Godrej Consumer Products Ltd Management Discussions.

Risks and Opportunities

Risks

Supply chain risks are related to the following:

• Potential disruption of operations due to geo-medical risks

• Labour-intensive product portfolios in some geographies

• Inadequate planning in procuring raw material

• Inability to deliver material to the customer as per agreed delivery dates

We have a comprehensive and structured approach for risk management at GCPL. Across our geographies, we have integrated our risk management practices into the operating framework and

Opportunities

Our manufacturing and supply chain focus is on becoming future-ready. We have initiated projects on Industry 4.0 and are making future-ready investments to ramp up our different processes. We have seen encouraging results in improved productivity, greater accuracy, safety, and efficiency. We will continue to introduce best practices across geographies and are trying to become more agile in responding to constantly changing consumer needs.

The core to our approach is how we build win-win relationships with all our partners. We partner closely to ensure capability development and alignment with our core values. Our ongoing engagement with partners has helped us identify emerging issues and adequately respond to them in a timely manner. We have also adopted a sustainable procurement policy that helps us work more closely with our partners to make their operations more sustainable, and build a robust supply chain.

reporting channels of our business. From Board level oversight to a dedicated Risk Committee, as a cross-functional team within GCPL, we routinely assess risks across our company and geographies.

While there is a range of risks that are routinely managed in the course of regular operations, the third-party materiality assessment carried out in 2019 highlighted a few risks related to primary material aspects of our business. These, along with the opportunities and mitigation plan, have been described in the subsequent section.

Strategic Pillar Alignment

• Making our supply chain best-in-class

Risks and Opportunities

Risks Opportunities
Competitive risk from: We have centered our growth strategy around emerging markets and the emergent consuming class in them. As incomes rise, purchasing power will improve and these markets will mature; new distribution systems and the digital economy are enabling greater reach. To be able to leverage this, we are ramping up our go-to-market and digital strategies and reach to go deeper and improve penetration. Our product ranges across home care, hair care and personal care include household insecticides, hair colour, soaps, air fresheners, liquid detergents, hair extensions, hair care, personal wash, styling in mass and professional markets, skin care, sanitisers, sun care and female deodorants. We are the leaders in most categories in the markets we operate. We are constantly innovating to create superior quality products that have a positive impact on the environment throughout their life cycle, at affordable prices.
• Dependency on a few product categories to drive sales
• Product pricing strategy
• Greater aggression by competitors
• Competitive market conditions and new entrants
• New online, offline and omni-channel go-to-market models and channels
• Nimble e-commerce/digital-first brands
Political economy in geographies of operation as follows: Our globalisation strategy (named ‘3 by 3) has been very deliberate. Guided by this, over the last decade, we have created significant value through M&A and established strong beachheads. Our focus is to build leadership in three categories (home care, hair care, and personal care) in three emerging geographies (Asia, Africa, and Latin America). Our Risk Committee, along with regional business and finance teams, closely monitors the political economy of each geography to respond and adapt to emerging situations.
• Political instability
• Macroeconomic risks
• Exchange rate volatility
• Devaluation of local currency
• Inflation
• Impact of economic environments on consumer behaviour

