RM. And we have to [Indecipherable] vehicle companies, which were created at the stage of buying out these businesses and some of our acquisitions also have been in a calibrated way in their outlined utility. So we are looking at kind of delayering and reducing down the number of subsidiaries, which sort of simplified. And also I mean evaluate possibilities of upstreaming cash in the most tax-efficient way for some of our large markets.
Harit Kapoor — Investec Capital Services — Analyst
So apart from taxes, Sameer any other business impacts?
Sameer Shah — Chief Financial Officer
No, absolutely no business impact. Hopefully, there should be lower G&A expenses also because of a reduction in the number of legal entities.
Operator
Thank you. The next question is from the line of Manoj Menon from ICICI Securities. Please go ahead.
Manoj Menon — ICICI Securities — Analyst
Hi, team. While a lot of questions and responses about HI was already done. Just wanted to push the envelope on one particular aspect on the mosquito repellent side. Look, a lot of discussion on whether this being a market problem or a sales problem or an R&D problem, etc. And thanks for the responses. But one question is, is there any — is there a sales problem or a distribution problem yet to solve. Sudhir, on the refine I’m asking this, because you have been reiterating this for a while that premiumization is one of the important agenda for you as a company, particularly in the context of HI. So are we essentially saying that it is just the marketing problem to solve or there is no sales uplift, which we can expect in the medium term?
Sudhir Sitapati — Managing Director and Chief Executive Officer
No, no. There is in the sense that this premium categories are not presenting as many stores as we want them to. But that’s not because we’re not going to our stores. We are going to the stores in soaps and many other categories. It’s not going to those stores because of whatever reason, relevance of price, etc., it’s not relevant to smaller stores. So one of the things that will have to happen is the distribution will go up. But I don’t think that’s the underlying reason for lack of premiumization and household insecticides is not — unlike, let’s say, hair care, right? So a lot of the growth that we’ve got on hair care this year has been on the back of massive distribution increase and macro media increase. It’s quite simple. But that’s not the case in the case of household insecticides in India.
Manoj Menon — ICICI Securities — Analyst
Understood, sir. Now the kind of sort of a follow-up question on this is like what is likely happening in Indonesia currently that there is definitely a course correction in terms of the overall portfolio or a country level margins. Is that some sort of a necessity in India also in the medium term so that you are in a much better wicket from a long-term point of view?
Sudhir Sitapati — Managing Director and Chief Executive Officer
So I think definitely there’s reasons and we’ve already done it. So it’s not — we’re not just talking about it. We need to increase our investments behind our brands. Gross margins, as Sameer said, we’ll take it to roughly where we were or maybe a little less or somewhere in the vicinity. And we will go helpful under behind us, and our objective should frankly be to try and save as much of the increased investment in working media through costs. And hopefully, the balance gets covered by volume leverage. So that is the business model.
Sameer Shah — Chief Financial Officer
Yes. And I think the aggregate of that also Manoj, should result in profitable growth. I mean something which we had called out in our strategy also with a few quarters back.
Manoj Menon — ICICI Securities — Analyst
Okay. Understood, Sameer. The question or rather one of important industrial questions, and I’ve got one follow-up also on kind of a message from investors. Is that look, are we — where are we in the journey of, let’s say, finding the right water table in terms of margins, adjusting for inflation and pass-through, etc. I’m talking about on a LFL basis in India.
Sudhir Sitapati — Managing Director and Chief Executive Officer
Manoj, again, like, as I said, and I said this in the past as well, it’s better not to target what a margin, right? It’s fair to say what’s the right kind of gross margin for this kind of business. And what Sameer is saying, which I agree with is our normative margins are roughly the right kind of gross margins to this kind of business. What’s the kind of advertising trends at this kind of business should add. I think we’re still somewhere away by the way, even after all the increases there. So you can build that. Then we have to ask the question, everything else, you got to keep reducing costs. And we will keep doing it. I’m saying — I don’t think we should stop at either [Indecipherable] media because they’re not achieving a target EBITDA margin or stop at an EBITDA margin, even if there are more costs to be safe. So if your question is, do I anticipate massive EBITDA margin declined versus the past, probably not. But that’s not on how we’re thinking about it.
Manoj Menon — ICICI Securities — Analyst
Very clear, sir. And second, it’s more of an investor question, stop chatter, which get addressed to us some of the analysis. There is a perception of higher managerial churn or, let’s say, particularly in the middle to senior management. And this is honestly excluding [Indecipherable] pursuing for other career opportunities. Is there anything which you’ll be able to offer comment for the larger audience?
Nisaba Godrej — Executive Chairperson
I don’t think — I think there’s been across the industry higher attrition that obviously that we saw in COVID. But once if I look at some of the other external board [Indecipherable] FMCG benchmark. So even within other COVID group companies, I don’t think GCPL’s attrition rate, if anything is higher. And actually, what’s happening, we’ve had attrition like other companies that we’re actually seeing like now is people also coming back and what’s happening, some of our best people are actually coming back. So I don’t think GCPL is seeing any particular issue on attrition. And if anything, I think people in a tough macro environment, but I think people are quite excited about some of the changes and some of the clarity on strategy and simplifying the business and going for the big bets.
