Nov 03, 2016 02:24 PM IST | Source: CNBC-TV18

Still 1-2 quarters away from pick-up in rural demand: Bajaj Corp

There‘s weakness is rural markets and while the FMCG industry has been focussing on harnessing rural growth, demand hasn‘t been great, said Sumit Malhotra, Managing Director of Bajaj Corp. He said that the sector is still one-two quarters away from rural recovery.

Personal care products maker Bajaj Corp has attributed slow revenue growth in the September quarter to weak rural markets.

There’s weakness is rural markets and while the FMCG industry has been focussing on harnessing rural growth, demand hasn’t been great, said Sumit Malhotra, Managing Director of Bajaj Corp. He said that the sector is still one-two quarters away from rural recovery.

Malhotra said November sales can be seen as an indicator of demand recovery as non-discretionary festive spend decrease. Going ahead, the company expects better profit in the coming quarters.

Bajaj Corp's profit increased 24 percent year-on-year to Rs 58.3 crore in July-September quarter, driven by other income despite slow revenue and operational growth. Revenue increased 3.5 percent to Rs 196.8 crore during the quarter compared with same period last year while other income jumped 91 percent to Rs 14.9 crore.

Below is the transcript of Sumit Malhotra’s interview to Sonia Shenoy, Anuj Singhal and Latha Venkatesh on CNBC-TV18.

Sonia: The feedback that we are getting from the market is that the demand has not picked up as much as one would have expected. Are you also noticing weakness especially in some of your key products?

A: There is a weakness and definitely, the weakness is more to do in the rural areas because over the last five years, the fast moving consumer goods (FMCG) industry, as it is, has been focusing on harnessing the rural growth. And what has happened over the last 5-6 quarters is that urban was bad, rural has become much slower than it used to grow even a year ago. So yes, there is still a lot of strain and I would say that we are still at least 1-2 quarters away from any sign of recovery from the rural growths.

Latha: This is quite a dip. A year ago, you were still at double digits – 10.6 percent Q1 of last year, 6.3 percent Q2 of last year. This is a fairly steep or near no-growth phase. Does it get at least a little better from here? Is October giving you some hope after the rains?

A: Normally October for hair oils and consumer staples is not a good month, especially because of Diwali. A lot of money has actually moved to other non-essentials or gift items or apparel, etc. So, normally, for things like hair oils, toothpaste, shampoo, etc. it is not a very great month. The decider will be November, once the harvesting starts in a certain part of India and also the immediate seasonal or festival demand tapers off.

Latha: How long will this amortisation continue? It started declining.

A: It is over.

Latha: So, you will have better net margins in coming quarters?

A: A better profit after tax (PAT), yes.

Latha: I wanted to ask you about your ad expenses as well. Gross margins have improved, of course they stand at 66 percent, we understand in your last quarter. Is there more headroom? How are raw material prices shaping up and therefore, what will be your ad expenses strategy?

A: In terms of margins, I do not think there is a lot of headroom. The top-three raw materials and packaging materials have more or less bottomed out though we have contracted till the end of this financial year. So, I do not see a contraction in margins, but I do not see a major expansion. What you will see is an increase in advertising and promotion (A&P), our new campaign goes on TV this month and therefore, you would see possibly an upside on A&P spends in this quarter.

Sonia: So, how much will that be approximately as a percentage of sales? How much could your ad spends go up by?

A: Advertising will go up by 1-2 percentage points. How much of that will be adjusted in promotion is something time will tell.

Sonia: In terms of exports, you are looking to enter new geographies like Russia, Indonesia, Egypt, etc. tell us over the next 1-2 years, how much will the international business be in terms of revenues and a percentage of overall sales?

A: To give you a track, till last year it was approximately 3 percent. This first half of this year, we have already hit 5 percent. In the next two years, this will be a mid-double digit percentage to the total turnover.

Latha: We were given to understand by analysts that your premiumisation process slowed down. Is it time to reverse or will there be more of it?

A: The premiumisation has not slowed down if you look at our price versus the competition. What has happened is because of the deflation or rationalisation of raw material packaging material, everybody has stopped taking price increases and therefore, our ratio, vis-à-vis our competition remains the same. In fact the number two brand in light hair oil is 33 percent at a discount to us. That remains. So, if the raw material packaging material prices rise, ideally we take a price hike in April, otherwise you could have another year of now price rise.

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