Strategic Pillar Alignment

• Extending leadership in our core categories and geographies

• Accelerating innovation and building purposeful brands

• Leveraging digital

• Enhancing go-to-market

• Extending leadership in our core categories and geographies

• Accelerating innovation and building purposeful brands

• Leveraging digital

• Enhancing go-to-market

• Making our supply chain best-in-class

Risks Opportunities
Labour risks due to the following: The safety of our team members is of paramount importance to us. Our people are key to building a strong safety culture, and we regularly train them to enable this. We take much pride in fostering an inspiring workplace with an agile and high-performance culture to attract, develop, and retain the best global talent. We have adopted best-in-class, globally-acclaimed people, policies, and processes, which celebrate diversity and inclusion.
• Shortages due to industrial disputes and attrition of key staff
• Health and safety-related risks in manufacturing operations and frontline distribution teams
Social risks arising from the following: We are now exploring ways to further our commitment through shared value initiatives that create value for both society and business. Our business continuity plans are in place to address any man-made or natural disasters and ensure seamless running of business as usual.
• Community unrest
• Repercussions of natural and man-made disasters
Compliance, regulatory changes, and emerging regulations We have the highest levels of statutory compliance and ensure adherence to all regulations and laws of the land. Furthermore, our Legal and Audit teams are in constant communication with key government departments and industry bodies to keep track of new and emerging regulations, including environmental, social, and governance (ESG) risks in our operations and supply chain. They routinely assess and analyse regulations to assess how these will impact business to mitigate for the same.

Strategic Pillar Alignment

• Fostering an inclusive, agile, and high-performance culture

• Building a more inclusive and greener world

• Extending leadership in our core categories and geographies

• Making our supply chain best-in-class

• Fostering an inclusive, agile, and high-performance culture

• Building a more inclusive and greener world

Other Disclosures

A. Key financial ratios

Consolidated

Standalone
FY 2019-20 FY 2018-19 FY 2019-20 FY 2018-19
Debtors turnover ratio 8.02 8.05 16.28 18.47
Inventory turnover ratio 6.03 6.52 8.42 9.33
Interest coverage ratio 8.75 9.91 23.97 22.78
Current ratio 1.06 1.20 1.20 1.12
Debt equity ratio (including financial liabilities) 0.32 0.34 0.05 0.00
Operating profit margin (%) 20.17% 19.27% 25.92% 26.59%
Net profit margin (%) * 15.23% 22.91% 21.82% 31.58%
Return on net worth (%) * 18.95% 32.22% 22.86% 35.63%

* The company has recognised tax credits in respect of Minimum Alternate Tax (MAT credit) of r 609.87 crore (net of r 24.71 crore of MAT credit utilised for the year ended March 31, 2019).

For the fiscal year ended 2019, there was a gain in exceptional item ofr 252.56 crore (due to reversal of business liability combination and UK divestment), whereas for fiscal year 2020, there was loss of r 81.05 crore (due to impairment loss and other charges) [Refer note 37 of financials]

Formulae used for calculation of the ratios
Debtors turnover ratio Net sales/Average of opening and closing trade receivables
Inventory turnover ratio Net sales/Average of opening and closing inventories
Interest coverage ratio Profit before interest, taxes/Finance costs
Current ratio Current assets/Current liabilities
Debt equity ratio (including financial liabilities) Debt (net of cash)/Equity
Operating profit margin (%) Profit before interest, taxes & exceptional items/Net sales
Net profit margin (%) Profit after tax/Net sales
Return on net worth (%) Profit after tax/Equity

B. Internal control systems and their adequacy

We have implemented an internal control framework to ensure that all assets are safeguarded and protected against loss from unauthorised use or disposition and that transactions are authorised, recorded, and reported correctly. The framework includes Internal Financial Controls over Financial Reporting, which provides reasonable assurance over the integrity of financial statements of the company and reduces the possibility of frauds. Our Corporate Audit and Assurance department issues well-documented operating procedures and authorities with adequate built-in controls at the beginning of any activity and during the process to keep track of any major changes. As part of the audits, they also review the design of key processes from the point of view of adequacy of controls. Periodic reports - as part of continuous monitoring - are generated to identify exceptions through data analysis. The internal controls are tested for their design and operating effectiveness, across all our locations and functions by the Corporate Audit team, control failures is reviewed by the management from time to time, for corrective action. Controls with respect to authorisation in underlying IT systems are also reviewed periodically to ensure that users have access to only those transactions that their roles require. Our head office in Mumbai, offices across India, and all major factories follow an Information Security Management System and are ISO/IEC 27001:2013 certified.

Our Strategic Pillars

44 Extending leadership in our core categories and geographies

62 Accelerating innovation and building purposeful brands

90 Leveraging digital 100 Enhancing go-to-market

114 Making our supply chain best-in-class

126 Fostering an inclusive, agile, and high-performance culture 144 Building a more inclusive and greener world