Marico will continue to focus on volume growth: CFO

Below is the edited transcript of his interview to CNBC-TV18.

Q: How does the volume growth picture looks? Has the growth of 14-16 percent been maintained this time like last four quarters?

A: We continue to hold the volume growth trajectory. In terms of volume we have grown by 14 percent and the growth has been robust in India across categories. Our overseas volumes have been flat, but we have registered a growth of 16 percent. In Kaya segment, we have registered a growth of 38 percent. In this quarter we have registered 19 percent value growth. Our operating margins have also expanded by 27 percent and they now stands at 13 percent in comparison to sales. There have been some hits below the line so our PAT has risen by 10 percent.

Q: Which are the major expenses heads and the amount that has hit below the line?

A: In May, we acquired Paras personal care brands for Rs 740 crore, its full impact is visible in July-September quarter. The acquisition was partly funded via our internal accruals but the balance part is still significant. We also bought a new office space for Rs 120 crore, the interest cost is also impacting the below line. We also made some borrowings in addition to raising equity.

There was also a change in our effective tax rate as the Indian volumes have surged significantly over the past 3-4 quarters. The incremental production is not coming out of the tax holiday zones and as a result the effective income tax rate applicable to our profits is higher by almost 450 basis points. Our input costs were favourable by a very large number.

Q: The price of copra has declined and your company has not moderated the prices, so there was room for margin expansion? What is the reason for lower than expected EBITDA performance

A: Copra prices duly came down which helped to lower our input cost by 680 basis point. But on the other hand, we have equally heavily invested in advertising and sales promotion (ASP) which pushed our cost by 450 basis points.

We also need to compare the two quarters reasonably. Last year there was lot of uncertainty about the input cost and so we communicated to the market that we are unsure how the input prices will move. Last year we were very judicious and stingy in investing in our brands. In this quarter we have undertaken many brand building exercise not only for existing products but Paras for also, so this activity has reduced our operating margin.

Q: How would you asses the impact of what you have invested in advertising and sales expenditure for the full year? How would you estimate the volume gain and margins for all quarters?

A: The numbers of ASP, ad spends to percentage of sales, quarter to quarter are not a good indicator because our mean is around 11-12%. Paras brands mean will move towards 12 percent rather than 11 percent, but it will not be 13.7 percent which we have reported for this quarter.

The impact of this investment in brands is visible in terms of market shares moving up.  The share in coconut oil has gone up by 57percent. The volume share in hair oil is at 25 percent. We expect this share to sustain. In the Bangladesh market we have a good market share of 80 percent. We will continue to do well in grabbing the top-line and consumer franchise. Margins will vary depending upon the gestation period of the investment.

Q: After looking at the numbers there could be a concern among analysts when the raw material prices were down significantly and the company had a certain cushion, the company had 3 month inventory, the prices were not tinkered much.Going forward if there is some moderation in pricing, margins could go down further. In that case would you moderate your ASP and maintain margins. What is the strategy with respect to operating margins?

A: Our primary goal is to get consumers on to the Marico bandwagon and we are working on that line by increasing our market share, increasing the number of households or retail target. Quarter-on-quarter basis our goals are necessary compared to our margins. However we expect to ensure healthy margins. We expect to maintain a margin of 13 percent which we delivered in this quarter.

Q: What is the trajectory of the Paras brand, how have they done so far and therefore what will you extrapolate?

A: Compared to last year, Paras brand has grown 28 percent in this quarter. Unlike every acquisition there is a transition which as the potential to disrupt the brand trajectory. However, we have kept it to minimum so we are confident about Paras brand and gung-ho about this category. For the first time we have a strong youth brand component in our portfolio so we will invest in it as mush as it is feasible.  

Q: Was there any volume slowdown in individual categories?

A: We did not do well in some overseas market. The Bangladesh market is not growing rapidly and we saw a minor de-growth. Volumes have been flat in the South African market. Apart from Egypt, the Middle East market has not done well. Vietnam has done pretty well. Our international portfolio is a mixed bag leading to a very flattish volume growth. Kaya projected strong growth number.

The same store growth number is healthy but it is much lower than 38 percent value growth number which generally is around 12-15 percent same store growth in Kaya. But we do expect that being a discretionary category in the second half there could be some issues in Kaya volumes. We would like to be cautious with regards to many categories, especially hi-end products, due to economic slowdown.

Q: Should we expect a volume growth of 14 percent for the year?

A: It is slightly on the higher side. Our focus is volume growth and we feel more comfortable in chasing it. We will continue to focus on the volume rather tan margin. I think we are in line with our long term target.

Q: EBIT in skin care segment is positive this time around. What is the profitability status in Kaya?

A: By and large, Kaya business is doing much better than before. But it is still not in the profit zone. It will take time for Kaya to turn profitable but we are happy that it is turning out same store growth and grabbing the consumers.