Operator
Thank you. The next question is from the line of Sheela Rathi from Morgan Stanley. Please go ahead.
Sheela Rathi — Morgan Stanley — Analyst
My first question, Sudhir goes to you, you mentioned in the opening remarks that the performance this quarter was below your expectations? Is this more to do with India business or across the businesses and across geographies?
Sudhir Sitapati — Managing Director and Chief Executive Officer
Sheela, we have a forecast, which we — at the beginning of every quarter, we keep having a running forecast. So when I say below my expectations only been below my expectation on one particular side, which is India household insecticides. So both in terms of top line and bottom line, that has been the only sales which has not been what we forecast at the beginning of the quarter. So yes, I mean, the rest of the sales even Indonesia, which is not a great result, it’s something we foresaw a few months ago. We didn’t foresee such a big drop in our word insecticides versus what we [Indecipherable].
Sheela Rathi — Morgan Stanley — Analyst
Understood. And the second question was a lot of questions, obviously have been asked on that sense. I just wanted to get some understanding here is that some our perspectives [Indecipherable] category development. Are the focus going ahead would be more on advent along the distributions or advent over distribution? And if you could just give us some idea of how the distribution strategy has been playing out? I mean how the focus has been say over the last 12 months.
Sudhir Sitapati — Managing Director and Chief Executive Officer
So to only focus on India market development is on three big areas. One is on awareness led by advertising. Second is sampling. And third is by getting accessibility. For example, on hair color, what we did, which was launching a INR15 sachet in market developers through accessibility and we’re very happy with those results. So that — these are the three things in India where we will do. In Africa and Indonesia, in addition to this, we would like to increase our GP footprint. So we’ve had significant expansion of general trade footprint in household insecticides in Nigeria, for example. In Indonesia, I think it’s a structural problem, but Rajesh is engaged with how do we move our salience of GT from 30-odd to 50-odd. So I would say the answer problem on distribution as an independent variable is largely in Africa and in Indonesia and Africa is yielding very weak results. So I would say a lot of our fast growth in FMCG, which we’ve not spoken about here, but we are very happy with the progress we are seeing in household insecticide or hair care in Africa. And a lot of that has been driven by direct retail distribution expansion.
Sheela Rathi — Morgan Stanley — Analyst
Understood. And my final question was, if you could just elaborate once more in terms of when you say what is this profitable growth which we are talking about? What is this profitable business? So if you could you elaborate that?
Sameer Shah — Chief Financial Officer
I mean, increase in our margins, right? I mean so while the sales will grow at whatever pace it does, it will also be backed with expansion in margin. Something again Sheela, which we called out in our strategy, right, but we will see expansion in margins. I think 150 bps to 200 bps over a period of time. So profitable growth is your margins expand alongside sales growth.
Operator
Thank you. The next question is from the line of Richard Liu from JM Financial. Please go ahead.
Richard Liu — JM Financial — Analyst
I have two questions. Number one, Sudhir, can you outline for us how you think soaps will pan out now that you are doing price parts 25% kind of growth what we’ve been seeing in recent quarters in this business, can drop to how they — as you start to cut prices? And how much will margin expansion offset that impact? And related to this, how much danger is there from the unorganized guys coming back and spoiling the party in the wake of the more benign input cost environment?
Sudhir Sitapati — Managing Director and Chief Executive Officer
Richard are you there?
Richard Liu — JM Financial — Analyst
Did you hear me or…
Sudhir Sitapati — Managing Director and Chief Executive Officer
I heard the question, and so I got disconnected. Was there a second question?
Richard Liu — JM Financial — Analyst
So the second question is a different area. I wanted to understand a little bit about the movement and other expenses, which seems to be pretty well contained in India, but there’s a big increase in international. So that was my second question.
Sudhir Sitapati — Managing Director and Chief Executive Officer
Okay. So let me answer the question on soaps, right. It’s easy for you to do the math. I mean soaps is a category that grows a little bit more of the population growth of the country is what the volume growth of soaps typically is. So the population of the country grows at 2%, 2.5%, it’s a 95% penetrated category or 98% penetrated. Category grows at 3%, 3.5%. We roughly have been gaining some amount of share. For the last decade on, we have been gaining 50 bps to 60 bps of share a year, that we now share projecting. So you can now calculate now.
In this entire inflation period of about four or five quarters, while the volumes went down, I don’t think consumption went down. At least in my past, it has not happened. I’ll have to see the results carefully now. So one can assume that the consumption is what it was and the inventory got reduced. Somebody was having 60 grams of soap at home and became 55 grams in the pantry. Shopkeepers are keeping less stocks, etc., etc. So I would say that the three-year CAGR of this category will be in the 3%, 3.5%. Our long-term CAGR will be in the 4%, 4.5%. Now you can calculate based on the various ups and downs. And therefore, we will see the compensate the upside in volumes pretty soon to compensate for the foreign volumes. If for a moment, you say that consumption hasn’t fallen and it’s probably an inventory pipeline for the last four quarters.
