In an interview to CNBC-TV18, Milind Sarwate, group chief executive officer, Marico gives his views on the company's Q3 performance. The company's consolidated net profit rose by 21.4 percent year-on-year to Rs 102 crore in the third quarter of financial year 2012-13.
Marico's domestic business volume grew by about 15 percent. "If you divided that into organic and inorganic, the organic volume growth, which means the brands which we already had last year, would be about nine percent. About six percent is because of the youth brands that we acquired last year," he says.
On the path ahead, Sarwate says one can expect the prices of products to fall within a range of 5-10%. This, Sarwate says will be done in order to trigger volume growth. "The range may wary from somewhere between 5-10 percent which on our low unit prices is not a large number, but it does help us convert unbranded consumers to branded consumers," he adds.
Below is the edited trancsript of Sarwate's interview to CNBC-TV18.
Q: The numbers have come in little below consensus estimates. Take us through the pricing as well as the volume growth you all have clocked in this time for the domestic business?
A: The domestic business volume growth is about 15 percent. If you divided that into organic and inorganic, the organic volume growth, which means the brands which we already had last year, would be about nine percent. About six percent is because of the youth brands that we acquired last year. The nine percent volume growth has to be viewed in the context of the category. Nine percent is a decent clip. It is lower than what we have been registering in earlier quarters, but I believe there is a slowdown which is now extending itself to the consumer products or the fast-moving consumer goods (FMCG) sector.
We felt it more in the high end discretionary items, but this time it probably has been a little more wide spread. We are taking pricing action in certain categories in the coming few weeks and we are hopeful that with the economic recovery somewhere in sight, we should do well in the coming quarters in terms of volume growth.
We have been weighed down to some extent by the international business which at constant currency levels did not record any significant increase at all. Kaya grew by about five percent. So, these two numbers have in a way dragged down the group average to about 11 percent sales value growth.
Q: Does it get lower than the nine percent organic volume growth that you have seen in this quarter?
A: This is something that we are working on and this could be a fair bit of a bottom. We have not had a single digit volume growth in the recent quarters, but we are not alarmed by this. We are conscious of what is happening and we are taking the necessary steps. What is encouraging for us is that our market shares have been held or they have been up.
For example, our coconut oil, Marico's market share is about 58 percent and the value added hair oils' share is around 26 percent.
These two are good numbers and the story is similar elsewhere. Even in Kaya for example, the same store growth number continues to be positive at four percent. It is lower than earlier quarters, but it is there.
The second thing which enthuses us is our new products; primarily Parachute Skin Lotion and Saffola oats have both done well. They have notched up good market shares and these things are encouraging notwithstanding the overall nine percent volume growth.
Q: Take us through how exactly Kaya did this quarter? What is the update on the de-merger? What would the margins or the bottom-line look like?
A: If Kaya is to be excluded, the operating margin would move up from 14.2 percent to somewhere in the late teens. I don’t have the exact numbers, but mathematically, it is easy to work out. So, operating margin wise, Kaya has been an investment business and it has to some extent, dragged our consumer product bottom-line.
At the same time, if you look at Kaya numbers separately, they have been recording an operating margin of a positive number which has been an encouraging sign. As a separate business, they will get much more focused. Our expectation is that the separation of the two businesses would help both of them to grow independently and in a very constructive focused manner.
On the de-merger, we announced it on January 7. There is a series of steps to be completed for that which includes the court process. We have made application to the stock exchanges also for the eventual listing of the separate company. We expect that the whole process including the court approval should be through by the end of June or maybe in the first week of July or so. So, we expect that by the time we declare the quarter one results of FY14, we would be declaring effectively the results of the two companies separately at that time. That is the plan as of now.
Q: You spoke about some pricing action in the next two to three weeks. To what extent and across which products are you looking at a price increase?
A: There can be a price correction, not a price increase so that we can trigger back the volume growth to a higher number. It would take place in some of the larger categories. The correction, however, will not be a major one. The range may wary from somewhere between 5-10 percent which on our low unit prices is not a large number, but it does help us convert unbranded consumers to branded consumers.
Q: Give us an idea of your market share in Parachute, Saffola. Also, once you take these price cuts, where is the sustainable margin trajectory? How much of a cost pressure are you all facing at this point in time?
A: A large portion of that input basket is copra where the market has been quite benign. Copra prices have been lower as compared to the corresponding quarter last year. We expect the same to continue for a while, but after all it’s a commodity market. We are definitely way below the peaks that Copra had seen in the past couple of years.
The other part of our input basket is oils, like Safflower or rice brand. Rice brand has been pretty steady, but Safflower has been costlier than before. We have a mixed basket of input inflation. Our cost pressures are expected to be a little more in the coming quarters. The price cut would be in selective categories and they are unlikely to impact the total.
Infact, we will be able to better manage our entire value chain and supply chain with the merging of our two separate divisions which used to operate as the consumer product business or CPB in India and IBG which was the international business group. We see synergies which we can consciously target with a unified management team. So, we expect that in terms of cost pressures, we would be able to tide them over in the next few quarters.
In the case of Parachute and Nihar, which are our major coconut oil brands, between them we have a 58 percent market share. Our share has moved up by about 400 basis points in this quarter. So, the shares are growing. If you look at value added hair oils, we have a 26 percent market share. Saffola in the premium edible oil category again has a very good market share. Coincidentally, that is also 58 percent. So, I feel that this cues in with our philosophy of operating in categories where we could be number one or number two, or also not be in any category and the strength of our brands, gives us the confidence of churning out good numbers quarter after quarter.