In an interview to CNBC-TV18, Saugata Gupta, MD & CEO, Marico discusses the company earnings and its plans ahead.
Below is the transcript of Saugata Gupta’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: It is been a good quarter overall. The domestic volume growth at 6 percent for 9 months is a shade below what you have guided for FY15. What led to the miss in the volumes this quarter?
A: While the Parachute's rigid growth and the hair oil growth is inline, the Saffola volume which has been 3 percent and also the youth business which is pretty flat these have contributed to the lowering of the volume growth. Also the non value added part of the coconut oil business because of the continuing input cost inflation has not performed well. Having said that, as far as Saffola is concerned the competitive pricing had gone down last quarter we haven’t taken any pricing intervention.
In addition to that there was lack of advertising inputs which contributed to that 3 percent growth and we are taking certain correction on that front. As far as youth business is concerned we had talked about change of our strategy of investing behind gels and serums instead of deos because deo being a very highly competitive market.
Now that switch over in investment took over some time because of some internal change over in terms of the new launch of gels. So that as a result because of the new pack did not hit the market we did not give inputs behind the things. So that will start taking off in Q4. So these were the two misses that ensure the resulted in a drop from the 7 percent to the 5 percent number which you have seen.
Latha: What you are saying is that the company will be able to meet its volume target of 7-8 percent because of bunching of sales in Q4?
A: The way the trend is that if you get back the youth volumes on track with the new initiatives and take the corrective action on Saffola having said that also the food business is doing pretty well. Yes, the kind of getting back into 7 percent volume is achievable in this quarter.
Sonia: Gross margins in this quarter have remained under pressure as was anticipated. How are the Copra prices trending, a new season starts in February any signs of a bit of a correction even on a sequential basis?
A: So far we have not seen any visibility on reduction of the Copra input cost. However, having said that we believe that this season it will be lower than the last season. Now how much to what extent is very difficult to predict at this point in time because we will be in a better position to give you a better clarity sometime in the month of April.
Latha: One strong theme for next year is the kind of fall we have seen in commodity, cost crude and other commodity cost. Marico with 40 percent of sales from hair oils has huge dependants on crude derivatives raw materials. How much can that delta prevail on the margins?
A: We function in most of the emerging markets where our entire philosophy is focusing on volume growth and market share again subject to a threshold level of margins. I think you are absolutely right in the case of we would get some margin improvement in our hair oil business. As far as the coconut oil business is concerned as we have already said that any improvement in terms of the decrease in inputs cost we are very carefully to pass on in terms of a price drop to the consumers in terms of recruiter packs so that our volumes growth remains constant.
I would say in the fast-moving consumer good (FMCG) sector next year there will be hardly any inflation because one of things which the FMCG sector is very concerned about is to drive volume growth, get volume growth on back on track given the fact that there is lower inflation and we hope that even the gross domestic product (GDP) growth is better. I would say that the impetus will be towards ensuring that we pass on some of the gains into the consumer’s hands.
Sonia: Many of your peers have guided towards a possible price war to pass on the benefits of softening input cost to the consumer. Will you also jump in on this when Copra starts to correct meaningfully?
A: Our biggest input which is Copra has not shown any reduction yet. So we are waiting and watching what we can do on the Parachute portfolio. As far as other is a concerned we will take certain calls. We have not taken such calls as of now but certainly in the quarter April to June where we will have a fair idea of how much is the input cost looking forward we could look at some but selective ones. However, having said that I would be looking at ploughing back that investment, that incremental margin into innovation and driving further growth. To us volume growth is more and more critical then just pocketing short-term margins.
Latha: Coming to the ads spends, a bit of softening this quarter. I am talking ads spends as a percentage of sales is it because that festive demand got shifted to Q2 and what is the outlook for FY16 in terms of ads spends?
A: You have to look at the advertising and promotions (A&P) on annualised basis. There could be certain quarterly fluctuations. In this particular quarter two reasons we had a huge go-to-market (GTM) change in Egypt. As I said on the youth business because of the change over of packs which got delayed so we did not support these two brands. So on annualised basis we will maintain between 11 and 12 in a certain quarter there could be a shade of difference.
Sonia: You said that FY16 could witness some muted topline growth due to deflation as a result of reducing raw material prices. However the company will aim at a volume growth of 8-10 percent. Can you discuss this FY16 guidance a little more? Which pockets will translate into that 8-10 percent volume growth?
A: We believe while there is no evidence of significant increase in consumption on the ground there are enough green shoots and combination of lower inflation especially food inflation and higher economic growth if you have two or three quarters of higher GDP growth would get FMCG specially urban consumption back on track. Therefore for any FMCG company it is important to capitalise on that greater consumption demand.
So the way we look at it is that we should get back the volume growths as we gradually move back to another quarters in the FY15-16 into 8-10 percent. The growth will be gradual I do not see a certain hockey stick kind of an impact in FMCG consumption. So, any significant potential margin expansion because of cost we would rather invest behind driving that additional growth. It is too early to say but our first objective is to get back the volume growth into 8-10 percent. The other things which we look at and track very carefully is we would like a dominant part of a portfolio to continue to gain market share.