Richard Liu — JM Financial — Analyst
And given that the rate of value growth was exposed into the last four or five quarters had an inflation last year and now that is going to come off to how much a tender [Phonetic]. From a profit growth perspective as far as this category is concerned, how much of levy is there in the form of farmers coming off, but obviously will be passing on some of the [Indecipherable] cuts.
Sudhir Sitapati — Managing Director and Chief Executive Officer
Yes. The price to — as Sameer said to get back to normative or normal margins, right? So we have cost on price dropped by [Indecipherable] significantly higher than what they were at this time of the year, but they were even out. So this is, again, like we’re going through a cycle of results, there will be a factor even not eventually. So what will remain is the long term, I hope growth of the category at 3%, 3.5% and asset maybe 150 bps over that. I hope is what the structure will remain. Margins should return back to close to where they were. And that should happen to be soon actually.
Richard Liu — JM Financial — Analyst
And then your comments on the unorganized guys probably coming back and joining the party?
Sudhir Sitapati — Managing Director and Chief Executive Officer
In some other categories, Richard, soaps is not a category which has a huge amount of unorganized players anymore. This category is now — I mean, I think in terms of volumes, it will be like I’m guessing, but 10% to 12% will be unorganized players. It is largely the top five, six players and as more some local regional brands. So unlike some other categories where there’s high deflation in some commodity categories, suddenly local players come up, that’s not to the same extent that will happen in soaps.
Richard Liu — JM Financial — Analyst
And so the second question is in other expenses, especially on the international front. That seem to have like grown quite a bit despite the fact that the India other expenses were very, very well controlled your perspective on that, please.
Sudhir Sitapati — Managing Director and Chief Executive Officer
Yes. There’s been couple of reasons for that, Richard, one is increase in the utilities cost, right? I mean, they have been — I mean, honestly, through the roof over the last three, four months, so that’s something which is hitting over there. And also a lot of our route-to-market expenses, both in Indonesia as well as key markets in Africa like Nigeria are seeking other expenses. The combination of that has resulted in increased also by the way, we had a little bit of yield in leverage in Indonesia. So that’s the reason why the other expenses in international business has gone up on a Y-o-Y business.
Operator
Thank you. The next question is from the line of Abhijeet Kundu from Antique Stockbroking. Please go ahead.
Abhijeet Kundu — Antique Stockbroking — Analyst
My first question was on directionally, we have seen that all your India category other than HR has been well. There would be some time to soap in the overall sales growth. But there have been those underlying strategies across the board has worked. We are not really worked as an HR, where the accessible paths, innovations will lead the way. Here, are we — September has been — September quarter has been bad. But when we say we are seeing some amount of optimism. Is there some optimism on how meant it to say, is there a challenge actually that there has been some amount of recovery for the category as a whole? So my first question is on that.
Sudhir Sitapati — Managing Director and Chief Executive Officer
No, I’m saying — No. I think, look, as I said already, there are — structurally, our Q2 performance ex-HI in India has actually been very good. HI, there are two components to it. One is that there is a seasonal impact, which I think is — which having looked at now October and November, I think was a seasonal impact. And there is also an impact in HI, which we have to do better, which is to premiumize the category. So we got to break up, even if the season was good, let me say that the exact growth would not have been where we want it to go. So that story continues. If anything, the non-HI part of the portfolio has done extremely well in — if you don’t forget in India, we’ve grown at 8% in Q2, and that’s on the back of a very, very difficult quarter on household insecticides. So you can imagine this is a large component of our business. So you imagine what the rest of our portfolio has grown at.
Abhijeet Kundu — Antique Stockbroking — Analyst
And secondly, on when we look at your Africa margins, there is a significant difference between the EBITDA margin and the EBIT margin. So just why is that, I mean?
Sameer Shah — Chief Financial Officer
I think one of the biggest reason for that difference is forex [Phonetic], especially in terms of markets, similar to premium in Africa, so that’s the reason why the EBIT is lower than EBITDA.
Abhijeet Kundu — Antique Stockbroking — Analyst
So once the forex fluctuation reduces over a period of time then that difference should reduce?
Sameer Shah — Chief Financial Officer
Yes, absolutely. But my sense is in coming quarters, maybe the quantum of forex losses would go up. But as we have seen in the previous quarters also, they keep on oscillating. But yes, I mean, they will come down once the currency stabilizes.
Operator
Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Pratik Dantara for closing comments. Thank you, and over to you.
Pratik Dantara — Associate Vice President, M&A and Investor Relations
Thanks, everyone, for joining. If you have any further questions do reach out to the IR team. Thank you.
Operator
[Operator Closing Remarks]