No slowdown in consumer goods, Dabur eyes 10% volume growth

Sunil Duggal, CEO of Dabur India believes a good monsoon will be the key to volume growth for the first half of FY13. So far, the monsoon has disappointed and if there is a shortfall, it may dent volumes significantly, said Duggal. However, Dabur is expecting a 10% volume growth for this fiscal and if the monsoon plays out well, it could even go up to 12%, informed an optimistic CEO

Despite slowdowns in various sectors within the economy, in an interview with CNBC-TV18, Duggal said that consumer staples have not yet seen a slowdown. The company's international business performance has been robust and Dabur is now looking to build a supply chain in Africa.

Dabur has also lined up several products in the pipeline which might push up their advertisement spends comparatively this year. He also thinks that commodity prices will continue to remain volatile.

Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.

Q: You have rural India as a big market, it will obviously be a supplier of raw material but, what's the downside if it is a not so good monsoon? The last bad monsoon we had was 76% of the long-term average. If things got to that point, what's the downside for Dabur?

A: 76% shortfall is pretty serious, I think there would certainly be some aback in terms of overall demand plus there could be some inflation in agri commodities consequent to that. I think that's pretty much of a worst case scenario.

However, if there is a small deficiency of maybe 85-95% or 90%, I don't think demand would be materially affected. There could be some inflationary pressures building up, but the demand side should remain robust. But a serious shortfall like the one you mentioned, can be a cause of serious concern.

Q: Coming to the extinct demand itself. We hear slowdown stories all over the place. They began with capital expansion and investment cycle going down. It's beginning to show in the consumer space as well. The car numbers we got for the month of June were pretty dismal and two wheelers, the much smaller category also followed suit. Is it now beginning to show at your end as well?

A: Not yet. I don't think it's filtered down into consumer staples, especially the non-discretionary items. I think demand will remain robust in the event of a normal or close to normal monsoon. We are not particularly worried on that account, of course the monsoon being the only issue which is at stake.

Q: We have seen some softening of raw material prices or at least they are off their highs. Are you expecting any gross margin improvement in this quarter? And there is also a sense among analysts that a lot of this incremental gross margin improvement could flow into advertising and promotions (A&P). Is that the thinking at the company as well?

A: For us, yes that's exactly what our thinking is. There has been improvement in the gross margins. Most of it has been put into A&P and some of it has flowed down. Going forward, the outlook on commodity prices will see a lot of volatility. I don't think it is going to be a one way street in terms of downward movement of commodity prices. There would be volatility.

Oil already is firming up a little bit now. How the whole traction would be in terms of prices is a little bit early to say. But it would be a little bit more benign than what we saw last year when we saw extremely high material inflation. Let's see how it works out but A&P spends are going to remain robust at least in our case.

Q: What about the international outlook? How is the integration with Namaste going on, what are your targets in terms of overall growth in FY13? Last year you drew about Rs 650 crore. Could we see a 20-30% jump there?

A: 20-30% is aggressive. I think it will be more in the region of 20% or thereabout. The integration phase is going on and I think there is a lot of work to be done in building a supply chain for Africa which is really the epicenter of our integration and efforts.

That's not something which will be completed in the next couple of quarters. It will take this year and perhaps a bit of next for it to be completed and then the fruits of integration will be visible which is primarily going to be driven by a local supply chain. The international business otherwise is doing well.

The Middle East and African businesses are doing exceedingly well on the back of rapidly softening raw material prices because those are largely dollar denominated regions. And the demand is also fairly robust there. No major issues on our core businesses overseas which are in the MENA (Middle East and North Africa) region.

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Q: Are you contemplating any new products or new positioning in any or all of your products? Any new juices, toothpastes that you might enter? Shampoos are seeing a lot of competition, so anything in terms of different placements? Your herbal products, a big category, any repositioning to tap the youth? Actually anything in the big brand space?

A: I think we got a huge number of initiatives in the pipeline. Some are pretty close to fruition, some will take a little bit longer in terms of going to the market. How many we put to market would depend upon the whole demand situation, the margin environment.

If you are under margin pressure then we would be a little more circumspect at introducing new products and it would be the other way in case margin pressures are not there. But, we do have a lot of very interesting ideas in beverages, in home and personal care, in healthcare which we would like to put to market if the economic situation allows.

Q: Would you spend more on ads than you did in FY12?

A: Yes, almost certainly. I think we already are spending more and that trend will continue. But if you want to introduce a large number of new products, they are incredibly demanding in terms of advertising and promotional spend. You can do well in good years and in years where the margin pressures are high you have to be a little more circumspect in introducing new products.

So how many products come into the market will be an outcome of that. It certainly will be more than last year because in aggregate terms, we do expect the margin environment to be better than last year. But, we still may not put all the products we have in the pipeline to the market.

Q: In terms of the distribution reach, you have worked quite a bit in terms of reaching out directly to the villages. How much will that support volume growth? Do you see upside to your internal volume estimates for FY13 on that? What's the feedback on that so far?

A: I think the volume impact certainly will be there. But what we are really measuring more is the profit impact in terms of the rural outreach. We do expect a wider assortment of our products to be available in the rural markets. Many of them are generative of high margins. That will be good for the bottom-line.

Its an omnibus plan which does not just mean that we expand our distribution but, we expand the quality, we improve the quality of our distribution and that's really the main focus. That work is in progress. It should be completed significant by the end of the second quarter and the results are already visible in terms of volume.

Q: So 10-12% in terms of volume growth is a fair assumption?

A: I think 10% is something which we would certainly look at and if the monsoon is normal, then it could go up to 12%. We will be very disappointed if we don’t do 10% quite frankly this year.

Q: Will the margins be at 15-16%?

A: Yes, the margins should be in that region. Higher level of gross margins, then there are higher levels of A&P spends, some flow-through on account of operating leverage and other management of cost is what the P&L should look like this year. But having said that, it's just barely three months into the year. I would hesitate to give any clear outlooks. A lot will depend on the monsoons.