Don't expect further margin contraction in Q3: Dabur India

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In its second quarter results reported today, Dabur India announced its sales figure at Rs 1,269.72 crore up by over 30%, however, the company witnessed some depression in the margins.

Talking exclusively to CNBC-TV18, CEO, Sunil Duggal said that the soaring input costs in Q2 have been the key reason for the margins being hurt. "Also, the inflation outlook is a major concern for the business. Soaring inflation will force the company to hike prices, going forward," Duggal said.

Further, he said the business restructuring in Q2 impacted the company's volume growth. Nevertheless, he said, "We do not expect any further margin contraction in Q3."

Below is an edited transcript of Sunil Duggal's interview to CNBC-TV18. Also watch the accompanying video.

Q: For the domestic business, what is the volume growth and what is the contribution of the price increase that you had undertaken?

A: It has been a blend of price increases and volume growth. The volume growth has been around 5% for the domestic branded business and the balance has been made up of price.

Q: On a year on year basis, the growth has also been lot more by consolidation of the Namaste Group and the Hobi Kozmetik. Could you tell us, on a like to like basis what the numbers would look like to get an understanding? How much the contribution of these two have been in this quarter?

A: Yes, if did like to like basis - if you minus out the acquisitions then the organic growth will be in the region of around 13%, driven by around 8% growth in domestic and around 20+ in the international business.

Q: Can you give us a sense of how input costs have panned out? Have they declined sequentially of their peaks now?

A: Not really, they have actually peaked in the second quarter and that has put a lot of pressure on margins. Going forward, we would see some relief only in Q4. The Q3 quarter would continue to be very tough, in terms of the entire margin profile. So you have the rupee depreciation, which came as a bit of an unexpected event.

We were hoping that the material cost would inch up in the second quarter, at least for the fag end of the second quarter, which they haven't. Now once again we see inflation peaking up, food inflation is now in excess of 11%. Oil prices are going northwards. So, the inflation outlook is the key concern as far as our business is concerned.

Q: If you are still facing pressures by way of raw materials, will there be any further price increases in Q3?

A: We would hope not and we will be watching the situation very carefully - the inflation cycle beginning to peak and then level of, in which case we will tend not to take price increases. But if it is more structural then another round of price increase would be inevitable.

We would like to avoid it but we haven't made up our minds as to which course of action to pursue. Perhaps in the next month or so we will be able to decide.

Q: A 5% volume growth on the domestic side, slightly lower than what analysts were working with. You expect this trend to sustain or would you expect it to be better going forward?

A: It will be certainly better in the next quarter or so, because we did see a major restructuring of our domestic business in the second quarter and it impacted the volume growth. Now that has been played out, so, I would look forward to much better top-line growth, in the next couple of quarters.

Q: You have done a couple of acquisitions. Are you looking out for more? Also, on the leverage situation, what has been the interest cost and are you looking to peg it down?

A: The interest costs have been pretty modest, considering the scale of the acquisitions. All of our debts overseas at very low rates. So, that's really not putting any burden on the whole P&L. The acquisitions are highly accretive and therefore there is no pressure on the bottom-line on account of the acquisitions.

We do have an acquisition strategy in place and it has been very successful in the four deals, which we have done over the last three or four years. We will continue to look at more targets, both in India and overseas.

Q: In Q3, how much lower can the margins go from the current 19% that you all saw in this quarter?

A: We had EBITD as of the domestic level of around 20% odd and I don't think they will drop off. They should level off at this stage. I don't see any improvement happening in Q3. The improvement would perhaps happen only in the Q4 on a YoY basis. So, we would see if material cost is peaking perhaps along where we are and having inventories, which are at high costs, the margin impact would be not fully visible in the Q3.

However, the inflation situation has been always much worst than what was anticipated and we did expect inflation to peak in the Q2, which it hasn't. So, I would be a little cautious and circumspect in giving any future outlook on the inflation situation.

Q: On the volume front, what has actually been a bit of a drag is it more of competition and erosion of market share or is it a moderation in demand itself?

A: It has been an event, which is internal in nature. Business restructuring drove down the volume growth in the second quarter and I do expect a sharp revival in volume growths in the rest of the year.